Abstract
This paper is about factors affecting credit risk of Islamic banks in the Gulf Cooperation Council countries using website data covering 25 Islamic banks over 2006 to 2010. This study uses non-performing loans as a proxy for credit risk, which is the dependent variable with three macro-economic, and six firm-specific independent variables. We find income is significantly negatively related to credit risk, which is consistent with findings in other countries about credit risk. Some firm-specific variables such as leverage, liquidity are also relevant variables for credit risk, which results are also consistent with bank behaviour reported in other studies. Credit risk is also broadly affected by both macro and firm-specific factors as found in other regions. Inflation and interest rates do not appear to be relevant. These results would suggest non-performing loan is broadly correlated with factors identified in other studies of banks.
Highlights
Islamic banking has developed as a niche banking serving customers with special financial needs, and Islamic banking products are compliant with a number of binding restrictions in the pricing, contracting, investments, and return characteristics compared with the mainstream banks, which dominate banking transactions
This section explains the modeling of the variables that relates NPL as credit risk to a number of assumed independent variables widely used in such studies: LNTA, MGTEFF, Regulatory capital (REGCAP), loan to deposit (L/D), RSKAST and Loan loss provision (LLP)
The aim of this paper is to make a preliminary study of how credit risk is associated with key macroeconomic and bank-specific factors in the fast-growing Islamic banking region, namely the Gulf region
Summary
Islamic banking has developed as a niche banking serving customers with special financial needs, and Islamic banking products are compliant with a number of binding restrictions in the pricing, contracting, investments, and return characteristics compared with the mainstream banks, which dominate banking transactions. Over some 50 years, these Islamic niche banks in 76 countries have developed systems of operations that rely on the principles of Islamic Sharīah (legal system) pertaining to financial transactions In those banks, Sharīahcompliant banking products are securitized, offered to meet the special needs of customers. In order to achieve the perceived benefits to society as per the compliance with the broader social needs of the community, Islamic banks have spread around the world during the past five decades. It has a significant presence in the Middle Eastern countries, with Saudi Arabia, Dubai and Bahrain having.
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