Are MENA banks' capital buffers countercyclical? Evidence from the Islamic and conventional banking systems

This study investigates the relationship between the business cycle and capital buffers of both Islamic and conventional banks in the Middle East and North African region during 2000-2014. Our results, generated by adopting the two-step generalized method of moments approach, reveal three main findings. First, they support the counter cyclicality of the capital buffers of both Islamic and conventional banks. Nevertheless, such behaviour varies across banks. Second, our results provide evidence of different speeds of adjustment costs, which are low (high) for Islamic (conventional) banks. They also highlight that nonperforming loans have a positive effect on the procyclicality of the capital buffer. However, countercyclical behaviour is identified for conventional banks. Third, we find that other determinants (e.g. business cycle, bank size, loan growth, regulatory pressure) do not show different procyclical capital buffers for Islamic and conventional banks. Our results are interesting for regulators and policymakers implementing the Basel III guidelines. (c) 2019 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.