Skip to main content
SpringerLink
Log in

Bankruptcy profile of the Islamic and conventional banks in Malaysia: a post-crisis period analysis

  • Published:
Economic Change and Restructuring Aims and scope Submit manuscript

Abstract

This study identified that accounting for endogeneity in bankruptcy forecasting models have been widely over-sighted. This study used Altman’s bankruptcy forecasting model to examine bankruptcy rates of the Islamic and conventional banks in Malaysia. Data for this study were collected from the post-crisis period 2009–2013. The results showed that the Islamic banks in Malaysia were more bankrupt as compared to the conventional banks. Hence, the claim of Islamic banks is in the stark contrast to the phenomena of being more shock-resilient to the financial crisis due to their Shariah compliance. Furthermore, the results of multiple regression analysis indicated that profitability possesses the highest explanatory power in reducing bankruptcy. However, the statistical tests Wu-Hausman and Durbin-Score identified profitability as an endogenous variable in Altman’s model, which this study addressed with an instrumental variable. Thus, this study draws a conclusion that consideration of endogeneity in bankruptcy forecasting is essential, or else the results could be misleading. The results of the study lend credence to the researchers, policy-makers, and practitioners for accurate bankruptcy forecasting.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. 11th Malaysian plan (2016–2010) is the last of the development plans which were first started in 1966. The 11th Malaysian plan is considered to be the final leg in the quest of becoming a fully developed country by 2020.

  2. The chapter 10 of the 11th Malaysian plans explains the aspirations for Malaysia beyond 2020. The chapter provide stress on “People, Economy, & Environment”.

References

  • Acemoglu D, Johnson S, Robinson JA (2000) The colonial origins of comparative development: an empirical investigation. National Bureau of Economic Research, Cambridge

    Book  Google Scholar 

  • Adkins LC (2011) Using Stata for principles of econometrics. Wiley Global Education, Hoboken

    Google Scholar 

  • Alhassan AL, Tetteh ML, Brobbey FO (2016) Market power, efficiency and bank profitability: evidence from Ghana. Econ Change Restruct 49(1):71–93

    Article  Google Scholar 

  • Alqahtani F, Mayes DG, Brown K (2016) Economic turmoil and islamic banking: evidence from the Gulf Cooperation Council. Pac Basin Finance J 39:44–56

    Article  Google Scholar 

  • Altman EI (1968) Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. J Finance 23(4):589–609

    Article  Google Scholar 

  • Altman EI (1984) The success of business failure prediction models: an international survey. J Bank Finance 8(2):171–198

    Article  Google Scholar 

  • Altman EI (2000) Predicting financial distress of companies: revisiting the Z-score and ZETA models. Stern School of Business, New York University, New York, pp 9–12

    Google Scholar 

  • Altman EI, Haldeman RG, Narayanan P (1977) ZETA TM analysis a new model to identify bankruptcy risk of corporations. J Bank Finance 1(1):29–54

    Article  Google Scholar 

  • Altman EI, Hartzell J, Peck M (1998) Emerging market corporate bonds—a scoring system. Emerging market capital flows. Springer, Berlin, pp 391–400

    Book  Google Scholar 

  • Aziz A, Emanuel DC, Lawson GH (1988) Bankruptcy prediction-an investigation of cash flow based models. J Manage Stud 25(5):419–437

    Article  Google Scholar 

  • Bankapure DG, Soni S, Mandhane MS (2015) Comparative study of solvency position (bankruptcy analysis) of co-operative banks of jalna, parbhani, pune and mumbai cities, maharashtra, india by using z-score analysis. Editor Board 4(4):1

    Google Scholar 

  • Beaver WH (1966) Financial ratios as predictors of failure. J Account Res 4:71–111

    Article  Google Scholar 

  • Beck T, Demirgüç-Kunt A, Merrouche O (2013) Islamic vs. conventional banking: business model, efficiency and stability. J Bank Finance 37(2):433–447

    Article  Google Scholar 

  • Benini R, Liping H (2013) Special issue on China: re-thinking China’s economic transition and development in the post-crisis era. Econ Change Restruct 46(1):1–7

    Article  Google Scholar 

  • Blunch N-H, Sulla V (2014) World gone wrong: the financial crisis, labor market transitions and earnings in Serbia. Econ Change Restruct 47(3):187–226

