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.

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