Does the efficiency of banks adversely affect financial stability? A comparative study between traditional and Islamic banks: Evidence from Egypt

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1. “Does the efficiency of banks adversely affect financial stability? A comparative study between traditional and Islamic banks: Evidence from Egypt” AUTHORS Hassan Mohamed Mohamed Hafez ARTICLE INFO Hassan Mohamed Mohamed Hafez (2022). Does the efficiency of banks adversely affect financial stability? A comparative study between traditional and Islamic banks: Evidence from Egypt. Banks and Bank Systems, 17(2), 13-26. doi:10.21511/bbs.17(2).2022.02 DOI http://dx.doi.org/10.21511/bbs.17(2).2022.02 RELEASED ON Monday, 25 April 2022 RECEIVED ON Tuesday, 26 October 2021 ACCEPTED ON Friday, 11 March 2022 LICENSE This work is licensed under a Creative Commons Attribution 4.0 International License JOURNAL "Banks and Bank Systems" ISSN PRINT 1816-7403 ISSN ONLINE 1991-7074 PUBLISHER LLC “Consulting Publishing Company “Business Perspectives” FOUNDER LLC “Consulting Publishing Company “Business Perspectives” NUMBER OF REFERENCES NUMBER OF FIGURES NUMBER OF TABLES 30 0 16 © The author(s) 2022. This publication is an open access article. businessperspectives.org
2. Banks and Bank Systems , Volume 17, Issue 2, 2022 Hassan Mohamed Mohamed Hafez (Egypt) BUSINESS PERSPECTIVES LLC “СPС “Business Perspectives” Hryhorii Skovoroda lane, 10, Sumy, 40022, Ukraine www.businessperspectives.org Does the efficiency of banks adversely affect financial stability? A Comparative study between traditional and Islamic banks: Evidence from Egypt Abstract Received on: 26th of October, 2021 Accepted on: 11th of March, 2022 Published on: 25th of April, 2022 © Hassan Mohamed Mohamed Hafez, 2022 Hassan Mohamed Mohamed Hafez, Associate Professor of Finance, Faculty of Business Administration and International Trade, Misr International University, Egypt. The efficiency of banks is an important factor that effectively contributes to the stability of the world financial system, thus reducing financial failure rates of banks and international financial crises that leads to the stability of the global financial system. This study aims to investigate whether the efficiency of Egyptian banks adversely affects financial stability. A sample of 30 banks operating in Egypt was selected to answer this question using the data envelopment analysis (DEA) approach and financial ratios. This study enables the Central Bank of Egypt to identify which banking system (Islamic banks or traditional banks) is more efficient and contributes significantly to boost economic growth. Results revealed that the efficiency of banks is a core factor to affect financial stability. The statically explanatory power of this effect is significant but weak at 14.1% for all Egyptian banks, 6.3% for traditional banks, strong for traditional banks with Islamic window at 22%, and stronger for Islamic banks at 55%. Consequently, the Islamic banking system in Egypt is more efficient compared to traditional banks and has a greater impact on financial stability as one of the pillars of financial inclusion to boost economic growth in Egypt. Keywords operating efficiency, conventional banks, financial stability, Egyptian banks, DEA JEL Classification G01, G21, G28 INTRODUCTION Since the emerging of the Covid-19 pandemic, the risks associated with banks’ loan portfolios and profitability have increased. The Central Bank of Egypt is seeking to provide relief to affected borrowers and ensuring a stable flow of credit to the real economy while maintaining financial stability. This will mandate financial and price stability and strengthen its governance, financial structure, operational and institutional autonomy. This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International license, which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited. Conflict of interest statement: Author(s) reported no conflict of interest http://dx.doi.org/10.21511/bbs.17(2).2022.02 The concept of efficiency refers to the link between input and output. It is defined by the production function. Efficiency in the banking sector is a concept that entails the optimal use of capital. It can be used to boost credit growth in the banking industry, which contributes to economic development and growth. The ratio of input-output, or generated quantity by the input used, is a common definition of efficiency. Efficiency in banking is a metric used to assess bank performance. The ratio of inputs to outputs is referred to as technical efficiency (Brown et al., 2007). Banks are technically efficient if a Decision-Making Unit generating maximum feasible output from the set of inputs that are included, or if it uses fewer inputs to achieve a given number of out- 13
