The effect of financing and non-financing income on Islamic banks’ risk : evidence from Gulf Cooperation Council Countries

Abstract

Purpose: This study investigates the effect of income structure on Islamic banks’ risk in Gulf Cooperation Council (GCC) countries. The main objective was to investigate whether a great reliance on non-financing income, and different types of non-financing income (Fees and Commission, Trading Income, and Other Income) impacts the riskiness of Islamic banks. Design/Methodology/Approach: A panel dataset of 16 Islamic banks from Bahrain, Saudi Arabia, Qatar, United Arab Emirates, and Kuwait during the period 2010 to 2016 were used to achieve the objectives of this study. Findings: The study found evidence that Islamic banks’ risks are decreased and stability is improved by non-financing income. In addition, the study found that components of nonfinancing income have different impacts on Islamic banks’ risk, where trading income and other income have decreased the Islamic banks’ risk. Islamic banks are found to be more focused on financing activities than non-financing activities (innovative activities). Practical Implications: These findings have important practical implications to Islamic banks in order to deal with non-financing income to boost their growth worldwide. Moreover, these findings have important implications for Islamic banks’ management. Originality/value: Testing the effect of income structure in the banking industry is still relatively needed. Furthermore, the Islamic banks literature has been largely ignored.