Credit Risk Management: A Comparative Study between Islamic and Conventional Banks in Turkey

Year 2019, , 45 - 64, 30.11.2019

Mohammed Alkhawaja Şakir Görmüş

https://doi.org/10.25272/ijisef.634607

Abstract

This study aims to
identify variables which determine credit risk in Islamic and Conventional
banks. Panel data fixed effect model employed to analyze which belongs to three
Islamic Banks in Turkey for the period 2008 Q1 to 2017 Q4. While for
conventional banks, previous studies that has been conducted in Turkey used to
compare Islamic to Conventional banks (CB). Non-performing Loans (NPL) ratio
was used as a proxy for credit risk. Result from fixed effect model showed that
NPL in Islamic Banks is positively affected by Loan Loss Provision and
Proportion of Loans to Deposits, and it is negatively affected by Assets Size.
While literature showed that conventional bank’s credit risk is positively affected
by Net Interest Margin, Loan Loss Provision, and Capital Adequacy Ratio and it
is negatively affected by Proportion of Loan to Deposits, Proportion of Loans
to Assets and Size. There were clear differences between both Islamic and
Conventional banks related to all variables of study except Loan Loss Provision
and Proportion of Loan to Assets ratios.

Keywords

Credit Risk, Non-performing Loans, Islamic Banks, Conventional Banks

References

• Abdioğlu, N., & Aytekin, S. (2016). Takipteki Kredi Oranını Etkileyen Faktörlerin Belirlenmesi: Mevduat Bankaları Üzerinde Bir Dinamik Panel Veri Uygulaması. İşletme Araştırmaları Dergisi, 8(1), 538-555.
• Adjé, K. G. (2018). Determinants of Bank Credit Risk in Developing Economies: Evidence from Benin. International Business Research, 11(4), 154-163.
• Ahmad, N. H., & Ahmad, S. N. (2004). Key factors influencing credit risk of Islamic bank: A Malaysian case. The Journal of Muamalat and Islamic Finance Research, 1(1), 65-80.
• Ahmad, N. H., & Ahmad, S. N. (2004). Key factors influencing credit risk of Islamic bank: A Malaysian case. The Journal of Muamalat and Islamic Finance Research, 1(1), 65-80.
• Ahmad, N. H., & Ariff, M. (2007). Multi-country study of bank credit risk determinants. International Journal of Banking and Finance, 5(1), 135-152.
• Akkizidis, Ioannis and Kumar, Sunil Khandelwal. (2008). Financial Risk Management for Islamic Banking and Finance. Hampshire: Palgrave Macmillan.
• Al-Fawwaz et al 2016. الفواز، تركي مجحم, داود، حسام علي, & عربيات، ياسر أحمد. (2016). إدارة مخاطر الائتمان في البنوك الإسلامية والبنوك التقليدية في الأردن= Credit Risk Management in Islamic and Conventional Banks in Jordan. Jordan Journal of Business Administration, 407(3974), 1-27.‎
• Al-Fijawi, M. F. A. (2016). Salam (forward sale) and ıstıønaņ (manufacture contract) ın modern applıcatıons: a maqóøıd al-sharīņah perspectıve. Alhassan, A. L., Kyereboah-Coleman, A., & Andoh, C. (2014). Asset quality in a crisis period: An empirical examination of Ghanaian banks. Review of Development Finance, 4(1), 50-62.
• Angbazo, L. (1997). Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking. Journal of Banking & Finance, 21(1), 55-87.
• Anjom, W., & Karim, A. M. (2016). Relationship between non-performing loans and macroeconomic factors with bank specific factors: a case study on loan portfolios–SAARC countries perspective. ELK Asia Pacific Journal of Finance and Risk Management, 7(2), 1-29.
• Baltagi, B. H., & Moscone, F. (2010). Health care expenditure and income in the OECD reconsidered: Evidence from panel data. Economic modelling, 27(4), 804-811.
• Boudriga, A., Boulila Taktak, N., & Jellouli, S. (2009). Banking supervision and nonperforming loans: a cross-country analysis. Journal of financial economic policy, 1(4), 286-318.
• Bhatti, M. (2011). Mudaraba, Musharaka, Murabaha-New Terms to Bank on: A Basic Knowledge of Islamic Banking and Finance Has Become Important for Legal Practitioners. Available at SSRN 2609216.
• Bialas, M., & Solek, A. (2010). Evolution of Capital Adequacy Ratio. Economics & Sociology, 3(2), 48.
• Borhan, J. T. (2002). Istisna'in Islamic Banking: Concept and Application. Jurnal Syariah, 10(2), 99-108.
• Bozga, D., & Trenca, I. (2018). Determinants of Credit Risk in the European Banking Sector. EuroEconomica, 37(1).
• Christaria, F., & Kurnia, R. (2016). The Impact of Financial Ratios, Operational Efficiency and Non-Performing Loan Towards Commercial Bank Profitability.
