Determinants of Credit Risk in the MENA Region: A Comparative Study Between Islamic Banks and Conventional Banks
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Date
2021-04-03
Authors
قشتم, رنا
Journal Title
Journal ISSN
Volume Title
Publisher
An-Najah National University
Abstract
This thesis investigates the determinants of credit risk in both Islamic banks and conventional banks. It concentrates on the differences of the determinant of credit risk between Islamic and conventional banks in the Middle East and North Africa region (MENA). Banks’ specific characteristics and country-level determinants were examined using two models to investigate this study's objectives. The credit risk was measured by the non-performing loans for an unbalanced sample of 197 Islamic and conventional banks in the MENA region for 2010-2018. The results show that bank-specific and country-level factors drive credit risk. The assumptions needed to be fulfilled for OLS were tested, and the model was found to fit the purpose. Using fixed effect panel regression, results showed that return on asset, bank size, capital adequacy, asset quality, inflation, and regulatory quality are the main determinants of the banks’ credit risk.
Moreover, the results uncover that Islamic banks in the MENA region face higher credit risk than the conventional banks. There is a positive relationship between asset's poor quality and credit risk, while a negative relationship between bank size, return on asset, capital ratio and credit risk are observed. For country-level determinants, inflation and regulatory quality as focal determinants have a negative impact on credit risk. The results also show that the bank type's effect is negative on the relationship between asset poor quality and credit risk. It can be concluded that Islamic banks are less affected by asset poor quality than conventional banks. Other bank-specific and country-level independent variables appear to have the same impact on credit risk in both types of banks.
Future research on credit risk determinants may consider the banking system's development and more institutional factors when explaining banks' credit risk in the MENA region. The overall findings indicate that both macroeconomic and bank-specific factors do have significant effects on credit risk.