Does corruption affect Islamic banking? Empirical evidence from the OIC countries
| Date | 20 July 2020 |
| Published date | 20 July 2020 |
| DOI | https://doi.org/10.1108/JFC-06-2020-0101 |
| Pages | 170-186 |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
| Author | Zuhairan Yunmi Yunan |
Does corruption affect Islamic
banking? Empirical evidence from
the OIC countries
Zuhairan Yunmi Yunan
Department of Economics, Syarif Hidayatullah State Islamic University Jakarta,
Tangerang Selatan, Indonesia
Abstract
Purpose –This paper aimsto examine whether the level of corruption affectsprofitability and soundness of
Islamic banking.
Design/methodology/approach –This paper uses a dynamic panel of 61 Islamic banks from 12
Organizationof Islamic Cooperation (OIC) countriescovering the period between 2016 and 2018.
Findings –This paper finds that the empirical evidence examined shows that corruptiondoes affect the
profitabilityand soundness of Islamic banks.
Originality/value –The value of thispaper is to emphasize further understanding of corruptionbehaviour
on Islamic banking inIslamic countries. This paper contributes to fillingthe gaps in the current literature on
corruption and Islamic banking.Existing literature has only focussed on either profitabilityor soundness of
Islamic banking, whereas this paper analyses the impact of corruption levels for both performance
measurementssimultaneously.
Keywords Corruption, Islamic bank, Profitability, Bank soundness, Transparency international
Paper type Research paper
1. Introduction
The complex nature of corruption has attracted discussion and debate among scholars.
Many scholars from various fields have discussed corruption issues intensively with the
discussion on the economics of corruption starting almost half a century ago (Abed and
Gupta, 2002). The economics of corruption gained significance because of globalization of
trade and global economic developments, democratic practices and good governance
requiring transparencyand accountability.
Economic research on corruption has evolved into various analyses in economics
including behaviour, institution, public policy, region and industry. More specifically, the
discussion on the impact of corruptionhas also been established in the banking sector. Some
scholars have found that corruptionaffects bank loaning (Akins et al.,2017;Chen et al.,2013;
Fung
a
cov
aet al., 2015;Weill, 2011), profitability (Bougatef, 2017) and stability (Ho et al.,
2019;Toader et al.,2018). In the context of developing countries, corruption has a negative
impact when the countries have weak institutions, low democracy and poor governance
(Boudriga et al., 2009). In addition, corrupt behaviour occurring in banks impedes financial
accessibility(Qi andOngena, 2019) and growth of companies (Beck et al.,2005).
Meanwhile, the impact of corruption on Islamic banking has too rarely been foundin the
literature constellation. Some studies stated that corruption has an effect on profitability of
Islamic banks (Arshad and Rizvi, 2013;Khediri and Ben-Khedhiri, 2009), soundness
JEL classification –C33, D73, F40, G21
JFC
28,1
170
Journalof Financial Crime
Vol.28 No. 1, 2021
pp. 170-186
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-06-2020-0101
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
(Bougatef, 2015) and Islamic bankinggrowth (Cham, 2018). From this, the analysis has only
concentrated the impact of corruption on each bank indicator. Understanding the impact of
corruption on Islamic banking is essential, as profitability and soundness of banking play
important roles for maintaining the stability of financial systems (Ho et al.,2019).
Consequently, a study to see the impact of corruption on profitability and soundness of
Islamic bankingsimultaneously with current data is essential.
Following this introduction, Section 2 of this paper reviews the literature on corruption
and Islamic bank indicators. Dataand variables used to analyse this paper are explained in
Section 3. The findings of this research are summarized in Section4, discussing the impact
of corruption on profitability and soundness of Islamic banking. Section 5 presents
conclusions as well as recommendations for future empirical studies on corruption in
Islamic banks.
2. Literature review
This section presents the discussion from the literature on the effects of corruption on bank
profitability and soundness. In addition, definitions and measurements of corruption are
presented to gain more understanding of the term “corruption”that will be used in this paper.
2.1 Defining and measuring corruption
There are various understandings of corruption presented in previous research. Corruption
can be defined from many perspectives such as religion, law, sociology, politics and
economics. Corruption definition can also be explained by some institutions and scholars.
The United Nations Convention against Corruption as a world institution that focusses on
corruption issues doesnot precisely define its context, as corrupt behaviour differs fromone
to another (United Nations,2004), whereas Transparency International defines corruptionas
the misuse of public power for private profit or the misuse of entrusted power for private
gain (Lambsdorff,1996).
Among scholars, the definition of corruption is still highly debated (Mikkelsen, 2013).
The concept of corruption was traditionally restricted to the destruction of integrity in the
discharge of public duties (Theobald, 1990). Hence, the definition of corruption has usually
been associated with public officialsinfluenced by bribery. However, it is now increasingly
accepted that the act of corruptionmay be applicable to both public and private individuals
and may extend beyondbribery (Ng, 2006).
Wedeman (2004) and Rose-Ackerman (1999) state that corruption includes the activities
such as embezzlement, trading in influence, bribery, concealment and laundering of
proceeds. However, as the limitation of the definition of corruption is still difficult to
determine, the understanding of corruption is closely related to the norms and conventions
of its original state (Kurer,2005).
The complexity of defining corruption makes relative measurement difficult. However,
several corruption measurements have been devised by scholars to compare corruption
levels. The measurements widely used to examine corruption levels in a country are the
Corruption Perception Index (CPI) and Control of Corruption (CC), published by
Transparency International and the World Bank, respectively (Asiedu and Freeman, 2009;
Knack, 2007). Variousmethods and data sources have been used to develop those indices.
2.2 Corruption and bank profitability
The impact of corruption on the profitabilityof banks has been studied by several scholars.
In a cross-countries analysis, a study conducted by Chen and Liao (2009) pointed out that
foreign banks in Asian countries are more profitablein the corrupted environment than local
Evidence from
the OIC
countries
171
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