Evaluating the 2013 Islamic Banking Regulation Capital Reform Implication for the Valuation of the Islamic Banks

The scope of research papers on the banking regulation reforms and its effect on conventional bank performance gave the authors the idea to consider Islamic banks in this light. Especially since in 2013 the Islamic Financial Services Board (IFSB) proposed the capital ratio for the Islamic banks. The paper employs the difference-in-differences model (DD) that allows to evaluate the treatment effect of the proposed IFSB regulation on the Islamic bank stock performance. The authors collected annual data on 25 Islamic banks (treatment group) and 41 conventional/mixed banks (control group) from 11 countries in the period of 2005–2020. The results reveal positive sign for the treatment effect. We interpret it that investors perceive the new regulation for the Islamic banks as a signal of increase in these banks' financial stability that much outpace the accompanying costs of higher capital requirements.