CREDIT RISK ANALYSIS IN ISLAMIC AND CONVENTIONAL BANKS IN REGULATED BANKING ENVIRONMENT

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Muhammad Irfan Chani
Ahmed Imran Hunjra
Fatima Sultana

Abstract

This study examines the difference between the credit risk level of Islamic banks (IBs) and conventional banks (CBs) in Bahrain, Indonesia, Pakistan and UAE. We use market and accounting information-based models to analyze the results. Data was collected from the financial reports of 32 banks for the period from 2008 to 2015. Group mean comparison test and panel regression are applied for hypothesis testing. Based on Distance to Default (DD) and Probability of Default (PD) models, results show that credit risk is higher in CBs as compared to IBs. Conversely, CBs have significantly higher Z-scores, lower Altman Z-scores and NPLs than Islamic banks, which suggests that CBs have lower credit risk. However, the results show a mix impact of bank-specific variables on the credit risk for both IBs and CBs.

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