3. Banks and Bank Systems , Volume 17, Issue 2, 2022 puts (Kamarudin et al., 2014). Pure technical efficiency describes how an economic unit’s resources are managed, because technical efficiency decides whether a production unit is operating at an optimal scale. The efficiency of Egyptian banks contributes to the success of adopted macroeconomic policies, which results in long-term development, economic growth, social welfare, and becomes more resilient to shocks during crisis. The financial stability in general is defined on the basis that it is the general framework that governs the functioning of the market and the financial infrastructure that enables the smooth performance of the financial system in Egypt and works to achieve sustainable development and raise economic growth rates. (CGAB, 2017). There is no doubt that Egyptian banks have an effective pivotal role in supporting the financial stability of the financial system as a whole in Egypt. 1. LITERATURE REVIEW of saving it as their wage rate is lower than the substance level. In addition, the financial system in So far, there is no much applied research on wheth- Egypt does not play a significant role in enhancing er the efficiency of banks – as an influence on the the efficiency of savings use, since the effect of the financial stability of the global financial system managerial performance and financial institution worldwide – effectively affects financial stability of to organize and direct savings to have capital acthe financial system in Egypt. cumulation is stronger. The results revealed that: Saqib (2013), examined the impact of financial efficiency and development on economic growth with a real GDP per capita as an indicator using a sample of 50 developing countries. Results suggested a positive and significant influence of the financial efficiency on the growth of economy for developing countries. The study highlighted the importance and value of the financial development for the economic growth and the efficiency on the sustainable growth performance for developing countries. The results confirmed the absence of statistically significant causality between financial efficiency and economic growth. Economic growth is compounded by the lack of deep and efficient financial markets. The measurement of financial development using five financial development sectors are: • • • • • 1) There was a major inefficiency in using foreign exchanges, it was consumed rather than used for production purposes. This leads to lacking economic development process. 2) Strong clues were found that mark the existence and growth of informal financial systems in the economy (black market), which adversely affects the efficient use of savings. Poshakwale and Qian (2011) investigated the impact of financial reforming on efficiency and competitiveness of the Egyptian banking sector. Moreover, how it affected the economic growth during the interim period from 1992 till 2007. Studies were divided into two different categories; one showed a positive relationship between the both as the reforming of finance better improves Information producing regarding potential bank efficiency, which achieves economic growth. While the other one showed that the reforming investment and capital allocation. Investment observing and enforcing corpo- causes the financial system to be more vulnerable, which can be the reason behind economic crisis. rate governance following financing. Trade management, diversification, and risk The performance of Egyptian banks is improved, since the efficiency of production and the competmanagement. itiveness are improved as well and this is reflected Savings mobilization. in an economic growth rate over the short term. The ease of exchanging goods and services. Helmy (2015) examined the factors that affect the Alber (2015) examined the impact of bank size, inefficient use of savings and its causes in Egypt. age and ownership on the efficiency of Egyptian Egyptians focus on spending their money instead banks using Data Envelopment Analysis. The au- 14 http://dx.doi.org/10.21511/bbs.17(2).2022.02
4. Banks and Bank Systems , Volume 17, Issue 2, 2022 There is a gap in efficiency between traditional and Islamic banks. This suggests that Islamic banks’ intermediation function is inadequate and that they were not able to maximize the management of input and output. Traditional banks that are classed as large banks receive a high degree of efficiency with a flat trend, but Islamic banks, categorized as small-capacity banks, have an annual efficiency gain. Because the number of traditional banks decreases every year, the efficiency of traditional banks has not increased. Islamic Banks, on the other hand, have seen an increase in the number of banks from a year to another, Shrieves and Dahl (1992) employed the data en- indicating the increase in their efficiency. velopment analysis model to examine the efficiency of traditional banks versus Islamic banks in Bangladesh using a sample of 37 banks during and 2. AIMS AND HYPOTHESES following the financial crisis. Results revealed that capital and risk have a negative impact on bank ef- The purpose of this study is to investigate if banks ficiency, while depositors covered by a flat premi- efficiency have an impact on its financial stability um are exposed to risk. As a result, having enough and, therefore, boosts economic growth in Egypt. cash could help to mitigate higher risk. It has been Also, it aims to further examine if there is a sigfound that traditional banks in Bangladesh have nificant difference between the categories of bank systems? operating in Egypt when addressing the more cost management efficiency. impact of the efficiency of banks on financial staMiah and Sharmeen (2015) stated that by improv- bility of the financial system in Egypt. ing “risk adjusted rates of return”, the traditional financial system is the best mechanism for achiev- The research hypotheses are as follows: ing prosperity and generating economic growth. Egypt’s banking sector has the potential for addi- H0: The efficiency of