• Das, A., & Ghosh, S. (2007). Determinants of credit risk in Indian state-owned banks: An empirical investigation.
• Dimitrios, A., Helen, L., & Mike, T. (2016). Determinants of non-performing loans: Evidence from Euro-area countries. Finance research letters, 18, 116-119.
• Ekanayake, E. M. N. N., & Azeez, A. A. (2015). Determinants of non-performing loans in licensed commercial banks: Evidence from Sri Lanka. Asian Economic and Financial Review, 5(6), 868.
• Fatima, M. (2006). Differences and similarities between Ijara and conventional operating lease contracts. Market Forces, 1(4).
• Fatima, N. (2014). Capital Adequacy: A Financial Soundness Indicator for Banks. Global Journal of Finance and Management, 6(8), 771-776.
• Fiordelisi, F., Marques-Ibanez, D., & Molyneux, P. (2010). Efficiency and risk in European banking. Journal of Banking & Finance, 35(5), 1315-1326.,
• Fell, J., Grodzicki, M., Metzler, J., & O’Brien, E. (2018). Non-performing loans and euro area bank lending behaviour after the crisis. Revista de Estabilidad Financiera, (NOV).
• Firmansyah, I. (2014). Determinant of non-performing loan: The case of islamic bank in indonesia. Buletin Ekonomi Moneter dan Perbankan, 17(2), 241-258.
• Goddard, J. A., Molyneux, P., & Wilson, J. O. (2001). European banking: efficiency, technology, and growth. Chichester: John Wiley.
• Havidz, S. A. H., & Setiawan, C. (2015). Bank efficiency and non-performing financing (NPF) in the Indonesian Islamic banks. Asian Journal of Economic Modelling, 3(3), 61-79.
• Hu, J. L., Li, Y., & Chiu, Y. H. (2004). Ownership and nonperforming loans: Evidence from Taiwan's banks. The Developing Economies, 42(3), 405-420.
• Isik, O., & Bolat, S. (2016). Determinants of non-performing loans of deposit banks in Turkey. Journal of Business, Economics and Finance, 5(4), 341-350.
• Jameel, K. (2014). Crucial factors of nonperforming loans evidence from Pakistani banking sector. International Journal of Scientific & Engineering Research, 5(7).
• Kabir, M. N., Worthington, A., & Gupta, R. (2015). Comparative credit risk in Islamic and conventional bank. Pacific-Basin Finance Journal, 34, 327-353.
• Karimiyan, A., Nasserinia, A., & Shafiee, H. M. (2013). Relationship between Loan Loss Provision and Future Earning, Return and Cash flow in Commercial Banks of Malaysia
• Khan, M. S., & Mirakhor, A. (2015). Theoretical studies in Islamic banking and finance. BookBaby.
• Kingu, P. S., Macha, S., & Gwahula, R. (2018). Impact of Non-Performing Loans on Bank’s Profitability: Empirical Evidence from Commercial Banks in Tanzania. International Journal of Scientific Research and Management, 6(01).
• Klein, N. (2013). Non-performing loans in CESEE: Determinants and impact on macroeconomic performance (No. 13-72). International Monetary Fund.
• Koju, L., Koju, R., & Wang, S. (2018). Macroeconomic and Bank-Specific Determinants of Non-Performing Loans: Evidence from Nepalese Banking System. Journal of Central Banking Theory and Practice, 7(3), 111-138.
• Kumbirai, M., & Webb, R. (2010). A financial ratio analysis of commercial bank performance in South Africa. African Review of Economics and Finance, 2(1), 30-53.
• Laeven, L., & Majnoni, G. (2003). Loan loss provisioning and economic slowdowns: too much, too late?. Journal of financial intermediation, 12(2), 178-197.
• Latif, R. A., Abdul-Rahman, A., Muda, R., & Abdullah, M. A. (2014). Failure and potential of profit-loss sharing contracts: A perspective of New Institutional, Economic (NIE) Theory. Pacific-Basin Finance Journal, 28, 136-151.
• Lekpek, A. (2018). Credit risk management in Islamic banking. Bankarstvo, 47(1), 32-51.
• Macit, F. (2012). Bank specific and macroeconomic determinants of profitability: Evidence from participation banks in Turkey. Economics bulletin, 32(1), 586-595.
• Masood, O., Al Suwaidi, H., & Darshini Pun Thapa, P. (2012). Credit risk management: a case differentiating Islamic and non-Islamic banks in UAE. Qualitative Research in Financial Markets, 4(2/3), 197-205.
• Misman, F. N., Bhatti, I., Lou, W., Samsudin, S., & Rahman, N. H. A. (2015). Islamic banks credit risk: a panel study. Procedia Economics and Finance, 31, 75-82.
• Nazir, M. S., Daniel, A., & Nawaz, M. M. (2012). Risk management practices: A comparison of conventional and Islamic banks in Pakistan. American Journal of Scientific Research, 68(1), 14-122.
