Moral hazard and risk-taking incentives in Islamic banks, does franchise value matter!

Abstract

Purpose

This paper aims to examine risk-taking in Islamic banks by exploring moral hazard and owner/manager agency problems simultaneously.

Design/methodology/approach

The authors propose to estimate a model of bank risk-taking that includes both franchise value and ownership structure as explanatory factors of bank risk.

Findings

The results show that franchise value is an important determinant of Islamic bank risk-taking. Banks with high franchise values are less likely to take risks than banks with low franchise value. In contrast, outside block holders have, at best, limited influences on bank risk-taking.

Originality/value

This paper conducts the first empirical examination of the relationship between managerial risk preferences and Islamic banks ownership. The authors examine simultaneously the effect of franchise value and owner/manager problem on Islamic bank risk taking behavior. They consider separately the impact on total risk, systematic risk and bank specific risk.

Citation

Mili, M. and Abid, S. (2017), "Moral hazard and risk-taking incentives in Islamic banks, does franchise value matter!", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 10 No. 1, pp. 42-59. https://doi.org/10.1108/IMEFM-12-2015-0148