Role of risk disclosure on creditworthiness and driving forces of risk disclosure of banks: Islamic vs conventional banks

Abstract

PurposeThis study aims to examine the effect of risk disclosure (RD) on commercial banks’ credit rating (CR) in the context of Bangladesh. It also explores the factors influencing RD in both Islamic and conventional banks.Design/methodology/approachThe sample includes 200 bank-year observations consisting of 20 commercial banks (15 conventional and 5 Islamic banks) from 2010 to 2019. The sample is further segregated into Islamic and conventional banks. Ordered logit and random effect ordinary least square models are used to analyze the data. Furthermore, the two-stage least squares approach is used to perform a robustness test.FindingsThis study shows that RD significantly positively impacts CR, with a stronger effect in Islamic banks than in conventional banks. This study also finds that banks’ age and leverage negatively influence CRs. Moreover, banks’ size and total capital have a positive and negative influence on CRs, respectively. This study also shows that the age of Islamic and conventional banks positively and negatively influences the RD scores, respectively. In contrast, the RD score of conventional banks is positively impacted by bank size.Practical implicationsBy examining which variables substantially impact RD and, hence, CR scores, bank stakeholders may make better financing, investment and other policy decisions. Investors may choose stocks with a high level of RD in the annual reports as the earlier studies imply that higher RD enhances CR.Originality/valueOnly a few studies have examined the relationship between RD and CRs, while, to the best of the authors’ knowledge, this study is the maiden attempt in the Bangladesh context. This study also compares the link between Islamic and conventional banks.