Credit risk management and practices in Islamic and conventional banks: an emerging market perspective

Abstract

This chapter undertakes a comparative assessment of credit risk management and practices of Islamic and conventional banks in Saudi Arabia. We employ a sample of Islamic and conventional banks and a questionnaire administered to more than one hundred senior officers carrying out credit risk management activity across five primary aspects of credit risk management: (i) understanding credit risk, (ii) credit risk management, (iii) credit risk assessment analysis, (iv) credit risk identification and (v) credit risk monitoring. We argue that because of their distinctive risk profile, credit risk management in Islamic banks could be challenging. However, we find that Islamic banks in Saudi Arabia appear to have better credit risk management and practices than conventional banks. We suggest one advantage of Islamic banks may lie in the external assistance provided to them in risk management by the Accounting and Auditing Organization for Islamic Financial Institutions and the Islamic Financial Services Board.