Principles of Islamic banking and finance/PIBF202/Structure and operations/Ownership structure of Islamic banks

The ownership structure of a bank is important as it affects the performance of a bank. In particular, the type of ownership affects the risk taking opportunities of bank managers - the famous agency problem in finance. Banks are generally owned by one of the three: government, institutions or a private sector entity. Also important aspect of a bank is the concentration of ownership. A bank in private sector can be owned by one person, holding 100% of the shares while in another bank no one would be holding more than 1 or 2 % of the shares. Similarly, a government may be holding 25% of a bank's share while rest of the shares are divided among many small share holders, thus keeping the power to make all important decisions. A large number of empirical studies address the effect of ownership structure and concentration on bank goals, performance and risk taking behavior.

Ownership structure and performance

In a recent study Zouari and Taktak (2014) investigate the structure of ownership of 53 Islamic banks belonging to 15 different countries. According to them, most of the Islamic banks have a concentrated ownership structure, and very few banks have a widely dispersed structure. Based on La Porta definition of ultimate owners, they report that only 17 per cent (9 of 53), 5.66 per cent (3 of 53) and 7.5 per cent (4 of 53) of banks in their sample have a dispersed structure, respectively, on C1, C3 and C5 concentration measures (where first measure of concentration is the percentage of shares held by the largest shareholders C1; second, the percentage of the first three largest shareholders C3, and the percentage of the first five largest shareholders C5). It also shows that the ownership in the four ownership categories is predominantly concentrated in the hands of a few shareholders, who are generally institutional investors but occasionally government or family investors. In fact, out of 53 banks, 41 are institutional (77.35 per cent), 7 are state (13.2 per cent) and 5 retain a family majority stake (9.43 per cent).

According to Zouari and Takak, family and state ownership affect positively a bank’s performance. Banks with institutional and foreign shareholders do not perform better. In addition, findings point out that ownership concentration does not impact Islamic banking performance according to neutrality thesis. They infer that the control scheme of Islamic banks differs from the conventional one. Depositors have some ownership rights unlike shareholders. In fact, besides the current accounts, Islamic banks offer investment accounts based on the principle of sharing profits and losses. The latter do not guarantee a fixed return, but the owners are involved in performance of the bank in proportion to their financial contribution, according to a sharing ratio predetermined. This difference, compared to conventional banks, introduces an element of mutuality in Islamic banking, making its depositors as customers with some ownership rights in it. The owners of capital (rabbul-mal) can be treated as temporary shareholders. Moreover, Islamic banks opting mostly for mutual organizational form will have more democratic character, enabling their depositors to enjoy some ownership rights.

Bank ownership and risk taking

In a study, Samir Sarairi (2013) finds a negative and significant association between ownership concentration and risk taking. The negative effect suggests that banks with concentrated ownership are taking lower risk in terms of credit risk and insolvency risk than banks in diffuse ownership. This result is in line with the findings of Iannotta et al. (2007) and Garcia-Marco and Roles-Fernandez (2008) and contrary to the agency theory (Jensen & Meckling, 1976) and the results of several studies (e.g., Saunders et al., 1990) which show that large owners lessen the conflicts of interests between managers and shareholders and have greater incentives and power to increase bank risk-taking than small shareholders. Their results are consistent with the argument of Burkart et al. (1997) which states that as the monitoring effort exerted by a large shareholder increases, managerial initiative to pursue new investment opportunities decreases. This can be translated in terms of less risk taking by managers in the case of concentrated ownership structure. In addition, some studies point out (Caprio et al., 2007 ; Shehzad et al., 2010) that in countries with low level of share-holder protections rights and supervisory control (the case of most MENA countries), ownership concentration reduces bank riskiness. The two measures of risk used show no difference between conventional and Islamic banks.

Islamic Banks' shareholders depositors

It is true, at least in theory, that the nature of depositors of Islamic banks is different. However, as Islamic banks are still not able to use the profit and loss share modes of financing (mudarabah, musharakah and operating lease) on a larger scale, the people savings with Islamic banks are not really treated as share holders. Furthermore, as most of the depositors hold non-investment accounts with Islamic banks and are primarily risk averse, they do not aspire to be at par with banks' share holders. Those who do put money in the investment accounts have remained at a disadvantageous position when compared to the share holders of the bank. A study by Abdou Diaw and Abdoulaye Mbow (2011) of International Centre for Education in Islamic Finance (INCEIF), Kuala Lumpur, Malaysia, finds that investment accounts holders (IAH), like the equity holders, are exposed to the risk of loss and yet they do not have voting rights that give them authority over the banks management as the case is for the equity holders. Moreover, since the depositors come to the Islamic banks individually, they may not have the possibility to bargain about the profit sharing ratio which significantly affects their return.