Credit Risk Of Islamic Banks Research Articles

How size influences the credit risk in Islamic banks

This research analyses the effects of the bank size and it financing to customer on credit risk, only few researches considered credit risk of Islamic banks by only focus on the determinants of cre...

Board of directors and credit risk: An empirical study of Indonesian Islamic banks

Credit risk is the primary risk in the banking industry related to its function in distributing credit to customers. Decreasing credit risk is the main duty of the management of banks. We examine the relationship between the Board of Directors (BOD) characteristics and credit risk in the Indonesian Islamic bank. BOD characteristics consist of BOD size, educational qualification, number of meetings, and expertise. The samples in this study are full-fledged Islamic banks in Indonesia that publish annual reports for the year 2013-2017. The data are processed using panel data regression. We indicate that the number of BOD meetings has a negative influence on credit risk, BOD size has a positive influence on credit risk while educational qualification and expertise do not influence credit risk of Islamic banks in Indonesia. Understanding BOD characteristics and credit risk are useful to mitigate the implementation of corporate governance for Islamic banks in the two-tier board system. The findings are expected to have a contribution to strengthening the BOD’s role to encourage the better performance of Islamic banks. JEL Classification: G21, G32 DOI: https://doi.org/10.26905/jkdp.v23i4.3484

Moderating Role of Intellectual Capital between Relationship of Bank Specific Factors and Credit Risk of Islamic Banks

Purpose-The Objective of this study is to investigate the moderating role of Intellectual Capital between the relationship of Bank internal factor and Credit Risk in Islamic banks of Pakistan. Design/Methodology-Panel data are obtained from annual reports of 4 Islamic banks of Pakistan from the period 2006 to 2017. These are analyzed using hierarchical regression techniques, via Eviews 9 software. Findings-The results showed that intellectual capital significantly moderates the relationship of bank internal variable and credit risk in Islamic banks in Pakistan. Practical Implications-The study found that Intellectual Capital is a very important driver for credit risk. The investment in Intellectual Capital may lower the credit risk which will further help in the growth and sustainability of the bank and hence the growth in the economy. The results of the study will be useful for bank management, policy maker, and regulator and academia for future research.

Developments in Risk Management in Islamic Finance: A Review

The purpose of this study is to review recent developments pertaining to risk management in Islamic banking and finance literature. The study explores the fundamental features of risks associated with Islamic banks (IBs) as compared to those associated with conventional banks (CBs) in order to determine the extent to which IBs engage in effective risk mitigation. The study includes a consideration of the major studies in which the fundamental features of Islamic banks and finance (IBF) and the main characteristics of risk management in IBs are analyzed in comparison with those of CBs. Specifically, these two kinds of banks are compared in relation to the types of risks faced, the characteristics of those risks, and the nature and extent of exposure to those risks. A tabular methodology approach is used in concert with a comparative literature review approach for the analysis. The results show that there is weak support for Shariah-based product development due to the lack of risk mitigation expertise in IBs. The conclusion presented is that in comparison with CBs, IBs are more risk-sensitive due to the nature of their products, contract structure, legal costing, governance practices, and liquidity infrastructure. Furthermore, the determinants of the credit risk of Islamic banks in Malaysia (MIBs) are examined. Overall, bank capital and financing expansion have a significant negative impact on the credit risk level of IBs in Malaysia.

Black Gold’s Price Plunge: Are Conventional and Islamic Banks Equally Vulnerable?

Regarding the vulnerability of the banking industry to oil price plunges, we investigate the effects of oil price declines on credit and insolvency risks for the banking industry within specific bank specializations (conventional, Islamic, and conventional banks with Islamic windows), from 2000 through 2016, at both the aggregate and country levels in the Gulf Cooperation Council (GCC). Our findings show that falling oil prices significantly increase the credit risk for the banking industry, particularly for banks operating in Kuwait, Qatar, Saudi Arabia and the United Arab Emirates. Commercial banks with Islamic windows are also prone to oil price shocks. However, falling oil prices do not affect the credit risk of Islamic banks. Utilizing accounting-based and marked-based proxies for the insolvency risk, our analysis shows that oil price plunges do not increase the insolvency risk of the banking industry or bank specializations. We argue that bailout packages given by the wealth funds to GCC banks is a probable cause for counter intuitive results with respect to solvency risk. Our research findings will be of interest to various stakeholders, particularly the regulators who look for empirical evidence to develop deeper insights to the sound functioning of the banking systems.

