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

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohsin Ali ◽  
Mudeer Ahmed Khattak ◽  
Nafis Alam
Keyword(s):  
Credit Risk ◽  
Banking System ◽  
Islamic Banks ◽  
Content Type ◽  
Panel Data Estimation ◽  
System A ◽  
Size Groups ◽  
Conventional Banks ◽  
Fierce Competition ◽  
Data Estimation

PurposeThe 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/approachUsing 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.FindingsThe 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/valueThe 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.

Determinants of bank margins in a dual banking system

2017 ◽  
Vol 43 (6) ◽  
pp. 630-645 ◽  
Author(s):  
Siew Peng Lee ◽  
Mansor Isa
Keyword(s):  
Credit Risk ◽  
Market Share ◽  
Emerging Market ◽  
Banking System ◽  
Operating Costs ◽  
Islamic Banks ◽  
Content Type ◽  
Conventional Banks ◽  
Interest Payments ◽  
Conventional And Islamic Banks

Purpose The purpose of this paper is to determine of bank margins for conventional and Islamic banks in the dual banking system in Malaysia. Design/methodology/approach The study uses unbalanced panel data for 20 conventional banks and 16 Islamic banks over the period 2008-2014. The dynamic two-step GMM estimator technique introduced by Arellano and Bond (1991) is applied. Findings The results suggest that there are significant similarities with minor differences in terms of factors determining bank margins between conventional and Islamic banks in Malaysia. The margins for conventional banks are influenced by operating costs, efficiency, credit risk, degree of risk aversion, market share, size of operation, implicit interest payments and funding costs. For Islamic banks, the margin determinants are found to be operating costs, efficiency, credit risk, market share and implicit interest payments. This means that more factors influence the margins in conventional banks compared to Islamic banks. Although bank diversification activities have increased in recent years, their impact on bank margins is minimal. Practical implications The results suggest that improving operational costs, operational efficiency and credit risk management, and minimising implicit interest payments would be the best strategy to enhance the bank margins for both conventional and Islamic banks. The results also have important policy implications on the necessity to expand the size of Islamic banking in Malaysia. Originality/value There are relatively few studies concerning determinants of bank margins in emerging markets. The present study adds to the literature by presenting evidence from Malaysia, an emerging market with a dual banking system. This allows us to explore the similarities and differences between conventional and Islamic banks in Malaysia in respect of determinants of the margins.

Risk and risk management practices

2020 ◽  
Vol 11 (8) ◽  
pp. 1555-1581 ◽  
Author(s):  
Adel Elgharbawy
Keyword(s):  
Risk Management ◽  
Credit Risk ◽  
Management Practices ◽  
Archival Data ◽  
Islamic Banks ◽  
Monitoring And Control ◽  
Content Type ◽  
Different Types ◽  
Conventional Banks ◽  
And Control

Purpose This study aims to compare types and levels of risk and risk management practices (RMPs) including the recognition, identification, assessment, analysis, monitoring and control of risk in both Islamic and conventional banks. Design/methodology/approach A questionnaire survey was conducted among the Islamic and conventional banks in Qatar, together with an analysis of archival data extracted from the Thomson Reuters Eikon database for the period 2009-2018. Data were analysed using descriptive statistics, ANOVA and regression analysis. Findings Islamic banks encounter unique types and levels of risk that are not encountered by conventional banks. In Islamic banks, risks such as those of operation and Sharia non-compliance are perceived to be higher, while in conventional banks other risks such as those of credit and insolvency are higher; other risks, for example, liquidity risk, are faced by both. RMPs are determined by understanding risk and risk management, risk identification, risk monitoring and control and credit risk analysis, but not by risk assessment and analysis. However, the RMPs of the two types of bank are not significantly different, except in the analysis of credit risk. Research limitations/implications The study contributes to the debate in the literature by developing a better understanding of the dynamism of risk management in Qatari banks, which can be extended to similar contexts in the region. However, the relatively small sample size in only one country limits the possibility of generalizing the findings. The survey methodology is based on the perception of bankers rather than their actual actions and does not provide in-depth analysis for each type of risk, especially credit risk. However, using archival data, in addition to those from the survey, minimises the bias that would result from depending on one source of data. Practical implications The study provides valuable insights into the different types and levels of risk, as well as the RMPs in Islamic and conventional banks, which can help in guiding the future development and regulation of risk management in the banking sector of Qatar and its region. Originality/value The study helps to explain the mixed results of previous studies that compare types and levels of risk and RMPs in Islamic and conventional banks. Using different types of data and analysis, it provides evidence from one of the fastest growing economies in the world. It also addresses the concerns over RMPs in banks since the global financial crisis.

scholarly journals Influence of economic freedom and its subcomponents on risk-taking behavior

