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

Abstract

Purpose This 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/approach The 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. Findings This 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 implications By 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/value Only 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.

Role of fintech in credit risk management: an analysis of Islamic banks in Indonesia, Malaysia, UAE and Pakistan

“…These results of the study conform to the works of Albaity et al (2022), and Dibooglu et al (2022) that credit risk is a multidimensional phenomenon that includes a country-wise dimension as well. Also, since Malaysian banking is greater in size, therefore the results in the case of Malaysia also conform to the results of Hasan et al (2023) that the credit risk of Islamic banks is a also a function of surveillance systems. The varying effects of fintech on credit risk management in various countries also conform to the earlier works of Albaity et al (2022), Mateev et al (2022), Alshater et al (2022) and Elkmash (2022).…”

“…Abd-AL jabar Awda (2022) narrates that credit risk is a natural risk that any financial institution, including an Islamic bank, has to face because of the nature of its operations. Hasan et al (2023) indicate that the credit risk in Islamic banks is also a function of its size and better risk reporting based on improved credit risk surveillance. Mohamed and Elgammal (2023) report that credit risk screening policy should not be stereotyped.…”

A systematic review of customer Sharia compliance behaviour in Islamic banks: determinants and behavioural intention

“…Whether there is, a fundamental difference between the model of products and services offered by Islamic banks and the model based on usury used by conventional banks is a topic of continuous dispute among academics and industry professionals. Moreover, many Sharia banking practitioners and researchers continue to doubt the differences between Sharia bank products and conventional ones, as some clients continue to believe there are no substantial distinctions between the two types of banks (Hasan et al , 2023).…”