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Credit risk in Islamic banking: evidence from the GCC

Trevor Chamberlain (Department of Finance and Business Economics, DeGroote School of Business, McMaster University, Hamilton, Canada)
Sutan Hidayat (Department of Business Administration, University College of Bahrain, Manama, Bahrain)
Abdul Rahman Khokhar (Department of Finance, Information Systems and Management Science, Sobey School of Business, Saint Mary’s University, Halifax, Canada)

Journal of Islamic Accounting and Business Research

ISSN: 1759-0817

Article publication date: 29 January 2020

Issue publication date: 17 April 2020

699

Abstract

Purpose

This study aims to investigate the differences in the credit profiles of Islamic and conventional banks in the Gulf Cooperation Council (GCC) region and attempts to identify the factors responsible for those differences.

Design/methodology/approach

Financial data sourced from the Bankscope database for a sample of 25 Islamic and 56 conventional banks headquartered in the GCC region between 1987 and 2014 are used. The credit risk of Islamic versus conventional banks is compared using a variety of univariate (mean difference test and correlation analysis) and multivariate tests (pooled ordinary least squares (OLS) regressions with robust standard errors and year fixed effects, regressions with interaction variables and logistic regressions).

Findings

Pooled OLS regressions find that Islamic banks have lower credit risk than conventional banks. Robustness checks using logistic functions and interaction variables confirm this result. Using multiple econometric specifications, we also find that higher capitalization, greater liquidity and cost inefficiency contribute to the lower risk profile of Islamic banks.

Research limitations/implications

The study is unable to disaggregate data for banks offering both Islamic and conventional banking services and hence does not include conventional banks with Islamic windows. In addition, there are differences across countries even within the GCC region as to what is considered Sharia’h-compliant and what is not.

Practical implications

The results are of potential interest to not only researchers, but also market participants, regulators and legislators. The methods used in this study could be extended to other two-tiered banking systems and, in the case of Islamic and conventional banking, to other markets.

Originality/value

The authors use a unique sample of banks headquartered in the GCC countries, whose banking markets are similar, if not homogeneous, thus excluding operations of multinational banks. By focusing on the Gulf region, differences in the credit profiles of Islamic and conventional banks can be examined without the confounding effects of unobserved factors like culture, accounting regime or regulatory environment.

Keywords

Acknowledgements

The authors wish to thank Mounir Ballout for research assistance and the anonymous referees of the journal for valuable suggestions and insights.

Citation

Chamberlain, T., Hidayat, S. and Khokhar, A.R. (2020), "Credit risk in Islamic banking: evidence from the GCC", Journal of Islamic Accounting and Business Research, Vol. 11 No. 5, pp. 1055-1081. https://doi.org/10.1108/JIABR-09-2017-0133

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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