Egyptian banks adversely tional development, expansion, and inclusiveness. affects financial stability of the financial system in Egypt. Hafez (2018) analyzed the interrelationship between the bank efficiency and capital adequacy ra- H1: The efficiency of Egyptian banks has a positio. He found that high-efficiency banks increase tive impact on financial stability of the financapital in positive correlation with the level of efficial system in Egypt ciency. The larger the capital ratio, the greater the risk, which has no bearing on the possibility of fi- H2: There is no significant difference between nancial failure. The lower capital banks, the higher traditional and Islamic banks in Egypt when the capital, the lower the cost. to measure the efficiency of Egyptian banks on the financial stability of the financial sysHafez and Halim (2019) analyzed the operational tem in Egypt and pure efficiency before and after the financial crisis through the application of data envelopment analysis. Findings revealed that traditional banks 3. RESEARCH METHODOLOGY are more efficient before the financial crisis, however, Islamic banks are more efficient than tradi- 3.1. Sample tional banks after the international financial crisis; this is due to the efficiency of management. The Financial statements of Egyptian banks are listed study revealed that Islamic banks play very vital in the Bankscope database. This study covers the and essential role in supporting and boosting eco- period from 2005 to 2020 and divides Egyptian banks into: nomic growth in Egypt. thor analyzed ten Egyptian banks during the period from 1984 to 2013. The results revealed that the efficiency of the banks’ score changes significantly, depending on “size”, “age” and “ownership”, as smaller and older banks and in addition to the private sector’s banks happen to be more efficient than bigger, younger, and public banks. The efficiency level is 95.3% for small banks and 89.3% for bigger ones; 89.18% and 94.88% for younger and older banks; 86.48% for public banks and 95.74% for private banks. http://dx.doi.org/10.21511/bbs.17(2).2022.02 15
5. Banks and Bank Systems , Volume 17, Issue 2, 2022 • Group (A): traditional banks; 21 banks; • Group (B): traditional banks with Islamic windows 4 banks; • Group (C): Islamic banks; 5 banks. Accordingly, four different models of analysis have been conducted. Data envelopment analysis is based on the linear programming used to build non-parametric piecewise frontier over the sample data to compute the efficiency index of Egyptian banks. The production function is not known of the fully efficient bank. The updated model CCR as per unit orientation of the data envelopment analysis is used to compare between small and large banks. The economic efficiency index of Egyptian banks includes operational efficiency and allocative efficiency. Operational efficiency measures how Egyptian banks are efficient to maximize outputs from a given set of inputs. However, allocative efficiency addresses how to maximize the use of certain input. The technical efficiency is commonly measured by TE1 = 0Q/0P, which equals 1 – (QP/0P) ranges from 0 to 1. If the technical efficiency of a bank is 1, the bank is fully efficient. Moreover, the allocative efficiency of a bank operating is AE1 = 0R/0Q. As a result, the total economic efficiency of any Egyptian bank is EE1 = 0R/0P. A measure of the ratio of all outputs over all inputs across all Egyptian banks is obtained, namely (u’yi/v’xi) where u is an M×1 vector of outputs weights, and v is a K×1 vector of input weights. Taking the highest value of the weighted outputs into the weighted inputs, the technical efficiency of Egyptian banks is obtained. Multiple input and output of Egyptian banks is to be reduced to one input and output by obtaining the optimal weighting. The allocative efficiency of a bank is calculated as: (2) µ ' y j − v ' x j ≤ 0, The equivalent envelopment of the linear programming problem is obtained as follows: Minθ ,λθ , − yi + Y λ ≥ 0, (3) θ xi − X λ ≥ 0, λ ≥ 0, Where θ is a scalar and λ is an N x 1 vector of constant. The value of θ is the value of bank efficiency. It has to be solved N times according to the number of banks included in the study sample. The minimum requirement to conduct the DEA analysis is the rule n ≥ max {m×s,3(m + s)}. The cutoff point rule stating that (2 inputs ×2 outputs, 3(2+2)) is exist to apply data envelopment analysis (Coelli, 1996). We conclude that the number of variables used in this study are reliable to conduct an efficient analysis. 3.3. The calculated economic efficiency index Table 1 shows the efficiency index calculated by the researcher and divided into pure efficiency and scale efficiency, taking into account the banks’ classification in the Egyptian market: traditional banks, traditional banks with Islamic windows, and Islamic banks. 3.4. Model specification β 0 + β1 ( BZ ) + Financial Stability = + β 2 ( NIM ) + β3 ( NNIM ) + β 4 ( NOM ) + Max u ,v ( u ' yi / v ' xi ) , (1) j= 1, 2, …., n, u , v ≥ 0. The values of u and v are necessary to calculate the maximized values of the economic efficiency. The 16 Max µ ,v ( µ ' yi ) , where v ' xi = 1, 1, 2, ., n, µ , v ≥ 0. j =… 3.2. Economic efficiency index where u ' y j / v ' x j ≤ 1, main constraint is the value of bank efficiency ≤ 1; as a result, there is an infinite number of solutions. In order to solve this statistical obstacle, a constant constraint is put, that v’xi = = 1 and the following formula is obtained (Farrell, 1957): + β5 ( AME ) + β 6 ( Efficiency Index ) + +ε = i 1.8 = t 1.9, where dependent variable: Financial stability (Z-score) – “Yi ”; β0 = Intercept; X1: Bank size (BZ); http://dx.doi.org/10.21511/bbs.17(2).2022.02