    Article  Google Scholar 

  • Boďa M, Zimková E (2016) Malmquist index analysis of the recent development of the Slovak banking sector from two different angles. Econ Change Restruct 50:1–37

    Google Scholar 

  • Brown K (2003) Islamic banking comparative analysis. Arab Bank Rev 5(2):43–50

    Google Scholar 

  • C.A.—score (1987) A warning system for small business failures. Bilanas, pp 29–31

  • Cameron AC, Trivedi PK (2009) Microeconometrics using stata, vol 5. Stata Press, College Station

    Google Scholar 

  • Cecchetti SG (2015) The road to financial stability: capital regulation, liquidity regulation, and resolution. Int J Cent Bank 11(3):127–139

    Google Scholar 

  • Chenhall RH, Moers F (2007) The issue of endogeneity within theory-based, quantitative management accounting research. Eur Account Rev 16(1):173–196

    Article  Google Scholar 

  • Chiaramonte L, Poli F, Zhou M (2016) How accurately can z-score predict bank failure? Financ Mark Inst Instrum 25(5):333–360

    Article  Google Scholar 

  • Chieng JR (2013) Verifying the validity of Altman’s Z” score as a predictor of bank failures in the case of the Eurozone. Submitted to the National College of Ireland

  • Čihák M, Hesse H (2010) Islamic banks and financial stability: an empirical analysis. J Financ Serv Res 38(2–3):95–113

    Article  Google Scholar 

  • Deakin EB (1972) A discriminant analysis of predictors of business failure. J Account Res 10(1):167–179

    Article  Google Scholar 

  • Derbel H, Bouraoui T, Dammak N (2011) Can Islamic finance constitute a solution to crisis? Int J Econ Finance 3(3):p75

    Article  Google Scholar 

  • Dritsaki C, Dritsaki-Bargiota M (2005) The causal relationship between stock, credit market and economic development: an empirical evidence for Greece. Econ Change Restruct 38(1):113–127

    Article  Google Scholar 

  • Drukker DM (2003) Testing for serial correlation in linear panel-data models. Stata J 3(2):168–177

    Article  Google Scholar 

  • Elsinger H, Lehar A, Summer M (2006) Using market information for banking system risk assessment. Int J Cent Bank 02(01):138–165

    Google Scholar 

  • Greene WH (2003) Econometric analysis. Pearson Education India, London

    Google Scholar 

  • Hamdi B, Abdouli M, Ferhi A, Aloui M, Hammami S (2017) The stability of Islamic and conventional banks in the MENA region countries during the 2007–2012 financial crisis. J Knowl Econ. doi:10.1007/s13132-017-0456-2

  • Hamilton BH, Nickerson JA (2003) Correcting for endogeneity in strategic management research. Strateg Organ 1(1):51–78

    Article  Google Scholar 

  • Harbord RM, Whiting P (2009) Metandi: meta-analysis of diagnostic accuracy using hierarchical logistic regression. Stata J 9(2):211

    Article  Google Scholar 

  • Hashem SQ, Giudici P (2016) Systemic risk of conventional and Islamic banks: comparison with graphical network models. Appl Math 7(17):2079

    Article  Google Scholar 

  • Iman van Lelyveld FL (2006) Interbank contagion in the Dutch banking sector: a sensitivity analysis. Int J Cent Bank 2(2):100–133

    Google Scholar 

  • Jan A, Marimuthu M (2015a) Bankruptcy and sustainability: a conceptual review on Islamic banking industry. Glob Bus Manag Res Int J Account Finance 7(1):109–138

    Google Scholar 

  • Jan A, Marimuthu M (2015b) Altman model and bankruptcy profile of islamic banking industry: a comparative analysis on financial performance. Int J Bus Manag 10(7):p110

    Article  Google Scholar 

  • Jan A, Marimuthu M (2015c) Sustainability profile of islamic banking industry: evidence from world top five islamic banking countries. Int J Econ Finance 7(5):p125

    Article  Google Scholar 

  • Jan A, Marimuthu M (2016) Bankruptcy profile of foreign vs. domestic islamic banks of malaysia: a post crisis period analysis. Int J Econ Financ Issues 6(1):332–346

    Google Scholar 

  • Jeucken MH, Bouma JJ (1999) The changing environment of banks. Greener Manag Int 1999(27):20–35

    Article  Google Scholar 

  • Karim BA, Lee WS, Karim ZA, Jais M (2012) The impact of subprime mortgage crisis on Islamic banking and Islamic stock market. Proced Soc Behav Sci 65:668–673

