The impacts of bank-specific and macroeconomic variables on the capital adequacy ratio: evidence from Islamic banks

ABSTRACT

The study investigates the relationship between the capital adequacy ratio (CAR) and different bank-specific and macroeconomic variables for 28 Islamic banks. We document that there is a statistically significant positive relationship between the CAR and the bank-specific and macroeconomic variables. In particular, bank-specific variables such as ROA, ROE, leverage, credit risk and size show a strong association with the CAR, while on the macroeconomic side, inflation, market capitalization and exchange rate have an impact on the average Islamic bank in our sample study. Furthermore, we run another model (equity to assets ratio) as dependent, with similar control variables, and the results reveal that, except for inflation, all the variables that have a significant effect on the CAR also influence the equity to assets ratio.

KEYWORDS:

• Islamic banks
• capital adequacy ratio
• bank-specific
• macroeconomic variables
• dynamic panel data
• financial crisis

JEL CLASSIFICATION:

• G15
• G21
• G11

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ It is worth mentioning that above studies are for conventional banks and they did not consider bank-specific and macroeconomic variables together.