Comparative credit risk in Islamic and conventional bank

Abstract

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. JEL classification: G21; G32

Risk of Debt-Based Financing in Indonesian Islamic Banking

“…The increase is due to the increase in financing that occurred in the previous year. This result is consistent with the results of the research (Kabir et.al, 2015), which revealed that NPF on Islamic banking showed a lower risk against credit risks. Other researchers who studied the credit risk analysis of NPF is (Ahmad, 2007;Berger & Deyoung, 1997;Das & Ghosh, 2009;Jiménez, et.al, 2007;Sukmana & Suryaningtyas, 2016)…”

“…It's also answered why debt-based financing more attractive than the equity based financing by (Shahari et al, 2015)not only because DBF using collateral and fixed returns guarantees, but also have a lower risk and still be able to maintain the financial stability of Islamic banking well so that far from the possibility of failure. This study is in compliance with the study of (Cihak & Hesse, 2008;Kabir, et.al, 2015;Rajhi & Hassairi, 2013).…”

Stability of Islamic banks in Indonesia: Autoregressive Distributed Lag Approach

“…Some plausible reasons are from the limited investment of Islamic bank because they have to meet the Sharia principles (Hussein, 2010), having better risk management (Hassan, Khan, & Paltrinieri, 2019) and having low credit risk because of no speculative transaction in their financing (Miah & Uddin, 2017). On another hand, some empirical literature indicates that the Islamic banks' stability is worse than conventional banks because moral hazard and asymmetric information bear on the profit-and-loss sharing system (Kabir, Worthington, & Gupta, 2015;Lassoued, 2018). Volume 24, Issue 1, January 2020: 40-52 | 42 | 2016; Setyawati et al 2017;Sriyana, 2015;Widarjono, 2018;Risfandy, 2018;Octavio & Soesetio, 2019), efficiency of Islamic banks (Hosen & Rahmawati 2016;Aisyah & Hosen, 2018;Majdina, Munandar, & Effendi, 2019) and credit risk of Islamic banks (Firmansyah, 2015;Husa & Trinarningsih, 2015;Nugraheni & Muhammad, 2019).…”

Islamic Banking, Costly Religiosity, and Competition

“…Although aspects like Shariah compliance (Abdelsalam et al 2014), competition and performance (Ariss 2010), efficiency (Abdul‐Majid, Saal, and Battisti 2011), risk (Abedifar, Molyneux, and Tarazi 2013; Kabir, Worthington, and Gupta 2015 and references therein), corporate governance (Ghayad 2008; Nienhaus 2007), asset quality, and comparison and contrast with conventional banking (Beck, Demirgüç‐Kunt, and Merrouche 2013; Basov and Bhatti (2014); Abedifar et al 2015) are covered in the literature, the critical aspects of Islamic banks are studied less both theoretically and empirically (Khan 2010; Azmat et al 2016). In particular, less attention is paid to whether Islamic banks gradually deviate from their fundamental goal of ethics, justice, and equity, fulfilling the demand of the niche market and isolating themselves from the challenges and competition emanating from conventional banks.…”