The Impact of Regulatory and Supervisory Structures on Bank Risk and Efficiency: Evidence from Dual Banking System

  • Nafis Alam Nottingham University Business School, University of Nottingham-Malaysia Campus, Jalan Broga, 43500 Semenyih, Selangor, Malaysia.


James Madison once said “If men were angels, no government would be necessary”. Madison’s view has direct implications for efficient bank supervisory and strong regulatory strategies. On the onset of 2007-08 subprime crisis banking system across the globe were left exposed to financial tsunami due to over-expansion and excessive risk concentrations. This incident should provide regulators wake up call to further develop and strengthen the regulatory system with new and strict monitoring mechanism. In the given context, this paper will investigates the linkages between bank regulatory and supervisory structures associated with Basel III’s pillars and various aspects of banks’ efficiency and risk. The analysis will be focussed on dual banking system over the period 2006-2010. Our results suggest that regulations and strict monitoring of banking operation, and higher supervisory power of the authorities, increase the technical efficiency for Islamic banks but decreases convention banks efficiency. We observe the opposite effect in the case of restrictions on bank activities, with higher restrictions having a reduction in risk taking of Islamic banks while increasing the risk taking of conventional banks. Results also indicate that Islamic banks are better prepared towards the implementation of Basel III guidelines compared to their conventional counterparts.

Author Biography

Nafis Alam, Nottingham University Business School, University of Nottingham-Malaysia Campus, Jalan Broga, 43500 Semenyih, Selangor, Malaysia.

Dr. Nafis is an Assistant Professor of Finance at the Nottingham University Business School (NUBS) in the University of Nottingham - Malaysia Campus (UNMC). Prior to this, he was attached with Monash University at Sunway campus where he worked as lecturer in finance/Islamic finance.

He has published quite extensively in the area of Islamic finance and his scholarly research has featured in leading journals like Review of Islamic Economics; Journal of Internet Banking and Commerce and Journal of Financial Services Marketing among others. He also co-authored three books in Islamic Finance among them is Encyclopedia of Islamic Finance which is first of its kind and has sold over 1000 copies worldwide. He has also participated in leading Islamic finance conferences worldwide such as Harvard Islamic Finance forum and IDB sponsored conference. He also acted as consultant for various Islamic banks across the globe in the area of product development and risk management issues. Currently he is also member of editorial advisory board of finance journals.

Dr. Nafis has a PhD in Islamic Finance from Monash University, Australia, MBA in Finance from the MMU, Malaysia and a Bachelor’s degree major in Economics and Statistics from Patna University, India

Research Articles