Comparative credit risk in Islamic and conventional bankMd Nurul Kabir, Andrew Worthington () and Rakesh Gupta Pacific-Basin Finance Journal, 2015, vol. 34, issue C, 327-353 Abstract: In this paper, we consider the levels of credit risk in Islamic and conventional banks. One problem with existing studies is the use of accounting information alone to assess credit risk, and this could be especially misleading with Islamic banking. Using a market-based credit risk measure, Merton's distance-to-default (DD) model, we evaluate the credit risk of 156 conventional banks and 37 Islamic banks across 13 countries between 2000 and 2012. We also calculate the accounting information-based Z-score and nonperforming loan (NPL) ratio for the purpose of comparison. Our results show that Islamic banks have significantly lower credit risk than conventional banks as based on DD. In contrast, and as expected, Islamic banks display much higher credit risk using the Z-score and NPL ratio. These findings suggest that the measure chosen plays a significant role in assessing the actual credit risk of Islamic banks. Keywords: Credit risk; Distance-to-default; Z-scores; Nonperforming loans; Islamic banking (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:34:y:2015:i:c:p:327-353 DOI: 10.1016/j.pacfin.2015.06.001 Access Statistics for this article Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee More articles in Pacific-Basin Finance Journal from Elsevier |
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