2019 ◽  
Vol 12 (4) ◽  
pp. 335-356 ◽  
Author(s):  
Rafik Harkati ◽  
Syed Musa Alhabshi ◽  
Salina Kassim
Keyword(s):  
Risk Taking ◽  
Economic Freedom ◽  
Banking Sector ◽  
Banking System ◽  
Islamic Banks ◽  
Content Type ◽  
Economic Freedom Index ◽  
Risk Taking Behavior ◽  
The Government ◽  
Conventional Banks

Purpose The purpose of this paper is to investigate the influence of economic freedom and six relevant subcomponents of it on the risk-taking behavior of banks in the Malaysian dual banking system. It also aims to make a comparative analysis between Islamic and conventional banks operating in this dual banking sector. Moreover, the study is an effort to enrich the existing literature by presenting empirical evidence on the argument that the risk-taking behavior of the two types of banks is indistinguishable given that they operate in the same regulatory environment. Design/methodology/approach Secondary data of all banks operating in the Malaysian banking sector are collected from FitchConnect database, in addition to the economic freedom index from Foundation Heritage for the period 2011–2017. Generalized least squares technique is employed to estimate the influence of economic freedom and the six relevant subcomponents of it on the risk-taking behavior of banks. Findings The level of economic freedom influenced risk-taking behavior within the banking sector as a whole, conventional and Islamic banking sectors negatively during the study period (2011–2017). Risk-taking behavior of conventional and Islamic banks is similar. However, conventional banks turn to be less influenced by economic freedom level as compared to Islamic banks. Practical implications The government and regulators may benefit from the results by rethinking and setting the best economic freedom index that better serves the stability of the banking system, and lessens banks’ risk-taking inclination. Originality/value To the present time, this paper is thought to be of a significant contribution. Given the argument that Islamic and conventional banks behave in the same way. This is one of the first attempts to address this issue in light of the influence of economic freedom and six subcomponents of it on the risk-taking behavior of banks operating in a dual banking system.

Credit risk in Islamic banking: evidence from the GCC

2020 ◽  
Vol 11 (5) ◽  
pp. 1055-1081
Author(s):  
Trevor Chamberlain ◽  
Sutan Hidayat ◽  
Abdul Rahman Khokhar
Keyword(s):  
Credit Risk ◽  
Fixed Effects ◽  
Ordinary Least Squares ◽  
Islamic Banks ◽  
Gulf Region ◽  
Content Type ◽  
Multivariate Tests ◽  
Interaction Variables ◽  
Cost Inefficiency ◽  
Conventional Banks

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.

Does the tag “Islamic” help in customer satisfaction in dual banking sector?

2019 ◽  
Vol 10 (1) ◽  
pp. 138-149 ◽  
Author(s):  
Fayaz Ahmad Lone ◽  
Ulfat Rashid Bhat
Keyword(s):  
Customer Satisfaction ◽  
Banking Sector ◽  
Banking System ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Content Type ◽  
Level Of Satisfaction ◽  
Alternative Approach ◽  
Future Strategy ◽  
Conventional Banks

Purpose The purpose of this paper is to find out the importance of the tag “Islamic” in the title of banks. This will help to determine the future strategy of Islamic banks, while expanding to the countries where Islamic banking is seen as a religious banking and not an as an alternative approach to the conventional banking. Design/methodology/approach Adopting convenience sampling, a total of 596 customers of both Islamic and conventional banks were surveyed from four regions of Saudi Arabia (Makkah, Madinah, Riyadh and Dammam) using a self-structured questionnaire on a five-point Likert scale. Findings The results concede that Islamic banks without the tag “Islamic” and conventional banks have same customer satisfaction. There are some factors other than the tag “Islamic” which are driving customers towards Islamic banking. Those factors include physical aspects of the bank, level of satisfaction with the services, dealing and attendance by the staff and safety and security of the bank. Besides, the application of fundamental principles of Islamic banking works as a key motivation for customer satisfaction with Islamic banking. Practical implications Applying the tag “Islamic” is not as important as implementing the principles of Islamic banking. Islamic banks can survive and compete well even without using the “Islamic” tag if they implement the prime principles of Islamic banking and work on improving the factors highlighted by this study. This study can prove to be helpful in the expansion of Islamic banking in the countries where religious banking is not generally preferred by customers. Originality/value This is the first study to find out the customer satisfaction in a dual banking system (comprising of conventional banks and Islamic banks that do not use the tag “Islamic”), thereby filling the existing gap in the Islamic banking literature.

