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A structural model of 'alpha' for the capital adequacy ratios of Islamic banks.

Baldwin, Kenneth and AlHalboni, Maryam and Helmi, Mohamad Husam (2019) 'A structural model of 'alpha' for the capital adequacy ratios of Islamic banks.', Journal of international financial markets, institutions and money., 60 . pp. 267-283.


The denominator of the capital adequacy ratio (CAR) for Islamic banks includes an adjustment factor, alpha, arising from the subsidisation of investment account holders’ returns using bank equity. The methodology established by the risk management standard-setting body for Islamic banks, the IFSB, estimates an alpha for each country using panel-data and normally distributed asset returns for its credit institutions. Consequently, the IFSB methodology precludes bank-specific alphas linked to the actual risk profile of underlying assets. There is also no discernible mapping between alpha and a bank’s own propensity to subsidise cash returns. This paper instead develops a new theoretical model for bank-specific alpha that is estimated for 43 Islamic banks in 11 countries. Our alpha values broadly correspond with those of the IFSB. However, a form of regulatory arbitrage is shown to exist which favors banks with relatively high alphas. This finding also has policy implications for bank efficiency and systemic risk.

Item Type:Article
Full text:(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
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Publisher statement:© 2019 This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Date accepted:26 December 2018
Date deposited:29 May 2019
Date of first online publication:28 December 2018
Date first made open access:28 December 2019

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