    Article  Google Scholar 

  • Kumar PR, Ravi V (2007) Bankruptcy prediction in banks and firms via statistical and intelligent techniques–a review. Eur J Oper Res 180(1):1–28

    Article  Google Scholar 

  • Kusuma H, Ayumardani A (2016) The corporate governance efficiency and Islamic bank performance: an Indonesian evidence. Pol J Manag Stud 13(1):111–120

    Article  Google Scholar 

  • Mamo AQ (2011) Applicability of Altman (1968) model in predicting financial distress of commercial banks in Kenya. University of Nairobi, Nairobi

    Google Scholar 

  • Ohlson JA (1980) Financial ratios and the probabilistic prediction of bankruptcy. J Account Res 18(1):109–131

    Article  Google Scholar 

  • Olson D, Zoubi TA (2011) Efficiency and bank profitability in MENA countries. Emerg Mark Rev 12(2):94–110

    Article  Google Scholar 

  • Olson D, Zoubi T (2016) Convergence in bank performance for commercial and Islamic banks during and after the Global Financial Crisis. Q Rev Econ Finance 65:71–87

    Article  Google Scholar 

  • Pruteanu-Podpiera A, Podpiera J (2008) The Czech transition banking sector instability: the role of operational cost management. Econ Change Restruct 41(3):209

    Article  Google Scholar 

  • Roberts MR, Whited TM (2012) Endogeneity in empirical corporate finance. University of Rochester, William E. Somon Graduate School of Business Administration, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1748604

  • Safiullah M (2010) Superiority of conventional banks & Islamic banks of Bangladesh: a comparative study. Int J Econ Finance 2(3):p199

    Article  Google Scholar 

  • Sharma N (2013) Altman model and financial soundness of Indian banks. Int J Account Finance 3:55–60

    Google Scholar 

  • Shumway T (2001) Forecasting bankruptcy more accurately: a simple hazard model. J Bus 74(1):101–124

    Article  Google Scholar 

  • Singh H, Singh BP (2013) An effective & resourceful contribution of green banking towards sustainability. Int J Adv Eng Sci Technol 1(2):41–45

  • Sorwar G, Pappas V, Pereira J, Nurullah M (2016) To debt or not to debt: are Islamic banks less risky than conventional banks? J Econ Behav Organ 132:113–126

    Article  Google Scholar 

  • Springate GLV (1978) Predicting the possibility of failure in a Canadian firm. Unpublished M.B.A. Research Project, Simon Fraser University, January 1978

  • Swamy V (2014) Testing the interrelatedness of banking stability measures. J Financ Econ Policy 6(1):25–45

    Article  Google Scholar 

  • Trad N, Trabelsi MA, Goux JF (2017) Risk and profitability of Islamic banks: a religious deception or an alternative solution? Eur Res Manag Bus Econ 23(1):40–45

    Article  Google Scholar 

  • Wintoki MB, Linck JS, Netter JM (2012) Endogeneity and the dynamics of internal corporate governance. J Financ Econ 105(3):581–606

    Article  Google Scholar 

  • Young E (2016) World Islamic banking competitiveness report 2016. New realities new opportunities

  • Zmijewski ME (1984) Methodological issues related to the estimation of financial distress prediction models. J Account Res 22:59–82

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Management and Humanities, Universiti Teknologi Petronas, 32610, Teronoh, Malaysia

    Amin Jan, Maran Marimuthu, Muhammad Kashif Shad, Haseeb ur-Rehman & Muhammad Zahid

  2. COMSATS Virtual Campus, Islamabad, Pakistan

    Ahmad Ali Jan

Authors
  1. Amin Jan
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Maran Marimuthu
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Muhammad Kashif Shad
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Haseeb ur-Rehman
    View author publications

    You can also search for this author in PubMed Google Scholar

  5. Muhammad Zahid
    View author publications

    You can also search for this author in PubMed Google Scholar

  6. Ahmad Ali Jan
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Amin Jan.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Jan, A., Marimuthu, M., Shad, M.K. et al. Bankruptcy profile of the Islamic and conventional banks in Malaysia: a post-crisis period analysis. Econ Change Restruct 52, 67–87 (2019). https://doi.org/10.1007/s10644-017-9220-7

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10644-017-9220-7

Keywords

JEL classifications

Search

Navigation