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Abstract: (22 Views)
This paper assesses the nonlinear relationship between capital structure and financial performance of Islamic banks in selected OIC countries during the period 2010-2020. Using a balanced data panel of 125 banks and 1375 annual observations, first, fixed and dynamic effects panel linear models were estimated to test the direct effect of equity to assets ratio on return on assets and return on equity. Then, using the dynamic threshold panel regression model, two breakpoints were identified at the levels of 12% and 18%, indicating a positive and significant effect of capital ratio up to the first threshold, a slight decrease at the middle threshold, and a noticeable slowdown at the higher threshold. Structural stability tests, random resampling with 1000 resamplings, and alternative estimates with NIM and Z Score criteria have confirmed the validity and stability of these findings. Regional analyses show that the magnitude of the impact of capital on performance is greater in the Gulf region than in other regions, and regulatory differences and market depth affect the optimal capital thresholds. The results of this study indicate that in determining the target capital ratio, Islamic banks should balance the benefits of tax shields and agency costs at medium levels with the effects of increased bankruptcy costs and operational complexity at high levels. The findings of this study are important from two theoretical and practical aspects: first, they are useful for setting flexible regional regulatory policies and improving the capital frameworks of Islamic banks. Second, these findings confirm the efficiency risk hypothesis (the possibility of reduced operational efficiency) and the royalty value hypothesis (the value inherent in competitive advantages and brand).
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