6. Banks and Bank Systems , Volume 17, Issue 2, 2022 Table 1. Efficiency index Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 The efficiency index The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency The Efficiency Index: Operational Efficiency Pure Efficiency Egyptian banks Traditional banks Islamic windows Islamic banks 0.892 0.923 0.967 0.049 0.975 0.938 0.809 0.994 0.971 0.909 0.898 0.970 0.716 0.884 0.811 0.601 0.785 0.764 0.720 0.834 0.864 0.790 0.892 0.886 0.765 0.870 0.880 0.790 0.883 0.895 0.797 0.887 0.899 0.782 0.884 0.885 0.703 0.881 0.798 0.778 0.885 0.880 0.787 0.886 0.889 0.781 0.885 0.883 0.820 0.899 0.913 0.907 0.935 0.970 0.852 0.945 0.902 0.862 0.956 0.901 0.693 0.869 0.798 0.592 0.764 0.775 0.691 0.821 0.842 0.718 0.825 0.871 0.734 0.852 0.862 0.769 0.873 0.882 0.769 0.872 0.882 0.759 0.876 0.867 0.771 0.891 0.865 0.783 0.875 0.895 0.758 0.874 0.867 0.706 0.866 0.815 0.895 0.939 0.954 0.859 0.910 0.945 0.824 0.923 0.893 0.836 0.932 0.897 0.781 0.879 0.889 0.685 0.778 0.881 0.704 0.830 0.849 0.741 0.840 0.883 0.749 0.861 0.871 0.784 0.882 0.890 0.793 0.881 0.901 0.874 0.998 0.876 0.808 0.912 0.886 0.841 0.934 0.901 0.816 0.899 0.908 0.808 0.893 0.905 0.929 0.924 0.978 0.874 0.917 0.954 0.878 0.954 0.921 0.893 0.960 0.931 0.777 0.890 0.874 0.726 0.885 0.821 0.724 0.860 0.842 0.740 0.886 0.836 0.740 0.879 0.843 0.781 0.895 0.873 0.798 0.904 0.883 0.891 0.994 0.897 0.885 0.948 0.934 0.875 0.911 0.961 0.879 0.922 0.954 0.905 0.943 0.960 X2: Net interest margin (NIM); X3: Net non-interest margin (NNIM); X4: Net operating margin (NOM); X5: Asset management efficiency (AME); X6: The efficiency index; ε: Error term; β0 is a con- http://dx.doi.org/10.21511/bbs.17(2).2022.02 stant; (β1: β6) are the parameters for explanatory variables; (εi) is the unobservable individual heterogeneity, and vit is the remainder disturbance in the regression model. 17
7. Banks and Bank Systems , Volume 17, Issue 2, 2022 3.5. Definition of variables Table 2. Variables’ definitions Dependent variable = Z Financial stability (Z) ROA + E / A ⋅100 σ ⋅ ROA Independent Variables (The efficiency of Egyptian Banks) Interest income from loans and security investments – Interest expense on deposits and on other debt issued Total Assets Net Interest Margin (NIM) Noninterest revenues – Noninterest expenses Total Assets Net Non-Interest Margin (NNIM) Total operating revenues − Total operating expenses Total Assets Net Operating Margin (NOM) Non Interest Expenses Operating Income − Loan Loss Pr ovision Asset Management Efficiency (AME) The Efficiency Index Score Bank Size (controllable variable) Through the application of (DEA) Log total assets cates data is not normally distributed because values of kurtosis are deviated from 3. 4. RESULTS The analysis was carried out at four levels, such as all Egyptian banks, Islamic banks, conventional banks Table 4 shows the correlation of coefficients beand conventional banks with Islamic windows, us- tween dependent and independent variables by ing the application of DEA and certain financial ra- the application on all Egyptian banks. tios expressing the efficiency of Egyptian banks. The efficiency index of Egyptian banks was calculated using data envelopment analysis and fi4.1. Model (A): All banks nancial ratios, namely: net interest margin, net operating in Egypt non-interest margin, net operating margin, and Table 3 illustrates the descriptive statistics of the the efficiency of management were used as an study variables; dependent and independent ones. approach to measure the efficiency of Egyptian As shown from the tables above, all variables are banks. Most of the independent variables have eiasymmetrical. Especially skewness is positive for ther a significant positive or negative relationship all variables except for bank size and net interest with financial stability except bank size, net intermargin. Kurtosis value of all variables also indi- est margin and net non-interest margin. Table 3. Descriptive statistics (Model A) Islamic banks Financial stability Min Max Mean Median Dependent variable –0.983 54.998 19.730 0.1901 Skewness Kurtosis SD Jarque-Bera 1.145 3.243 11.637 187.379 Independent variables The Banks Efficiency index 0.725 0.818 0.726 0.719 1.4051 2.978 0.067 411,873 Bank Size 6.3019 9.207 7.607 0.468 1.3798 5.621 0.559 332.05 14222.02 Net Interest Margin 0.687 7.0352 3.565 0.2326 1.709 30.891 1.188 Net Non-Interest Margin 4.845 10.792 0.6191 0.4351 3.912 1.451 1.379 67.1432 Net Operating Margin 3.1873 9.575 2.842 0.052 .615 66.207 1.517 70322.01 Asset Management Efficiency 0.0183 12.906 3.948 0.045 4.706 80.111 2.550 152037 180 180 180 180 180 180 180 180 Observations 18 http://dx.doi.org/10.21511/bbs.17(2).2022.02
