Are Islamic banks sufficiently diversified? : an empirical analysis of eight Islamic banks in Malaysia

Abstract EN

The aim of this study is to analyze the diversification among financial activities of Islamic banks and how it affects banks performance.

We used the Herfindahl-Hirschman Index (HHI) to measure the degree of asset/liability diversification and risk-adjusted performance as criteria of assets allocation and management compensation.

We found that retail and commercial activity are the most profitable activity, which lead to an overinvestment in those activities.

Some banks show high average correlation between commercial and retail activities, and corporate and investment activities.

The analysis of the efficiency shows that none of these banks falls on the frontier which means that they should change the structure of their portfolio in order to become less concentrated.

They should also allocate more assets to treasury activity.