FACTORS AFFECTING CREDIT RISK IN ISLAMIC BANKS

Abstract

This paper probed the effects of bank specific variables on the credit risk of Islamic banks with concentration only on full fledge Islamic banks of Pakistan. The research was conducted with the help of panel data collected for ten years. Data were gathered from all the four full-fledged Islamic banks taken as census sampling. Data were analyzed using pooled OLS. The results confirmed capital ratio and profitability with significant negative impact on the credit risk. However, bank size, management efficiency, and lending to risky sectors were found insignificantly related to credit risk. Thus, increasing capital might curtail the credit risk of the banks. Similarly, increased profitability would prove helpful in absorbing credit risk. Therefore, maintaining an adequate capital is essential for a bank to manage credit risk. Similarly, Islamic banks should focus on increasing their profitability through the efficacy of loan recovery mechanisms and increasing customers’ net.