8. Banks and Bank Systems , Volume 17, Issue 2, 2022 Table 4. Correlation matrix for Model A Correlation matrix Financial stability Bank size Net interest margin Net non-interest margin Net operating margin Management efficiency The Banks Efficiency Index Financial stability Size NIM Net NIM NOM – – – – – – – –.192 – – – – – – 0.315 .215 – – – – – 0.595 .310 –.0609 – – – – –0.915* .772 .891 –.321 – – – Management Efficiency efficiency Index Score 0.493* .241 0.673 –0.675* 0.601* – – 0.254** 0.245* 0.533 0.324 0.409* 0.512* – Note: ** significance level at 0.01 (2-tailed); * significance level at 0.05 (2-tailed). The efficiency index score and the management efficiency have a positive and significant relationship with financial stability at a significance level of 0.01 and 5%, respectively. However, net operating margin has a negative relationship with financial stability at a 0.01 significance level. 4.2. Model (B): Traditional banks Table 6 illustrates the descriptive statistics of the study variables; dependent and independent variables by the application on traditional banks. As shown from the tables above, all variables are asymmetrical. Especially skewness is positive for The efficiency of Egyptian banks (using financial all variables except for bank size and net interest ratios and the efficiency index score) has a signifi- margin. Kurtosis value of all variables also indicant positive impact on financial stability. A panel cates data is not normally distributed because valregression analysis using Eviews software is con- ues of kurtosis are deviated from 3. ducted by classifying Egyptian banks into three categories; traditional banks, traditional banks Table 7 illustrates the correlation of coefficients between dependent and independent variables with Islamic windows and Islamic banks. by the application on traditional banks in Egypt. Table 5 shows a panel regression analysis using the Findings revealed that majority of independent Eviews software. The analysis was conducted on all variables have no significant relationship with fiEgyptian banks in order to further examine the in- nancial stability except the efficiency index score terrelationship between the efficiency of Egyptian of Egyptian banks. The efficiency index score has banks and financial stability. The efficiency index a positive significant impact on financial stability score of Egyptian banks and other explanatory in- at a significance level of 0.01. dependent variables explains the variability in financial stability by very weak percent at 14.1%. Table 5. Analysis output for Model A Independent variables Bank Efficiency (Constant) The banks Efficiency Index Bank size Net interest margin Net non-interest margin Net operating margin Asset management efficiency Beta t Sig. Significant at 10% – 0.218 –.293 .258 .118 –.796 .958 –.689 0.043 –.163 .272 .129 –.282 .268 .492 0.713 .871 .786 .898 .778 .789 – Significant Insignificant Insignificant Insignificant Insignificant Insignificant Collinearity statistics Tolerance VIF – 0.791 .7041 .657 .691 .529 .778 – 3.671 2.165 3.289 4.519 5.634 2.162 Statistics fitness R2 Adjusted R2 F-equation Prob. (F-statistics) http://dx.doi.org/10.21511/bbs.17(2).2022.02 0.128 0.141 5.879 0.003 19
9. Banks and Bank Systems , Volume 17, Issue 2, 2022 Table 6. Descriptive statistics for Model B Islamic banks Financial stability Min Max Mean Median Dependent variable –0.599 53.448 21.015 Skewness Kurtosis SD Jarque-Bera 1.014 3.432 10.764 181.379 0.731 0.5157 0.2541 0.5307 0.096 0.1561 4.573 –1.2794 –1.690 4.905 0.779 5.607 24.712 4.721 39.190 1.607 67.317 89.179 0.054 0.461 1.282 0.939 1.471 2.799 35,415 837.15 15,615.12 76.2143 69,232.01 149,032 1.2910 Independent variables The index of bank efficiency Bank size Net Interest Margin Net Non-Interest Margin Net Operating Margin Asset Management Efficiency 0.679 6.301 1.067 4.254 3.187 0.018 0.713 8.587 7.035 6.019 7.168 9.469 0.654 7.415 3.609 0.599 2.934 3.223 Table 7. Correlations matrix for Model B Correlation matrix Financial stability Bank size Net Interest Margin Net Non-Interest Margin Net Operating Margin Management efficiency The Banks Efficiency Index Financial stability Bank size NIM Net NIM NOM Management efficiency Efficiency index score – – – – – – – .179 – – – – – – –0.217 .314 – – – – – 0.431 .219 .0804 – – – – 0.818 .673 .918 –.405 – – – 0.612 .309 0.775 –0.711 0.641* – – 0.221* 0.432 0.532** 0.449* 0.456* 0.613 – Note: ** significance level of 0.01 (2-tailed); * significance level of 0.05 (2-tailed). Table 8. Analysis output for Model B Independent variables banks efficiency (Constant) The Banks Efficiency Index Bank size Net interest margin Net non - interest margin Net operating margin Asset management efficiency Beta t Sig. Significant at 10% 0.081 .074 –.491 .019 .337 .065 .641 0.459 .594 –1.910 .141 1.226 .562 .523 0.661 .554 .059 .888 .223 .576 Insignificant Insignificant Significant Insignificant Insignificant Insignificant Collinearity statistics Tolerance VIF 0.721 .689 .782 .675 .537 .715 0.457 2.254 4.345 4.904 5.437 2.260 Statistics Fitness R2 Adjusted R2 F-equation Prob (F-statistics) 0.041 0.063 0.003 0.996 Table 8 shows a panel regression analysis using 4.3. Model (C): Traditional the Eviews software. The analysis was conductcommercial banks with Islamic ed on all traditional Egyptian banks in order to windows further examine the interrelationship between the efficiency of Egyptian banks and financial Table 9 illustrates the descriptive statistics of the stability. study variables; dependent and independent variables by the application on traditional banks with Results revealed that the index of bank efficien- Islamic windows. As shown from the table above, cy and other independent variables managed to all variables are asymmetrical. Especially skewexplain the variability in financial stability by ness is positive for all variables except for bank size only 6.3%. This means that there are other ex- and net interest margin. Kurtosis value of all variaternal variables that affect the financial stability bles also indicates data is not normally distributed of banks in Egypt. because values of kurtosis are deviated from 3. 20 http://dx.doi.org/10.21511/bbs.17(2).2022.02