• Ozili, P. K. (2019). Non-performing loans and financial development: new evidence. The Journal of Risk Finance, 20(1), 59-81.
• Özkan, N., & Işıl, G. (2016). İslami Bankalarda Kredi Riskini Belirleyen Faktörler: Panel Veri Analizi ile Türkiye'de Katılım Bankacılığı Üzerine Ampirik Bir Uygulama. Maliye Finans Yazilari, 30(105).
• Rajan, R., & Dhal, S. C. (2003). Non-performing loans and terms of credit of public sector banks in India: An empirical assessment. Reserve Bank of India Occasional Papers, 24(3), 81-121.
• Rajha, K. S. (2016). Determinants of non-performing loans: Evidence from the Jordanian banking sector. Journal of Finance and Bank Management, 4(1), 125-136.
• Radivojevic, N., & Jovovic, J. (2017). Examining of determinants of non-performing loans. Prague Economic Papers, 26(3), 300-316.
• Salim, R., Arjomandi, A., & Dakpo, K. H. (2017). Banks’ efficiency and credit risk analysis using by-production approach: the case of Iranian banks. Applied Economics, 49(30), 2974-2988.
• Saksonova, S. (2014). The role of net interest margin in improving banks’ asset structure and assessing the stability and efficiency of their operations. Procedia-social and behavioral sciences, 150, 132-141.
• Serwa, D. (2013). Measuring non-performing loans during (and after) credit booms. Central European Journal of Economic Modelling and Econometrics, 5(3), 163-183.
• Shahidul, I. M., & Shin-Ichi, N. I. S. H. I. Y. A. M. A. (2016). The determinants of non-performing loans: Dynamic panel evidence from South Asian countries.
• Sharifi, O., & Akhter, J. (2016). Effect of Non-Performing Assets on the Profitability of Public Sector Banks of India. International Journal of Engineering and Management Research (IJEMR), 6(5), 383-388.
• Shingjergji, A. (2013). The impact of bank specific variables on the non-performing loans ratio in the Albanian banking system. Research Journal of Finance and Accounting, 4(7), 148-152.
• Sinkey, J. F., & Greenawalt, M. B. (1991). Loan-loss experience and risk-taking behavior at large commercial banks. Journal of Financial Services Research, 5(1), 43-59.
• Siddiqui, A. (2008). Financial contracts, risk and performance of Islamic banking. Managerial finance, 34(10), 680-694.
• Soedarmono, W., Tarazi, A., Agusman, A., Monroe, G. S., & Gasbarro, D. (2015). Loan Loss Provisions and Lending Behavior of Banks: Do Information Sharing and Borrower Legal Rights Matter?.
• Tiby, E., & Mohamed, A. (2011). Islamic banking: How to manage risk and improve profitability. United States: Willey Finance.
• Tole, M. G., Jabir, M. S., & Wolde, H. A. (2019). Determinates of credit risk in Ethiopian commercial banks.
• Van Greuning, H., & Brajovic Bratanovic, S. (2009). Analyzing Banking Risk A Framework for Assessing Corporate Governance and Financial Risk. The World Bank.
• Van Greuning, H., & Iqbal, Z. (2007). Risk analysis for Islamic banks. the world bank.
• Vejzagic, M. (2014). Ijarah Muntahia Bittamleek (IMB): A Risk Management Perspective.". Merit Research Journal of Accounting, Auditing, Economics and Finance, 2(1), 001-007.
• Waqas, M., Fatima, N., Khan, A., & Arif, M. (2017). Determinants of Non-performing Loans: A Comparative Study of Pakistan, India, and Bangladesh. International Journal of Finance & Banking Studies, 6(1), 51.
• Wiryono, S. K., & Effendi, K. A. (2018). Islamic Bank Credit Risk: Macroeconomic and Bank Specific Factors. European Research Studies, 21(3), 53-62.
• Wood, A., & Skinner, N. (2018). Determinants of non-performing loans: evidence from commercial banks in Barbados. The Business & Management Review, 9(3), 44-64.
• Yağcılar, G. G., & Demir, S. (2015). Determination of the factors effecting non-performing loans in Turkish banking sector. International Journal of Alanya Faculty of Business, 7(1), 221-229.
• Yüksel, S. (2017). Determinants of the credit risk in developing countries after economic crisis: A case of Turkish banking sector. In Global financial crisis and its ramifications on capital markets (pp. 401-415). Springer, Cham.
• Zolkifli, N. A., Uda, M. A. H., & binti Janor, H. (2018). Determinants of Credit Risk in Islamic and Conventional Bank: Evidence from Malaysia. International Journal of Academic Research in Business and Social Sciences, 8(6).