Loan Loss Provisions, Income Smoothing and Loan Growth: Evidence from Islamic Banks

2016 ◽  
Author(s):  
Sigid Eko Pramono ◽  
Hilda Rosieta ◽  
Wahyoe Soedarmono
Keyword(s):  
Income Smoothing ◽  
Islamic Banks ◽  
Loan Loss ◽  
Loan Loss Provisions ◽  
Loan Growth

Income smoothing behavior and the procyclical effect of loan loss provisions in Islamic banks

2019 ◽  
Vol 10 (1) ◽  
pp. 21-34 ◽  
Author(s):  
Sigid Eko Pramono ◽  
Hilda Rossieta ◽  
Wahyoe Soedarmono
Keyword(s):  
Fixed Effect Model ◽  
Income Smoothing ◽  
Islamic Banks ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Risk Increase ◽  
Effect Model ◽  
Prior Literature ◽  
Loan Growth

Purpose This study aims to test whether loan loss provisions in Islamic banks is procyclical by explicitly examining the link between non-discretionary provisions and loan growth. In the next stage, this paper tests whether the link between non-discretionary provisions and loan growth is conditional on bank capitalization and lending. This is to identify whether bank-specific factors affect the procyclicality of non-discretionary provisions and whether such procyclicality can be explained by income smoothing in banks with different capitalization and loan profiles. Design/methodology/approach This study is conducted in four stages. The first stage identifies the determinants of loan loss provisions. The second stage investigates whether income smoothing is affected by capitalization and lending activities. In the third stage, the link between non-discretionary provisions and loan growth is examined. In the fourth stage, this paper tests whether the link between non-discretionary provisions and loan growth is affected by bank capitalization and lending. A two-way panel-fixed effect model is used. Findings Non-discretionary provisions are procyclical, particularly for banks with lower capitalization and lending activities, because such banks do not conduct income smoothing. Specifically, banks with lower capitalization experience a decline in loan growth when non-discretionary provisions to cover credit risk increase. Research limitations/implications The dataset used in this study follows Soedarmono et al. (2017) and does not enable to differentiate types of financing products in Islamic banks that may exacerbate or mitigate the procyclicality of non-discretionary provisions. Originality/value This paper extends prior literature on the procyclicality of loan loss provisions by specifically investigating the influence of non-discretionary provisions on loan growth in Islamic banks and whether such relationship depends on the role of income smoothing undertaken by banks with different levels of capitalization and lending. This paper builds on the work of Soedarmono et al. (2017) in which they do not explicitly examine the relationship between loan loss provisions and loan growth.

Loan loss provisions, bank valuations and discretion: A comparative study between conventional and Islamic banks

2014 ◽  
Vol 103 ◽  
pp. S160-S173 ◽  
Author(s):  
Marwa Elnahass ◽  
Marwan Izzeldin ◽  
Omneya Abdelsalam
Keyword(s):  
Comparative Study ◽  
Islamic Banks ◽  
Loan Loss ◽  
Loan Loss Provisions ◽  
Conventional And Islamic Banks

scholarly journals The Procyclicality of Loan Loss Provisions in Islamic Banks

2016 ◽  
Author(s):  
Wahyoe Soedarmono ◽  
Sigid Eko Pramono ◽  
Amine Tarazi
Keyword(s):  
Islamic Banks ◽  
Loan Loss ◽  
Loan Loss Provisions

scholarly journals Empirical Analysis of Non-Performing Loans and Liquidity of Deposit Money Banks: Nigeria Experience

2021 ◽  
Keyword(s):  
Monetary Policy ◽  
Gross Domestic Product ◽  
Capital Adequacy ◽  
Domestic Product ◽  
Loan Loss ◽  
Loan Loss Provisions ◽  
Minimum Capital Requirement ◽  
Small Quantum ◽  
Capital Adequacy Ratio ◽  
Loan Growth

Nigerian Deposit Money Banks (DMBs) tend to have suffered the plight of Non-Performing Loans (NPLs) in recent times in no small quantum. Consequently, a large chunk of them have had to increase their loan loss provisions and this may dwindle their liquidity. This study investigates the effect of non-performing loans on liquidity of Deposit Money Banks (DMBs) in Nigeria. A panel regression analysis was performed on a data of 15 quoted DMBs from 2009 to 2019, in order to examine the correlation between the explained variable (banks’ liquidity) and Non-Performing Loans (NPL) while other explanatory variables- Capital Adequacy Ratio (CAR), Bank Size (BS), Loan Growth (LG), Monetary Policy Rate (MPR), Gross Domestic Product (GDP) and Inflation were taken into consideration. Data were extracted from the banks’ yearly financial statements and the World Bank Financial Statistics. Based on the empirical findings, the study found only four variables-Non Performing Loans, Capital Adequacy Ratio, Bank Size and Inflation significantly related at 5% significant level with banks’ liquidity while the other three; Gross Domestic Product, Loan Growth and Monetary Policy Rate were identified as insignificant. The finding also revealed that NPLs has negative effect on banks’ liquidity while CAR, BS and INF showed positive relationship. The study recommends strict compliance of banks with the NPLs tolerable limit set by the Central bank. It also suggests that the CBN take proactive measure to ensure the banks’ compliance with the minimum capital requirement. Keywords: Banks, Financial Institutions, Liquidity, Non-Performing Loans, Performance

scholarly journals Provisioning, Bank Behavior and Financial Crisis: Evidence from GCC Banks

2015 ◽  
Vol 11 (3) ◽  
Author(s):  
Saibal Ghosh
Keyword(s):  
Bank Loan ◽  
Capital Regulation ◽  
Islamic Banks ◽  
Bank Capital ◽  
Loan Loss ◽  
Minimum Capital ◽  
Loan Loss Provisions ◽  
Bank Capital Regulation ◽  
Bank Behavior ◽  
Using Data

