The Impact of Capital Adequacy on Bank Market Value: Evidence from Islamic and Conventional Banks in Saudi Arabia

Povzetek

This study examines the relationship between capital adequacy and market value in Saudi Arabia's dual banking system, comparing Islamic and conventional banks using panel data from 10 listed banks (6 conventional, 4 Islamic) over 2020H1-2024H2, encompassing 100 semi-annual observations. Employing multiple regression analysis with Capital Adequacy Ratio (CAR) as the primary independent variable and controlling for profitability measures (ROA, ROE), bank size, and institutional type, we investigate how capital strength affects bank market valuations in the post-COVID era under Saudi Arabia's Vision 2030 economic transformation. Our findings reveal a statistically significant positive relationship between capital adequacy and market value, with each percentage point increase in CAR associated with a SAR 1.423 billion increase in market capitalization, supporting signaling theory that investors view higher capital ratios as indicators of financial strength and stability. Bank size emerges as the dominant valuation driver with the highest coefficient significance, consistent with economies of scale theory in banking. Most notably, we document a substantial "Islamic banking premium" of SAR 13.99 billion, whereby Islamic banks command higher market values despite being 20.7% smaller in assets and exhibiting 27.4% lower profitability (ROA and ROE) than conventional banks, suggesting that investors value Shariah compliance, ethical governance, and perceived stability of Islamic banking models beyond traditional financial performance metrics. Interestingly, profitability indicators showed no significant impact on market value, indicating that Saudi investors prioritize long-term solvency and institutional size over short-term earnings. The results support SAMA's Basel III-aligned capital requirements while highlighting strategic opportunities for Islamic finance sector development under Vision 2030, contributing to limited literature on bank valuation in emerging dual banking systems and providing empirical evidence for the market value of ethical banking principles in Muslim-majority economies.