DETERMINANTS OF CAPITAL STRUCTURE: A COMPARATIVE STUDY BETWEEN ISLAMIC AND CONVENTIONAL BANKS IN GCC

Abstract

This study explores the determinants of the regulatory capital and capital structure in baking sector operating in the Gulf Cooperation Council (GCC) countries. The sample includes banks in Saudi Arabia, Kuwait, Bahrain, Qatar, and United Arab Emirates. This study also examines the determinants of regulatory capital and capital structure in Islamic and conventional banks. And this is the first attempt to examine the regulatory capital align with the capital structure. Mainly, the study followed the capital structure field to study the impact of bank-specific factors such as size, profitability, liquidity, loan loss reserves and bank risk align with the macroeconomic factors GDP and financial crisis. This study used two models to test the capital structure on the selected panel data, Ordinary Least Square with applying the fixed effect model for the balanced data. A sample of 26 Islamic banks and 52 conventional banks were considered in this study. The findings demonstrate that regulatory capital for all banks negatively correlated with all determinants except the size, profitability and loan loss reserves. With respect to the regulatory capital, riskier and more liquid banks tend to have less regulatory capital in GCC banks. The capital structure for all banks are positively correlated with profitability, liquidity and loan loss reserves while negatively correlated with size and risk. The macroeconomic determinants have negative impact for the conventional banks on the two models in this study; regulatory capital and capital structure. Meaning that at the time of high GDP, Islamic banks tend raise more equity. The study finds enough evidence to support that financial crisis negatively impact both Islamic and conventional banks, so during the global financial crisis years 2007/2008, Islamic and conventional banks lower their capital ratios.