Abstract
This study examines the relationship between credit risk and performance using unbalanced quarterly panel data, of six Islamic banks in Pakistan. The study uses panel data instrumental variables regression, utilising the seemingly unrelated regression (SUR) models to identify the bank specific variables that affect credit risk and performance of Islamic banks. The results show that credit risk is an endogenous determinant of bank performance. The causes of credit risk may include components of credit assets, which is dependent on bank specific factors. Besides, the results also suggest that the credit risk of bank specific variables lowers bank profitability. Therefore, the results support the views that credit risk is negatively related to bank performance in the case of banking sector in Pakistan.
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