Islamic bank vs conventional bank: intermediation, fee based service activity and efficiency

2016 ◽  
Vol 9 (2) ◽  
pp. 296-311 ◽  
Author(s):  
Dimas Satria Hardianto ◽  
Permata Wulandari
Keyword(s):  
Credit Risk ◽  
Stochastic Frontier ◽  
Control Variable ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Control Variables ◽  
Content Type ◽  
Operating Income ◽  
Service Activity ◽  
Conventional Banks

Purpose The aim of this research is to compare the differences of intermediation, fee-based service activity and efficiency of conventional banks vs Islamic banks in Indonesia for the 2011-2013 period. Moreover, this study also includes some control variables to find their effect on the dependent variables. Design/methodology/approach This research uses two methods, namely, stochastic frontier approach and panel data regression. Findings The result indicates that Islamic banks have a higher intermediation ratio, have higher proportion on fee income-to-total operating income and are less efficient. The control variable that has a positively significant effect on intermediation ratio is size; meanwhile, inefficiency and non–loan-earning asset are negatively affecting the intermediation ratio. The control variable that show a positively significant effect on the proportion of fee income-to-total operating income is size; meanwhile, the credit risk variable has no significant effect on the proportion of fee income-to-total operating income. Size and credit risk are the control variables that have a negative relation to efficiency. Originality/value This study has significantly contributed to Indonesian Islamic banking based on which the Islamic banking manager should recognize that the intermediation level, fee-based service activity and efficiency are crucially important in establishing competition and maintaining sustainable Islamic banking.

Reconciliation or polarization in Islamic bank preference? Socio-political, socio-economic and demographic aspects

2016 ◽  
Vol 9 (1) ◽  
pp. 67-86 ◽  
Author(s):  
Etem Hakan Ergec ◽  
Bengül Gülümser Kaytanci ◽  
Metin Toprak
Keyword(s):  
Banking System ◽  
Field Work ◽  
Islamic Banks ◽  
Social Democrat ◽  
Content Type ◽  
Islamic Bank ◽  
The People ◽  
Strong Relation ◽  
Conventional Banks ◽  
Selection Of

Purpose The reasons for Islamic bank preferences have been extensively covered in the literature where religion has been depicted as a strong factor. In the limited number of accounts on this subject in Turkey, it was found that religiosity is a major factor in the selection of Islamic banks. Design/methodology/approach This study evaluates the findings of a major field work performed in the period between March and May 2011 in Eskisehir with the participation of Islamic bank customers. In the study, a sample of 500 respondents was used and a semi-structured survey was conducted. Findings According to the findings, religiosity is not the most significant and leading factor in Islamic bank preference; instead, it was found as the fourth most important factor. The study finds that recommendation by friends and relatives is the most significant factor for the people in preferring Islamic banks. The nationalist-conservative people make stronger reference to the religiosity as a factor than the secular-modernist and leftist-social democrat people do. Socioeconomic status is not found as a significant factor in the Islamic bank preference. People in advanced age, men, people with lower income and businessmen/artisan rely on the religiosity in Islamic bank preference as a factor stronger than people from other backgrounds. Practical implications In conclusion, it could be said that there is a strong relation of substitution between Islamic banks and conventional banks in Turkey and that the Islamic banks play significant role in inclusion of the people staying out of the banking system due to religious concerns and considerations in the financial system. Originality/value It is very comprehensive, both politically and economically, to handle the issue of Islamic banking.

scholarly journals The Determinants of Credit Risk Under Dual Banking System: Indonesian Experience Based on Bank Specific Variables

Al-Muzara ah ◽  
2021 ◽  
Vol 9 (2) ◽  
pp. 215-229
Author(s):  
Muhammad Nur Faaiz F. Achsani ◽  
Salina Kassim
Keyword(s):  
Credit Risk ◽  
Negative Relationship ◽  
Banking System ◽  
Dynamic Panel Data ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Independent Variables ◽  
Operating Side ◽  
Conventional Banks ◽  
Risk Determinants

In Indonesian banking system, conventional banks are operating side by side with Islamic banking in a dual banking system. In terms of the credit risk determinants, Islamic banks should be affected by the different factors as conventional banks. However, the similarity of Islamic banks and the conventional bank in terms of contracts might lead to the opinion the same variables are affecting the performance of Islamic and conventional banks. The objective of the study is to examine and obtain an understanding on how the credit and financing in Indonesian dual banking system responses to changes in bank-specific variables. The main approach to fit the model used in this study is the dynamic panel data. Based on the result of the combined model, there are some independent variables that significantly affect credit risk. Profitability significantly affects credit risk with a negative relationship. While size significantly affects credit risk with a positive relationship. When it comes to the dummy variable, it can be said that the type of bank doesn’t play a significant role in determining the credit risk. In other word, there is no difference between Islamic bank and conventional banks in terms of credit risk. To analyze the crisis effect deeper, we compare the result of conventional banking model 2016-2020 and Islamic banking model 2016-2020. There is no independent variable that significantly affect the credit risk in the conventional banking model 2016-2020, three out of four independent variables affect credit risk significantly in the Islamic banking model 2016-2020. This is because conventional banks tend to play safe by avoiding the disbursement of credit and focusing on derivatives. However, this strategy is not suitable for Islamic banking as they are not allowed to do speculative activities. Islamic banking are still focusing on traditional banking activity.

