International banking under the microscope

Staff from the school of Accounting and Finance have papers examining sectors of the international banking industry due for publication in the upcoming issue of Corporate Ownership and Control.

Managerial decisions are the main cause of inefficiency in the Sri Lankan banking industry, according to Lalith Seelanatha. Dr Seelanatha and co-researcher, Hilary E. Silva from the University of Jayewardenepura's paper presents findings from their study of efficiency in Sri Lankan banks over a 20-year period.

Although Sri Lankan banks were, overall, "relatively efficient", managerial decisions and operational scale had contributed to recorded inefficiency. The research revealed that management issues appeared to be more pronounced in medium-sized banks. While large banks were relatively more efficient than small banks, new commercial banks performed better than large other banks, he said.

In a separate paper,  Abdi (Abdiwahid) Hassan, Yongqiang Li, Esse Abdirashid, Bruno Zeller and Miaoli Du examine the performance of 91 Islamic banks around the world, from 1991 to 2010. Their paper examines the impact on investment protection on the Islamic banking sector.

Mr. Hassan and his colleagues argue that because many Islamic banks rely on financing methods such as mark up or lease financing, instead of profit-and-loss sharing methods (which are considered the core Islamic financing methods), they are exposed to default risks.

"The empirical results [show]... investor protection has a positive impact on the financial performance of Islamic banks. The legal approach to corporate governance in Islamic banks holds the key issue of protecting the investors from outside parties. This legal approach includes both conventional law and Shariah law, represented by the Shariah supervisory board. The policy implication is one of improving investor protection," Mr Hassan and his co-researchers explain. Mr Hassan said further research was needed because of the dramatic growth in the Islamic banking sector.

"We need to investigate what the optimal level of investor protection should be. This is important in orderto leverage between the improvement of short-term performance and sustainable development within the framework of Shariah principles."