Are Islamic Banks Sufficiently Diversified? An Empirical Analysis of Eight Islamic Banks in Malaysia

32 Pages Posted: 9 Apr 2018

See all articles by Mohamed Chatti

Mohamed Chatti

Islamic Development Bank

Sandrine Kablan

University Paris-Est Créteil (UPEC) - ERUDITE

Ouidad Yousfi

Université de Montpellier

Date Written: November 1, 2013

Abstract

The aim of this study is to analyze the diversification among financial activities of Islamic banks and how it affects banks performance. We used the Herfindahl-Hirschman Index (HHI) to measure the degree of asset/liability diversification and risk-adjusted performance as criteria of assets allocation and management compensation. We found that retail and commercial activity are the most profitable activity, which lead to an overinvestment in those activities. Some banks show high average correlation between commercial and retail activities, and corporate and investment activities. The analysis of the efficiency shows that none of these banks falls on the frontier which means that they should change the structure of their portfolio in order to become less concentrated. They should also allocate more assets to treasury activity.

Keywords: Diversification, performance, Islamic banks, HHI, MPT

JEL Classification: C01, G11, G21

Suggested Citation

Chatti, Mohamed and Kablan, Sandrine and Yousfi, Ouidad, Are Islamic Banks Sufficiently Diversified? An Empirical Analysis of Eight Islamic Banks in Malaysia (November 1, 2013). Islamic Economic Studies, Vol. 21, No. 2, 2013, Available at SSRN: https://ssrn.com/abstract=3158624

Mohamed Chatti (Contact Author)

Islamic Development Bank ( email )

P. Box. 5925
Private Sector
Jeddah, 21432
Saudi Arabia

Sandrine Kablan

University Paris-Est Créteil (UPEC) - ERUDITE ( email )

Mail des Mèches
61 avenue du Général de Gaulle
Créteil Cedex, 94010
France

Ouidad Yousfi

Université de Montpellier ( email )

Place Eugène Bataillon
Montpellier, 34095
France

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