Asset-liability management in Islamic banks: evidence from emerging markets

Abstract

Purpose Motivated by massive bank failures during the financial crisis and the remarkable resilience of Islamic banks (IBs), this paper aims to analyze the interdependencies between asset/liability portfolio choices of IBs in emerging markets. Design/methodology/approach The authors collect data from the financial statements of IBs in the Middle East and North Africa region and Southeast Asia during the period 2002-2012. Using canonical correlation analysis, the authors investigate the degree of interdependencies between the asset/liability accounts unique to IBs and how their ALM models work at times of economic turmoil. Findings IBs tend to make decisions on sources of finance based on their asset portfolio choices. The interdependencies are stronger for small banks. IBs direct more of their investments to risk-mitigating instruments that share the risk with the borrower/client and are based on the purchase and sale of real goods rather than financial instruments. Additionally, banks tend to rely less on equity to finance their investments during economic boom and increase their equity holdings during economic bust. Practical implications This paper contributes to research on an under-researched, globally growing finance sector. It extends research on ALM while providing novel evidence using non-standardized asset/liability accounts unique to IBs. Originality/value The analysis of unique accounts has not been discussed in prior studies, which mainly used standardized account balances to compare Islamic and conventional banks. Moreover, the resilience of IBs and whether their ALM models are superior at times of turmoil has remained a black box. The results of this study are relevant to unravel this unanswered question.