10. Banks and Bank Systems , Volume 17, Issue 2, 2022 Table 9. Descriptive statistics for Model C Islamic banks Financial stability Min Max Mean Median Skewness kurtosis Dependent variable 0.70535 0.782 0.745 0.1312 SD Jarque-Bera 1.013 2.345 11.98 191.830 1.2056 –1.2122 –1.123 2.219 .613 5.607 180 3.257 4.531 26.870 1.223 64.702 79.201 180 0.0.065 0.4190 1.0275 0.495 0.915 1.188 180 189,045 824.05 11213.02 73.13290 68221.01 142036 180 Independent variables The Bank Efficiency Index Bank Size Net Interest Margin Net Non-Interest Margin Net Operating Margin Asset Management Efficiency Observations 0.0030 7.692 0.687 1.386 1.0067 2.053 180 0.5140 9.207 5.037 0.614 4.455 6.048 180 0.1321 8.377 3.106 0.525 2.581 4.179 180 0.1211 0.7132 0.1321 0.4351 0.043 0.024 180 Table 10. Correlations matrix for Model C Correlation matrix Financial stability Bank size NIM NNIM NOM Management efficiency The Efficiency Index Score Financial stability – –.081 –0.345 0.541 –0.891* –0.592* 0.037** Bank size – – .521** .181* .387* –.146* 0.421* Net interest margin – – – –.079* .712** 0.635* 0.521 Net non-interest margin – – – – –.213* –0.536** 0.816 Net operating margin – – – – – .721** 0.713* Management efficiency – – – – – – 0.652** The Banks Efficiency Index – – – – – – – Note: ** significant level of 0.01 (2-tailed); * significance level of 0.05 (2-tailed). Table 10 illustrates the correlation of coefficients between dependent and independent variables by the application on traditional commercial banks with Islamic windows in Egypt. Table 11 shows a panel regression analysis using the Eviews software. The analysis was conducted on all traditional commercial banks with Islamic windows in Egypt to further examine the interrelationship between the efficiency of Egyptian banks and financial stability. The results proved that the efficiency index score of Egyptian banks and other independent variables explain the variability in financial stability by 22.2%. 4.4. Model (D): Islamic banks Table 12 illustrates the descriptive statistics of the study variables; dependent and independent variables by the application on Islamic Banks. All variables are asymmetrical. Skewness is positive for all variables except for bank size and net interest Table 11. Analysis output for Model C Independent variables Banks Efficiency (Constant) The Banks Efficiency Index Bank size Net interest margin Net non-interest margin Net operating margin Asset management efficiency Beta t Sig. Significant at 10% – 0.521 .394 3.44 –1.05 –5.88 –.988 –3.769 1.623 3.469 4.662 –3.203 –4.718 –3.351 .001 0.023 .002 .000 .003 .000 .002 – Significant Significant Significant Significant Significant Significant Collinearity statistics Tolerance VIF – 0.635 .6040 .559 .591 .410 .472 – 3.817 2.907 3.982 3.915 4.536 2.625 Statistics fitness R2 Adjusted R2 F-equation Prob (F-statistics) http://dx.doi.org/10.21511/bbs.17(2).2022.02 0.1938 0.222 16.79 0.0001 21
11. Banks and Bank Systems , Volume 17, Issue 2, 2022 Table 12. Descriptive statistics for Model D Islamic banks Financial stability Min Max Mean Median Skewness Dependent Variable –0.983 32.133 12.155 0.1433 kurtosis SD Jarque-Bera 1.103 2.651 9.62 211.138 Independent Variables The Banks Efficiency Index 0.0040 0.4065 0.1452 0.1120 1.9801 2.321 0.071 211,002 Bank size 6.883 8.018 7.477 0.6572 –1.5465 7.295 0.307 924.05 Net interest margin Net non-interest margin Net operating margin Asset management efficiency Observations 1.127 4.845 1.298 1.969 180 5.965 10.792 9.575 12.906 180 3.820 0.744 2.816 5.618 180 0.1572 0.5350 0.0651 0.015 180 –1.553 3.192 .858 6.707 180 28.378 1.618 68.207 100.792 180 0.932 2.410 1.934 1.730 180 12443.03 81.91329 71110.01 153949 180 Table 13. Correlations matrix for Model D Correlation Matrix Financial stability Bank Size Net Interest Margin Net Non-Interest Margin Net Operating Margin Asset Management Efficiency The Banks Efficiency Index Financial stability Bank Size NIM NNIM NOM – – – – – – – .065 – – – – – – 0.257* .431** – – – – – 0.457 .079 –.069* – – – – 0.798* –.286** .619** –.172* – – – Management Efficiency Index Efficiency Score –0.687 –.135* 0.532* –0.625** .535** – – 0.045** 0.423* 0.321 0.761 0.612* 0.712** – Note: ** significance level of 0.01 (2-tailed); * significance level of 0.05 (2-tailed). margin. Kurtosis value of all variables also indi- of Egyptian banks and financial stability. The efcates data is not normally distributed. ficiency index score of Egyptian banks and other independent variables explain the variability in fiTable 13 illustrates the correlation of coefficients nancial stability by 55.3%. between dependent and independent variables by the application on Islamic banks in Egypt. The relationship between financial stability and independent variables (bank size, net interest Table 14 shows a panel regression analysis using margin, net non-interest margin, asset managethe Eviews software. The analysis was conduct- ment efficiency) is linear variables are directed on Islamic banks in Egypt to further exam- ly proportional to each other and represent a ine the interrelationship between the efficiency straight line. Table 14. Analysis output for Model D Independent Variables Bank Efficiency (Constant) The banks’ efficiency index Bank size Net interest margin Net non-interest margin Net operating margin Asset management efficiency Beta t Sig. Significant at 10% – 0.721 –.170 .385 .364 .671 –.953 .934 1.211 –.724 1.895 1.988 1.873 –3.029 .356 0.006 .473 .066 .054 .069 .004 – Significant Insignificant Significant Significant Significant Significant Collinearity Statistics Tolerance VIF – 0.431 .540 .652 .498 .340 .371 – 2.987 1.709 1.219 2.929 3.635 3.526 Statistics fitness R2 Adjusted R2 F-equation Prob. (F-statistics) 22 0.372 0.553 3.11 0.557 http://dx.doi.org/10.21511/bbs.17(2).2022.02
