Analysis of the determinants of capital adequacy ratio: The case of Islamic banks in the Gulf Cooperation Council (GCC)

Unquestionably, capital adequacy ratio (CAR) remains topmost priority for regulators due to its capability to measure bank soundness. CAR measures the capacity of regulatory capital to soak up unexpected financial losses during financial distress. Therefore, the study objective is to analyze the effect of Return on Assets (ROA), Return on Equity (ROE), Financing to Deposit Ratio (FDR), Operating Expense to Operating Income (OEOI), Log Total Assets (SIZE), Non-Performing Financing (NPF), Gross Domestic Product (GDP), and İnflation (INF) on the Capital Adequacy Ratios (CAR) of the whole GCC Islamic banks between 2013 and 2018. This study implements a statistical research design to run the analysis. The descriptive statistics summarizes that the overall bank performances is favorable except slightly weak operating efficiency. Similarly the economic indicators are also favorable. According to the correlation analysis, only FDR has direct relation with CAR while ROE, OEOI, SIZE, NPF, GDP, and INF have inverse relations with CAR. Lastly, the regression analysis demonstrates that CAR is strongly and directly influenced by OEOI and FDR, but strongly and inversely by SIZE. All the other variables are found to be insignificant. In the end, it is recommended that bank need to minimize operating expenditure to the lowest level possible to improve their efficiency, and to develop optimal financing policy considering the harmful effect of over-and-under-financing on the banks' liquidity position. Also, the banks are recommended to pursue growth with minimal acceptable risk and maximum overall performance.