Risk, efficiency and financial performance in the GCC banking industry: Islamic versus conventional banks

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sutan Emir Hidayat ◽  
Muhammad Rizky Prima Sakti ◽  
Raqiya Ali Abdullah Al-Balushi
Keyword(s):  
Adverse Effects ◽  
Credit Risk ◽  
Financial Performance ◽  
Risk Sharing ◽  
Banking Industry ◽  
Islamic Banks ◽  
Content Type ◽  
Bank Managers ◽  
Conventional Banks ◽  
Conventional And Islamic Banks

Purpose The purpose of this study is to critically evaluate how conventional and Islamic banks trade off risk, efficiency and financial performance in their business models, to investigate how patterns of risk and efficiency vary between conventional and Islamic banks and to critically evaluate how the profitability of conventional and Islamic banks varies following the financial crisis. Design/methodology/approach This study uses univariate and multivariate statistical techniques by investigating 12 Islamic banks and 34 conventional banks operating in the Gulf Cooperation Council (GCC) region has been studied over the period 2011–2018. Findings The results suggest that Islamic and conventional banks differ not in the levels of efficiency, risk and profitability, but rather in how risk and efficiency influence banks’ financial performance. Islamic banks are found to be less influenced by the adverse effects of credit risk, which is consistent with the risk-sharing nature of Islamic financing. However, the results only hold for return on assets (ROA) and return on equity (ROE) while the net interest margin is observed to be negatively influenced by credit risk. Lower cost-income efficiency is also found to boost ROA and ROE of Islamic banks which could be attributed to a larger share of non-interest revenues due to Sharīʿah-compliance. Research limitations/implications From a theoretical point of view, this study helps to understand the risk, efficiency and financial performance of Islamic banks in comparison with conventional banks. Practical implications The results of this study can serve bank managers, regulators and shareholders. Policymakers should encourage a more risk-sharing structure of Islamic financing as it brings less adverse effects of credit risk and increases income sustainability for Islamic banks. The present study may help bank managers to improve the financial performance of their firms by controlling risk and efficiency. The study results also have implications for shareholders and depositors of Islamic and conventional banks as they should have a predetermined position about the level of credit risk and efficiency in each banking system. Originality/value The foremost contribution is that this is one of the few studies to compare risk, efficiency and financial performance of Islamic and conventional banks in the GCC region. By using the latest data, this paper hopes that the findings will be more relevant than previous studies to the current situation of the banking industry in the region.

Performance comparison of Islamic (participation) banks and commercial banks in Turkish banking sector

2014 ◽  
Vol 9 (2) ◽  
pp. 114-128 ◽  
Author(s):  
Cengiz Erol ◽  
Hasan F. Baklaci ◽  
Berna Aydoğan ◽  
Gökçe Tunç
Keyword(s):  
Asset Management ◽  
Banking Sector ◽  
Banking System ◽  
Performance Comparison ◽  
Islamic Banks ◽  
Comparative Performance ◽  
Data Set ◽  
Content Type ◽  
Logistic Regression Method ◽  
Conventional Banks

Purpose – The purpose of this paper is to attempt to compare the performance of Islamic banks against conventional banks in Turkey. This comparison is much more distinctive and significant in Turkey when compared to other countries, as Turkey stands as a model for the world in interest-free banking system. Design/methodology/approach – The comparative performance analysis was conducted by means of logistic regression method during the period of 2001-2009. The CAMELS approach is utilized to assess the managerial and financial performance of banks. Findings – The results signify that Islamic banks operating in Turkey perform better in profitability and asset management ratios compared to conventional banks but lag in sensitivity to market risk criterion. These findings might mainly be ascribed to the fact that these banks allow lower provisional losses compared to conventional banks and have some tax advantages. Research limitations/implications – Utilizing a more recent and consistent data set, the analyses could be replicated to determine if the results are subject to any sample bias. Practical implications – These finding reveal significant implications for potential entrants into Turkish banking sector particularly for foreign investors. Social implications – The findings from this study may reinforce the awareness and confidence in participating banks in Turkey. Originality/value – Turkey is particularly interesting to conduct this analysis because Turkey is a Muslim but secular country and both Islamic and conventional banks are subject to same set of banking regulations which are based on Western traditional banking system. Furthermore, to the knowledge, there is not a comprehensive study that compares the performance of conventional and Islamic banks in a Western banking system.

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