Abstract
The purpose of this study is to examine the impact of the Basel capital
standards on financing behaviour of Islamic banks in Pakistan. Literature has
depicted mixed results on this issue (Bernanke and Lown, 1991; Ben Naceur
and Kandil 2009, 2013). This topic gains importance in the Islamic banking
sector of Pakistan where capital adequacy ratio (CAR) is, on average, above
than the minimum capital requirements (MCR) under Basel. We have used
Ben Naceur and Kandil (2013) model which is based on Berger and Udell
(1994) approach with some adjustment to specifically convene to sample
composition of 5 full-fledged Islamic banks for the period of 2005-2014 by
using Panel data technique. The results of the study confirmed a negative
impact of capital adequacy ratio on the financing behaviour of Islamic banks
in Pakistan. It is also evident from the results that Islamic banks tend to
reallocate their assets portfolio towards secured instruments e.g. government
securities like ╖uk┴k which led to their restricted financing activities and
ultimately result in slower economic growth. The study provides significant
policy implications to regulators and bankers on the imposition of CAR and
its trade-offs in terms of stability at the cost of the credit crunch and
reallocation of assets portfolio by crowding out private sector financing in
Pakistan
Huma Ayub, Attiya Javeed. (2016) Impact and Implications of Capital Adequacy Ratio on the Financing Behaviour: Evidence from Islamic Banks in Pakistan, Journal of Islamic Business and Management, Volume 6, Issue 1.
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