Abstract
This study investigates the issue of reputation for Islamic banks. Bank reputation can either be modelled using a direct approach based on Game Theory (Chemmanur and Fulghieri in J Financ 49:57–79, 1994) or through an indirect approach that investigates linkages between conventional and Islamic banks. Adopting the indirect test approach, we propose a binary measure of Islamic Banks (IBs) reputation by testing their dynamic interactions with regard to conventional banks. Interestingly, we propose different qualitative econometric specifications to capture the drivers of IBs’ reputation. Using panel data for 10 major conventional banks and 10 Islamic banks over the period April 2006 – February 2013 (about 17,800 observations), we show that reputation probability can significantly increase in line with Islamic banking performance, while excess risk taken by Islamic bankers will decrease it. Further, we show that an environment with high global financial risk -induced for example by an increase in conventional product risk- has a negative effect on IBs’ reputation.
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Notes
See Jawadi et al. (2015a) for details about the development of Islamic Banks.
JPMorgan Chase (NYSE: JPM) is one of the oldest financial institutions in the United States. It is the leader in terms of financial services and investment banking. Accordingly, it is a good benchmark for conventional or business banks.
For our data, we used the same sample as Jawadi et al. (2015a), enabling us to compare the results of the two studies.
JPMorgan Chase (NYSE: JPM) is one of the oldest financial institutions in the United States. It is a good example of a benchmark for commercial financial institutions. It operates in over 100 countries, handles total assets of $2.4 trillion, and deals in investment banking, financial services for consumers and small businesses, as well as commercial banking.
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Jawadi, F., Cheffou, A.I., Jawadi, N. et al. On the Reputation of Islamic Banks: a Panel Data Qualitative Econometrics Analysis. Open Econ Rev 27, 987–998 (2016). https://doi.org/10.1007/s11079-016-9414-z
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DOI: https://doi.org/10.1007/s11079-016-9414-z