Credit risk and bank opacity: a comparative study of conventional and Islamic banks

In this paper, we examine the impact of banking opacity along other bank-specific and macroeconomic factors on credit risk using a regression analysis. We estimate our panel data model using the fixed and random effects method for 72 conventional and Islamic listed banks in the MENA region over the 2005-2015 period. We found that banking opacity has a direct positive effect on the credit risk of conventional banks. On the other hand, banking opacity has no significant impact on the credit risk of Islamic banks.

Credit risk and bank opacity: a comparative study of conventional and Islamic banks

In this paper, we examine the impact of banking opacity along other bank-specific and macroeconomic factors on credit risk using a regression analysis. We estimate our panel data model using the fixed and random effects method for 72 conventional and Islamic listed banks in the MENA region over the 2005-2015 period. We found that banking opacity has a direct positive effect on the credit risk of conventional banks. On the other hand, banking opacity has no significant impact on the credit risk of Islamic banks.

Structural changes, competition and bank stability in Malaysia’s dual banking system

This paper assesses Malaysia’s competition landscape and its risk implications subsequent to conventional banking consolidation and Islamic banking penetration in the aftermath of the 1997/1998 Asian financial crisis. Employing a panel sample of conventional and Islamic commercial banks, it arrives at the following conclusions. First, the consolidation exercise, which has led to a significant reduction in the number of domestic commercial banks, has not stifled banking competition. Second, the paper provides empirical support for the competition-stability relationship, particularly for the conventional banking sector. Islamic banking sector risk appears to be neutral to market competition or market power, although there is limited evidence that it increases with overall market concentration. Finally, the analysis uncovers the risk-increasing effect of the Islamic banking market structure on the conventional banking sector. By contrast, conventional banking market concentration tends to reduce the credit risk of Islamic banks.

Upravljanje kreditnim rizikom u Islamskom bankarstvu

During the centuries of conventional banking practice, a number of credit risk mitigation techniques and instruments have been developed and the process of their evolution, due to constant changes in the banking business, is continuing. Islamic banks, however, have not yet managed to develop authentic, Shariah acceptable credit risk management techniques to the extent sufficient to meet their needs. Therefore, they are often forced to use conventional techniques, whose consistent application in Islamic banking, due to the Shariah non-compliance of certain techniques or the way in which they are implemented in conventional banking, is quite limited. In this paper, we will analyze the conventional credit risk management and mitigation techniques and their applicability in Islamic banking, the credit risk management practices in Islamic banks, the achieved results and factors that influence the emergence and intensity of credit risk in Islamic banking.

The Impact of Macroeconomic Factors on Credit Risk in Conventional Banks and Islamic Banks: Evidence from Indonesia

The banking sector is viewed as an important figure in the economic development. However, this sector is vulnerable to macroeconomic instability which lead to higher credit risk of banks. Motivated by the fact that unlike conventional banking, there is limited research study about the impact of macroeconomic factors on credit risk in Islamic banking. Therefore, further research to study about it has become important. This research aim is to evaluate the association between macroeconomic factors with credit risk through comparative analysis of these two kinds of banking system. Empirical results suggest that Islamic banks are more resistant during crisis, and only two variables (Exchange Rate and MS) which are significant to credit risk in Islamic banks. Meanwhile, in conventional banks almost all variables are significant except Industrial Production Index. This research is expected to give contributions to literature, and provide comparable information on the credit risk profile across the banks to stakeholders.

Factors Affecting Credit Risk in Indonesian Islamic Banks

This study uses dynamic panel data methods to examine the factors affecting credit risk in Indonesian Islamic banks. The panel data is collected from 11 full-fledged Islamic banks and 22 Islamic business units (windows) in conventional banks from 2004-2012, taking into account both macroeconomic variables and bank-specific variables. The Generalized Method of Moments (GMM), as proposed by Arellano and Bond (1991), is utilized to estimate the model. The results show that the GDP growth rate and the unemployment rate with a one-year lag have a strong effect on the level of the non-performing financing. Moreover, bank-specific variables such as bank’s diversification and financing structure have a positive effect on the problem financing although its direction is not as expected. It is hoped that the findings could draw attention to factors affecting credit risk in Islamic banks so that credit risk can be properly managed.

