Creditor rights and bank capital decisions:Conventionalvs.Islamic banking

Using a sample of banks operating in 24 countries, we provide robust evidence that stronger creditorrightsareassociatedwithhighercapitaladequacyratiosforconventionalbanksbutnot for Islamic banks. Such results suggest that, under stronger creditor protection, only the managers of conventional banks increase equity, presumably as a means of signalling better monitoringeffortsandofavoidinglossofcontrol.ApossiblereasonforthefindingthatIslamicbanks donotgenerallyincreaseequityisthat,undertheprofitlosssharing(PLS)principle,depositors shareprofitsandlosseswiththebank.Theroleofcreditorprotectionishenceirrelevantinan Islamic banking context. However, we show that in predominantly non-Muslim countries with lesscompetitivemarkets,Islamicbanksshowasimilarassociationbetweencreditorrightsand capitalratiosasconventionalbanks.