The Effect of Corruption on Banks’ Credit Risk: A Comparative Analysis Between Islamic and Conventional Banks

Hatice Jenkins ()
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Hatice Jenkins: Department of Banking and Finance, Eastern Mediterranean University, Famagusta, Northern Cyprus via Mersin 10, Turkey

No 2024-08, Development Discussion Papers from JDI Executive Programs

Abstract: Corruption can increase banks’ non-performing loans (NPLs) and hence, their credit risk. This research explores whether corruption has the same impact on Islamic and conventional banks, or whether Islamic banks are protected from the adverse effects of corruption by their profit-loss sharing and sharia-compliant mode of financing. The findings confirm that Islamic banks are more protected than conventional banks against corruption. It is likely that religious commitment and the profit-loss sharing nature of financing help Islamic banks to limit the damaging effect of corruption on their credit risk. Conventional banks could benefit from anti-corruption measures and tight internal control systems to reduce corruption and, hence, the high credit risk originating from corruption.

Keywords: Corruption; Islamic banks; Conventional banks; Credit risk; NPLs (search for similar items in EconPapers)
JEL-codes: D73 G21 O16 (search for similar items in EconPapers)
Pages: 24 Pages
Date: 2025-01-29
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