Comparative credit risk in Islamic and conventional bank

In this paper, we consider the levels of credit risk in Islamic and conventional banks. One problem with existing studies is the use of accounting information alone to assess credit risk, and this could be especially misleading with Islamic banking. Using a market-based credit risk measure, Merton's distance-to-default (DD) model, we evaluate the credit risk of 156 conventional banks and 37 Islamic banks across 13 countries between 2000 and 2012. We also calculate the accounting information-based Z-score and nonperforming loan (NPL) ratio for the purpose of comparison. Our results show that Islamic banks have significantly lower credit risk than conventional banks as based on DD. In contrast, and as expected, Islamic banks display much higher credit risk using the Z-score and NPL ratio. These findings suggest that the measure chosen plays a significant role in assessing the actual credit risk of Islamic banks.

Bank Specific and Macroeconomics Dynamic Determinants of Credit Risk in Islamic Banks and Conventional Banks

The study analyzes macroeconomic and bank specific determinants of credit risk in Islamic and Conventional Banks. Multivariate Regression analysis is applied on the sample of 15 conventional banks and 13 Islamic Banks in Malaysia over the period between 2000 and 2010. The finding shows that the banks specific determinants of credit risk are uniquely influenced the credit risk formation of Islamic and Conventional banks. The study found that risky sector financing; regulatory capital (REGCAP) and Islamic Contract are significant to credit risk of Islamic banks. For Conventional Banks, loan loss provision, debt-to-total asset ratio, REGCAP, size, earning management and Liquidity are significant factors influencing credit risk. As for macroeconomic factors only Inflation and M3 are significant to credit risk for both Islamic and Conventional banks.

Comparative Credit Risk in Islamic and Conventional Banks

This study considers whether Islamic banks and conventional banks have different levels of credit risk. One problem with existing research in this area is the dominance of accounting information to assess credit risk, and this could be especially misleading in the case of Islamic banking. Using Merton’s distance-to-default (DD) model, a market-based credit risk measure, we evaluate the credit risk of 156 conventional banks and 37 Islamic banks across 13 countries between 2000 and 2012. We also calculate the accounting information-based Z-score and nonperforming loan (NPL) ratio for the purpose of comparison. Our results show that Islamic banks have significantly lower credit risk than conventional banks when measuring credit risk with the DD. In contrast, and as expected, Islamic banks exhibit much higher credit risk using the Z-score and NPL ratio. Overall, the findings suggest that the methodology used plays a significant role in assessing the apparent credit risk of Islamic banks.

Credit Risk of Islamic Banks in GCC Countries

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.

Islamic Justification of Credit Default Swap for Managing Credit Risk in Islamic Banking

Due to use profit-sharing modes in Islamic banks, the nature of risks in these institutions has changed and the return of investments or deposits isn’t predetermined. Because the return of investors settles based on profit-loss sharing, they are also contributed to risk of banking operations. In accordance with studies conducted in some Islamic financial institutions credit risk is one of the main risks that puts in danger Islamic banks. Conventional banks use commonly credit derivatives to reduce credit risk exposure. They can hedge themselves against any imposed credit event from counterparty through transferring risk to other party in credit derivatives. This is a principal question about possibility of applying credit derivatives for managing credit risk in Islamic banks considering the Islamic jurisprudence principals.Conventional institutions utilize commonly credit derivatives to reduce credit risk exposure. They can hedge themselves against any imposed credit events by counterparty. There is a permanently question about the possibility of applying credit derivatives to reduce credit risk in Islamic financial institution regarding the sharia principles.This article firstly considers credit risk and introduces different types of it. Then specified types of credit risk which exposure in Islamic credit institutions (especially Islamic banks) will be presented. The nature of Islamic banks appears special risks more than what commonly conventional banks face with them. Finally we look at jurisprudence possibility of applying credit derivatives for managing credit risk in Islamic banks. In this regard we review one of the most common types of credit derivatives (Credit Default Swap) according to sharia principals.

AUTHOR INDEX FOR VOLUME 36

This paper assesses Malaysia’s competition landscape and its risk implications subsequent to conventional banking consolidation and Islamic banking penetration in the aftermath of the 1997/1998 Asian financial crisis. Employing a panel sample of conventional and Islamic commercial banks, it arrives at the following conclusions. First, the consolidation exercise, which has led to a significant reduction in the number of domestic commercial banks, has not stifled banking competition. Second, the paper provides empirical support for the competition-stability relationship, particularly for the conventional banking sector. Islamic banking sector risk appears to be neutral to market competition or market power, although there is limited evidence that it increases with overall market concentration. Finally, the analysis uncovers the risk-increasing effect of the Islamic banking market structure on the conventional banking sector. By contrast, conventional banking market concentration tends to reduce the credit risk of Islamic banks.