Risk analysis in Banks: A comparison of Islamic and conventional banks in Jordan

Abstract

Islamic banks are different from conventional banks considering funding types, financing costs and the operational processes. It also differs in compliance and risk management processes. Thus, hybrid economic systems are a challenge for central banks as well as financial institutions. The research paper is focused on comparative risk assessment amongst Islamic and conventional banks in Jordan. With a focus on credit risk, operational risk, bank size and CAMEL framework, the study uses panel data for the period 2012-2017 for 13 conventional banks and three Islamic banks. The study found Islamic banks to be better managed in terms of risk management rather than conventional banks and operational risk was found to be best fitted to analyse performance of a bank. Also, a vector auto regression system at an optimum lag of four was found to be best suited to model performance of a bank based on credit risk, operational risk and size.