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The liquidity risk-credit risk-profitability trilogy: A comparative study between Islamic and conventional banks

Ameni Ghenimi (), Hasna Chaibi () and Azhaar Lajmi ()
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Ameni Ghenimi: GEF2A Lab-University of Tunis
Hasna Chaibi: FCF Lab-University of Tunis El Manar
Azhaar Lajmi: GEF2A Lab-University of Tunis

Economics Bulletin, 2020, vol. 40, issue 3, 1900-1913

Abstract: We offer a comparative analysis between Islamic and conventional banks in terms of the effects of credit and liquidity risks on profitability. We firstly compare the relationships between credit risk-liquidity risk-profitability in both banking systems. Employing a simultaneous structural equation approach on a comprehensive dataset of 25 Islamic banks and 49 conventional banks operating in the MENA region over the period 2006-2015 and using financial ratio analysis, we show that credit risk, liquidity risk and profitability have reciprocal relationships within both types of banks. We then examine the effect of liquidity and credit risks on profitability, and find that both risks are detrimental for bank profitability. Nevertheless, our findings reveal that there is no difference between the two types of banks in terms of the effects of credit and liquidity risks on profitability. These results remain robust to alternative estimators. Finanlly, our study allows decision-makers and banks managers to improve the banking performance by effectively managing and controlling levels of both credit and liquidity risks.

Keywords: Islamic banks; conventional banks; liquidity risk; credit risk; profitability; MENA region; simultaneous structural equation approach (search for similar items in EconPapers)
JEL-codes: G2 C3 (search for similar items in EconPapers)
Date: 2020-07-14
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