12. Banks and Bank Systems , Volume 17, Issue 2, 2022 4.5. Result summary Table 15. Results summary of the statistical model Financial stability across different categories of banks Model of traditional Model of traditional banks Model of Islamic banks with Islamic window banks Variables Model of all banks The efficiency index score Bank size Net interest margin Net non-interest Margin Net operating margin Asset management efficiency Insignificant Insignificant Insignificant Insignificant Insignificant Insignificant Insignificant at 10% Insignificant at 10% Significant at 10% Insignificant at 10% Significant at 1% Significant at 1% Significant at 1% Significant at 1% Significant at 1% Significant at 10% Insignificant Significant at 10% Significant at 10% Significant at 10% Insignificant Insignificant at 10% Significant at 1% Significant at 10% Hypothesis test: Failure to reject H0 is linear. • In the case of the model of Islamic banks – only bank size compared to other explanatory variables does not have any impact on financial stability. Financial stability was measured by z-score. Explanatory variables managed to explain the change in financial stability by only 55.3 %, representing a strong fit model, and p-value is equal to Results showed that the efficiency index score of 0.055, which is statistically significant at 10%. Egyptian banks has a very weak and significant impact on financial stability of Egyptian banks, • In the case of the model of all Egyptian banks – therefore, the null hypothesis H0 stating that the the size of the bank, net interest margin, net relationship between the efficiency of Egyptian non-interest margin, net operating margin banks and financial stability is zero can be acceptand the efficiency of asset management have ed. However, for the model of Islamic and tradino impact on financial stability. tional banks with Islamic windows, the efficiency index score has a positive strong impact on finan• In the case of the model of conventional banks – cial stability of Egyptian banks at a significance only net non-interest margin has an impact on rate 1% and 10%, respectively; this means that the financial stability at a significance rate 10%. null hypothesis can be rejected, the first alternative hypothesis H1 is accepted, and the second al• In the case of the model of traditional banks ternative hypothesis H2 is rejected; this means that with Islamic windows – all financial ratios there is a significant difference between traditionused in this study as a measure of efficiency al banks and Islamic banks in Egypt when considhave a significant impact on financial stability ering the efficiency of Egyptian banks in relation of Egyptian banks at a significance rate 1%. to financial stability. CONCLUSION Only a few studies have investigated how bank efficiency affects financial stability of Egyptian banks and accordingly boosts economic growth. Moreover, financial stability of Egyptian banks is significant because it shows a stable financial system, which is vital as it encourages trust in the system and prevents destabilizing occurrences. Empirical results showed that the efficiency of Egyptian banks has an impact on financial stability. However, the degree of impact varies based on the applicable banking system. Results revealed a positive, significant, and strong relationship between the efficiency of Islamic and traditional banks with Islamic windows and financial stability. The majority of Egyptian banks are traditional banks with a percentage of 70%. Islamic and traditional banks with Islamic windows are more efficient than traditional banks, since traditional banks do not http://dx.doi.org/10.21511/bbs.17(2).2022.02 23
13. Banks and Bank Systems , Volume 17, Issue 2, 2022 apply Islamic moods of finance and investment. Less efficient banks are exposed to lower credit risk, since they do not provide more loans and do not build more provisions as a cushion against non-performing loans. Ultimately, this will lead to lower profitability, and the capital will result in less financial stability and afford less risk. As long as banks are not efficient, they do not accept additional risk, this in turn reduces capital base to generate sufficient income. The lower the financial stability, the lower the banks’ capabilities to support economic growth and development in Egypt. Conversely, as the level of efficiency increases, Egyptian banks accept higher risk to increase profitability rates and financial stability to support economic growth. Different finance and investment patterns of Islamic banks allow banks to accept lower risk rather than other banking systems. This shows how efficient Islamic banks are compared to other banks operating in Egypt. The