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Risk in Islamic Banking

LAPE Working Paper

61 Pages Posted: 18 Nov 2010 Last revised: 12 Oct 2012

Pejman Abedifar

University of St Andrews - School of Management

Philip Molyneux

Amine Tarazi

Universite de Limoges, LAPE

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2012


This paper investigates risk and stability features of Islamic banking using a sample of 553 banks from 24 countries between 1999 and 2009. Small Islamic banks that are leveraged or based in countries with predominantly Muslim populations have lower credit risk than conventional banks. In terms of insolvency risk, small Islamic banks also appear more stable. Moreover, we find little evidence that Islamic banks charge rents to their customers for offering Sharia compliant financial products. Our results also show that loan quality of Islamic banks is less responsive to domestic interest rates compared to conventional banks.

Keywords: Islamic banking, Islaminc Finance, Bank risk, credit risk, stability, insolvency, Zscore

JEL Classification: G21, G32

Suggested Citation

Abedifar, Pejman and Molyneux, Philip and Tarazi, Amine, Risk in Islamic Banking (May 3, 2012). LAPE Working Paper. Available at SSRN: or

Pejman Abedifar (Contact Author)

University of St Andrews - School of Management ( email )

The Gateway, North Haugh
St Andrews, Fife KY16 9RJ
United Kingdom

Amine Tarazi

Universite de Limoges, LAPE ( email )

5 rue Felix Eboue
Limoges, 87000

No contact information is available for Philip Molyneux

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