Credit and investment risk: a comparative analysis of conventional and Islamic banks

Abstract

For a developing country such as Bangladesh, the banking system is one of the most important preconditions to achieve economic development. This study covers a five-year period (2007–2011) and includes ten sample banks from the Islamic and conventional banking sectors to study the credit/investment risk of the two streams of banking. For this study, two portfolios of the two streams of banking have been constructed to perform an analysis and for document finding in the form of sector averages. Analysis revealed that return on assets of conventional banks is better than that of Islamic banks. Non-performing loans of conventional banks are significantly higher than those of Islamic banks for the period from 2007 to 2011, which indicates conventional banks’ inefficiency in credit risk management. Therefore, this study concludes that in managing credit risk, some indicators support better performance of conventional banks, but some refute the claim. With proper guidelines and cautious operations, both the banking streams can mitigate their credit/ investment risk.