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Credit risk in dual banking systems: does competition matter? Empirical evidence

Mohsin Ali (Taylor’s Business School, Taylor’s University – Lakeside Campus, Subang Jaya, Malaysia)
Mudeer Ahmed Khattak (Department of Business Administration, Iqra University – Islamabad Campus, Islamabad, Pakistan)
Nafis Alam (School of Accounting and Finance, Asia Pacific University of Technology and Innovation (APU), Kuala Lumpur, Malaysia)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 24 May 2021

312

Abstract

Purpose

The study of credit risk has been of the utmost importance when it comes to measuring the soundness and stability of the banking system. Due to the growing importance of Islamic banking system, a fierce competition between Islamic and conventional banks have started to emerge which in turn is impacting credit riskiness of both banking system.

Design/methodology/approach

Using the system GMM technique on 283 conventional banks and 60 Islamic banks for the period of 2006–2017, this paper explores the important impact of size and competition on the credit risk in 15 dual banking economies.

Findings

The authors found that as bank competition increases credit risk seems to be reduced. On the size effect, the authors found that big Islamic banks are less risky than big conventional banks whereas small Islamic banks are riskier than small conventional banks. The results are robust for different panel data estimation models and sub-samples of different size groups. The findings of this paper provide important insights into the competition-credit risk nexus in the dual banking system.

Originality/value

The paper is specifically focused on credit risk in dual banking environment and tries to fill the gap in the literature by studying (1) do the Islamic and conventional banks exhibit a different level of credit risk; (2) does competition in the banking system impact the credit risk of Islamic and conventional banks and finally (3) do the big and small banks exhibit similar levels of credit risk.

Keywords

Citation

Ali, M., Khattak, M.A. and Alam, N. (2021), "Credit risk in dual banking systems: does competition matter? Empirical evidence", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-01-2020-0035

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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