Alternative measures for predicting financial distress in the case of Malaysian Islamic banks: assessing the impact of global financial crisis

Abstract

Purpose

The global financial crisis of 2008 still has an impact on the financial systems around the world, for which funding liquidity has been mentioned as one of the main concerns during that period. This study aims to consider the impact of and extent to which the funding structure of Islamic banks along with deposit structure, macroeconomic variables, other bank-specific variables, including alternative funding mix variables (in terms of funding structure measured as financing/deposit ratio), could play a part in explaining the financial conditions and predicting the failures and performances of Islamic banks in the case of Malaysia under the distress created by the global financial crisis.

Design/methodology/approach

Multivariate logit model was used with a sample including 17 full-fledged Islamic banks in Malaysia for the period from December 2005 to September 2010 by using quarterly data.

Findings

This study found that the funding mix variable (financing/deposit ratio), the composition of deposits, alternative bank-specific variables and alternative funding mix variables are statistically significant. In contrast, none of the macroeconomic variables is found to have a significant impact on bank liquidity. In the final models, the variables that showed significant performance were selected as explanatory variables. The results of McFadden R-squared for both selected models showed an excellent fit to predict the Islamic banks’ performance.

Originality/value

This empirical study contributes to the literature in two ways: to the best of the authors’ knowledge, this is the first study to examine the role of the funding structures of Islamic banks in determining their performance; and it also examines the effect of deposit composition (the mudharabah and non-mudharabah deposits) on Islamic banks’ performance.

Citation

Asutay, M. and Othman, J. (2020), "Alternative measures for predicting financial distress in the case of Malaysian Islamic banks: assessing the impact of global financial crisis", Journal of Islamic Accounting and Business Research, Vol. 11 No. 10, pp. 1827-1845. https://doi.org/10.1108/JIABR-12-2019-0223