Comparative credit risk in Islamic and conventional bank

Abstract

Article history: Received 2 September 2014 Accepted 9 June 2015 Available online 14 June 2015 In this paper, we consider the levels of credit risk in Islamic and conventional banks. One problemwith existing studies is the use of accounting information alone to assess credit risk, and this could be especially misleadingwith Islamic banking. Using amarket-based credit riskmeasure, Merton's distance-to-default (DD) model, we evaluate the credit risk of 156 conventional banks and 37 Islamic banks across 13 countries between 2000 and 2012. We also calculate the accounting informationbased Z-score and nonperforming loan (NPL) ratio for the purpose of comparison. Our results show that Islamic banks have significantly lower credit risk than conventional banks as based on DD. In contrast, and as expected, Islamic banks display much higher credit risk using the Z-score and NPL ratio. These findings suggest that the measure chosen plays a significant role in assessing the actual credit risk of Islamic banks. © 2015 Elsevier B.V. All rights reserved. JEL classification: G21 G32

Cite this paper

@inproceedings{Kabir2015ComparativeCR, title={Comparative credit risk in Islamic and conventional bank}, author={M. N. Kabir and Andrew Worthington and Rakesh Kumar Gupta}, year={2015} }