How Islamic and Conventional Banks Use Discretionary Loan Loss Provision in Pakistan

Irsa Azam ,Mamoona Majeed

doi:10.7176/jpcr/49-03

Abstract

The purpose of this paper is to investigate the use of DLLP in the banking sector of Pakistan. First, the study identifies the factors affecting the use of DLLP in Islamic banks of Pakistan. Secondly, the study also tries to examine the difference between the use of discretion in Islamic and conventional banks. The study used secondary data collection method and applied regression technique for analysis. The study provide evidence that all the factors including CAR, bank size and profitability effect the use of DLLP in Islamic banks except LD and EBTP. The study also found that conventional banks are more involved in DLLP compared with Islamic banks. The reason may be that Islamic banks in Pakistan work under Sharia supervisory board and avoid the practices of earnings management. The sharia principled are based on fairness, justice, and equal chances of profit and loss. This study may be helpful for regulators who can make policies for financial statements to be more transparent. This study can also be useful for investors to get to know how much discretion banks has made on the main accounting item. Keywords: Loan loss provision, Discretionary loan loss provision, Islamic banks, conventional banks, Earnings Management DOI: 10.7176/JPCR/49-03 Publication date: June 30th 2020

Highlights

The internal and external stakeholders depend heavily on the reliability of annual reports of a business
The purpose of this study is to identify the factors which effect the use of discretionary loan loss provision (DLLP) in Islamic banks of Pakistan
5.0 Conclusion The purpose of the study is to carefully analyze all those factors which can affect the use of DLLP in Islamic banks

Summary

Introduction

The internal and external stakeholders depend heavily on the reliability of annual reports of a business. The financial reports lead to the formation of crucial decision makings like capital raising and investment (Ghazali, Shafie & Sanusi, 2015). These reports work just like a mirror to all stakeholders because they used it for checking the financial performance of a bank. These reports must be reliable for stakeholders and for the general public (Haat, Rahman & Mahenthiran, 2008). The transparency of financial reports depends mainly on management, auditors and directors Their positive behavior would help in generating these reports valid (Haat et al 2008)

Objectives

Results

Conclusion