Risk in Islamic Banking
LAPE Working Paper
61 Pages Posted: 18 Nov 2010 Last revised: 12 Oct 2012
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: Suggested Citation