RISK OF GOVERNANCE AND FINANCIAL STABILITY

Abstract

Purpose This purpose ofthe study is specific role ofrisk governance in promoting financial stability in banks. Using hand collected data, it develops a Risk Governance Index (RGI) to the strength ofrisk governance structures and then examines its impact on six main indicators offinancial stability for conventional and Islamic banks in the countries. measure The objective ofthis study is to assess and compare the profitability ofIslamic banks and conventional banks. In the Panel data framework fixed and random effect models are used on the data from Pakistan, Malaysia, and Bangladesh ranging from 2008-2018. The results show that interest/mark-up income enhance the ROA and ROE of both Islamic and conventional banks. Further non-interest/non-mark-up income increase the profitability (ROA and ROE) ofIslamic banks while decrease the profitability (ROA and ROE) of conventional banks. On the contrary, loan/advances to deposits (LTD) increase the profitability of conventional banks while discourage the profitability of Islamic banks. The effect of deposits to total assets is significant and positive on the ROE of both Islamic and conventional banks while insignificant on ROA. Moreover, loan/advances to assets (LA) positively effect and capital adequacy ratio (CAR) negatively affect the profitability of both Islamic and conventional banks. Interestingly, the impact ofsize on the profitability of Islamic banks is positive and on the profitability of conventional banks it’s negative. Lastly, the economic activity (GDP) helps to increase the profitability of both Islamic and conventional banks. The country-wise analysis indicate that the impact ofthe profitability of banks is significant different of one country from another. Methodology & Design Statistical regression technique has been used in this study to analyze the risk governance index based on 8 banks in in which four Islamic and four conventional that’s working in Pakistan. Findings This study found natural logarithm oftotal assets, size of bank, credit risk has positive and significant impact on risk governance and financial stability. Limitations Every study has limitations and there are no exceptions. Data took only form banks & no other financial institutions. Other variable like economy, inflation etc. did not consider. Recommendations While comprehensive, a large number of indicators can cause complexity difficulties when comparing overall financial stability across different banks or regions. The purpose of this research is to construct a comprehensive stability indicator