Islamic Bank Incentives and Discretionary Loan Loss Provisions

Posted: 31 May 2018

See all articles by Greg Clinch

Greg Clinch

Macquarie Business School

Sayd Farook

Thomson Reuters

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Date Written: 2014

Abstract

The objective of this paper is to ascertain whether there are significant differences in the loan loss provisioning behaviour of Islamic banks as compared to conventional banks. We proposed that loan loss provisioning will be linked to the extent of profit distribution management. The results suggest that Islamic banks consistently record lower loan loss provisions. However, the association between profit distribution management and loan loss provisioning is mixed. The overall results tend to suggest that there is an inverse relationship between profit distribution management and loan loss provisions. The results also suggest that there are differential effects depending on whether the profit distribution management is for the benefit or the detriment of investment depositors. If there is a surplus of asset returns over profit distributions (positive profit distribution management), it is observed that Islamic banks increase their loan loss provisions. However, this result does not extend to the full sample containing both Islamic and conventional banks. Further, there is no effect where the profit distribution management is for the benefit of investment depositors.

Keywords: Discretionary Loan-Loss Reserve, Islamic Banks, Conventional Banks, Profit Distribution Management

JEL Classification: G2, P4, Z1

Suggested Citation

Clinch, Greg and Farook, Sayd Zubair and Hassan, M. Kabir, Islamic Bank Incentives and Discretionary Loan Loss Provisions (2014). Pacific-Basin Finance Journal, Vol. 28, 2014, Available at SSRN: https://ssrn.com/abstract=3174179

Greg Clinch (Contact Author)

Macquarie Business School ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
United States

Sayd Zubair Farook

Thomson Reuters ( email )

Bahrain

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

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