AbstractThe debate on bank capital regulation has in recent years devoted specific attention to the role that bank loan loss provisions play as a part of the overall minimum capital regulatory framework. Using data for 1996–2011, we find evidence in favor of both capital management and signaling behavior by GCC banks. Islamic banks appear to engage less in such behavior as compared to their non-Islamic counterparts.

scholarly journals The factors affecting the bank’s credit impairment losses by adopting IAS on PSAK 55 in Indonesia

2020 ◽  
Vol 22 (3) ◽  
Author(s):  
Sparta Sparta ◽  
Nadya Trinova
Keyword(s):  
Stock Exchange ◽  
Positive Influence ◽  
Vital Role ◽  
Income Smoothing ◽  
Loan Loss ◽  
Factors Affecting ◽  
Loan Loss Provisions ◽  
Ias 39 ◽  
The Stability

Loan loss provisions in banks plays a vital role in maintaining the stability and health of banks, as well as fulfilling the function of banks in channeling public funds. This study aims to determine the effect of income smoothing and the behavior of procyclicality against reserves of credit losses losses, as well as the role of adoption of IAS 39 in PSAK 55 in moderating the influence of these two variables. The object of this study are conventional commercial banks that are listed on the Indonesia Stock Exchange within the research period of 2008-2017. By using purposive sampling method, I obtained 20 bank samples and 196 observations. The hypotheses in this research are tested using multiple regression analysis. This study shows that income smoothing has a positive influence on loan loss provisions, whereas procyclicality and IAS 39 adoption in PSAK 55 do not affect loan loss provisions significantly. Meanwhile, IAS 39 adoption in PSAK 55 weakens the positive influence of income smoothing, however it cannot moderate the influence of procyclicality on loan loss provisions.  

scholarly journals Does banking oversight make financial statements more reliable? An analysis through countries which are part of the Single Supervisory Mechanism (SSM)

2019 ◽  
Vol 16 (3) ◽  
pp. 36-51
Author(s):  
Giacomo Ceccobelli ◽  
Alessandro Giosi
Keyword(s):  
Earnings Management ◽  
Banking Industry ◽  
Financial Statements ◽  
Income Smoothing ◽  
Capital Management ◽  
Loan Loss ◽  
Single Supervisory Mechanism ◽  
Loan Loss Provisions ◽  
Regulation And Supervision ◽  
Bank Regulation And Supervision

The purpose of this research is to investigate earnings management purposes in the banking industry via loan loss provisions using a sample of 156 banks from 19 European countries under the Single Supervisory Mechanism (SSM) over the period 2006-2016. Using regression analysis, banks are tested for income smoothing, capital management, and signaling purposes. This study contributes to the literature exploring the relationship between accounting quality and earnings management objectives by analyzing which one of the latter is the more important determinant. The hypotheses of income smoothing and signaling are strongly approved since loan loss provisions consist as a tool for smoothing the amount of net profit and to convey private information to the market; on the contrary, the capital management purpose is not supported. Additionally, the analysis finds that non-discretionary components of loan loss provisions (essentially non-performing loans) have played an important role, especially during the financial crisis. Furthermore, the research is aimed at investigating the peculiar regulatory and supervisory environment in the banking industry on the basis of a set of indexes included in the “Bank Regulation and Supervision Survey”, carried out by the World Bank. Unlike previous literature, this study takes into account the latest release of the survey, emphasizes the role of an on-site inspection as the main supervisory tool and extends the analysis of the interaction between bank regulation and supervision and earnings management. The results demonstrate that such controls can influence the behaviour of bank managers in terms of income smoothing and signaling practices. Therefore they can be considered as effective instruments for reducing banks’ management accounting discretion, making financial statements more reliable.

Do Islamic banks use loan loss provisions to smooth their results?

2010 ◽  
Vol 1 (2) ◽  
pp. 114-127 ◽  
Author(s):  
Neila Boulila Taktak ◽  
Sarra Ben Slama Zouari ◽  
AbdelKader Boudriga
Keyword(s):  
Islamic Banks ◽  
Loan Loss ◽  
Loan Loss Provisions

scholarly journals Discretionary provisioning practices among Western European banks

2017 ◽  
Vol 9 (1) ◽  
pp. 109-118 ◽  
Author(s):  
Peterson K. Ozili
Keyword(s):  
Financial Crisis ◽  
Credit Risk ◽  
Income Smoothing ◽  
Least Square ◽  
Loan Loss ◽  
Content Type ◽  
Crisis Period ◽  
Loan Loss Provisions ◽  
European Banks ◽  
Western European

Purpose The purpose of the study is to investigate whether discretionary ‘loan loss provisioning’ by Western European banks is driven by income smoothing or credit risk considerations. Design/methodology/approach To test the income smoothing hypothesis, the study uses ordinary least square regression to examine the relation between loan loss provisions and earnings before tax and loan loss provisions in the post-financial crisis period. Findings The authors find evidence that discretionary provisioning by Western European banks is driven by income smoothing incentives in the post-financial crisis period, particularly, among listed banks. Also, it is observed that discretionary provisioning is significantly influenced by credit risk factors, mainly, non-performing loans and loan growth. Also, it is found that discretionary provisioning by Western European banks is procyclical with fluctuations in the economic cycle. Overall, the implication of the findings is that discretionary provisioning among Western European banks is driven by both income smoothing and credit risk considerations. Originality/value This study focus on banks in Western Europe in contrast to prior European studies.

Sign in / Sign up

Export Citation Format

Share Document