efficiency of operating rates of Egyptian banks represents an essential and vital element of financial stability, which directly contributes to reducing unemployment rates, which is the ultimate goal for any country. Islamic banks are more distinguished in terms of efficiency rates compared to other bank systems operating in Egypt. The relationship between the efficiency level of Egyptian banks (three categories of banks) and financial stability is significant but very weak. On the contrary, the efficiency of Islamic and traditional banks with Islamic windows increases and has a positive and high significant impact on financial stability. Efficient banks accept risky assets with higher credit risk and build more provisions to generate higher returns for shareholders. The higher the risk, the higher the revenues and profits generated. Islamic banks increase capital to compensate the given high risk and enhancement the banks’s capital base to increase the capital adequacy ratio and financial stability. Alternative hypothesis is accepted stating that the efficiency index score of Egyptian banks has a positive significant impact on financial stability. This supports the adoption of the Islamic banking system to increase financial stability, as well as increase the financial inclusion and boost economic growth as a major requirement to the Egyptian economic, especially after the pandemic. AUTHOR CONTRIBUTIONS Conceptualization: Hassan Mohamed Mohamed Hafez. Data curation: Hassan Mohamed Mohamed Hafez. Formal analysis: Hassan Mohamed Mohamed Hafez. Investigation: Hassan Mohamed Mohamed Hafez. Methodology: Hassan Mohamed Mohamed Hafez. Project administration: Hassan Mohamed Mohamed Hafez. Software: Hassan Mohamed Mohamed Hafez. Supervision: Hassan Mohamed Mohamed Hafez. Validation: Hassan Mohamed Mohamed Hafez. Visualization: Hassan Mohamed Mohamed Hafez. Writing – original draft: Hassan Mohamed Mohamed Hafez. Writing – reviewing & editing: Hassan Mohamed Mohamed Hafez. REFERENCES 1. 24 Abduh, M., & Chowdhury, N. T. (2012). Does Islamic banking matter for economic growth in Bangladesh. Journal of Islamic Economics, Banking and Finance, 8(3), 104-113. Retrieved from https://ibtra.com/pdf/journal/ v8_n3_article6.pdf 2. Abduh, M., Hasan, S. M., & Pananjung, A. G. (2013). Efficiency and performance of Islamic Banks in Bangladesh. http://dx.doi.org/10.21511/bbs.17(2).2022.02
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15. Banks and Bank Systems , Volume 17, Issue 2, 2022 and foreign Islamic banks: empirical evidence from Malaysia. Journal Pengurusan, 37(1), 77-90. Retrieved from http://journalarticle.ukm.my/6960/1/3629-80901-PB.pdf irregularities and structural complexities in data envelopment analysis (pp. 305-320). Springer, Boston, MA. https://doi. org/10.1007/978-0-387-716077_17 26. Shrieves, R. E., & Dahl, D. (1992). The Relationship between Risk and Capital in Commercial Banks. Journal of Banking and Finance, 16(2), 439-457. http://dx.doi. org/10.1016/0378-4266(92)90024-T 28. Tan, Y., & Floros, C. (2013). Risk, capital and efficiency in Chinese banking. Journal of International Financial Markets, Institutions and Money, 26, 378-393. https://doi. org/10.1016/j.intfin.2013.07.009 27. Sufian, F., Kamarudin, F., & Noor, M. H. H. N. (2013). Assessing the revenue efficiency of domestic 29. Trabelsi, M. A., & Trad, N. (2017). Profitability and risk in interest-free banking industries: a dynamic panel data analysis. International Journal of Islamic and Middle Eastern Finance and Management, 10(4), 454-469. https://doi.org/10.1108/IMEFM-05-2016-0070 30. Yehya, M., Muhammad, J., & Hadi, A. R. A. (2012). A comparative study on the level of efficiency between Islamic and conventional banking systems in Malaysia. International Journal of Islamic and Middle Eastern Finance and Management, 5(1), 48-62. https://doi. org/10.1108/17538391211216820 APPENDIX A Table 1A. The study sample No. Bank name Bank type 1 Commercial International Bank Traditional bank 2 Societe Arab International De Banque (SAIB) Traditional bank 3 Suez Canal Bank Traditional bank 4 Arab African International Bank Traditional bank 5 Principal Bank for Development and Agricultural Credit Traditional bank 6 Arab International Bank Traditional bank 7 Export Development Bank of Egypt Traditional bank 8 Housing and Development Bank Traditional bank 9 Industrial Development and Workers Bank of Egypt Traditional bank 10 Arab Investment Bank Traditional bank 11 Arab Bank Corporation (ABC) Traditional bank 12 Bank Audi Traditional bank 13 Bloom Bank Egypt Traditional bank 14 Egyptian and Arab Land Bank Traditional bank 15 Credit Agricola Egypt Traditional bank 16 HSBC Bank Traditional bank 17 African Export and Import Bank Traditional bank 18 Bank of Alexandria and San Polo Traditional bank 19 Banque Misr Traditional bank 20 National Bank of Egypt Traditional bank 21 Mashreq Bank – Egypt 22 Banque du Caire Traditional bank Traditional with Islamic window 23 Egyptian Gulf Bank (EG Bank) Traditional with Islamic window 24 Misr Iran Development Bank Traditional with Islamic window 25 Qatar National Bank Al Ahly (QNB ALAhli) Traditional with Islamic window 26 Faisal Islamic Bank Islamic bank 27 Al Baraka Bank, Egypt Islamic bank 28 Federal Arab Bank for Investment and Development Islamic bank 29 United Bank – Egypt Islamic bank 30 Union National Bank Egypt (UNB – E) Islamic bank 26 http://dx.doi.org/10.21511/bbs.17(2).2022.02