Loan growth, capitalization, and credit risk in Islamic banking

Muhammad Sobarsyah, Wahyoe Soedarmono, Wahdi Salasi Apri Yudhi, Irwan Trinugroho, Ari Warokka and Sigid Eko Pramono

International Economics, 2020, vol. 163, issue C, 155-162

Abstract: We assess the effect of loan growth and capitalization on credit risk in Islamic banking. Using a sample of Islamic banks from 29 countries, our empirical results reveal that higher loan growth exacerbates credit risk one year ahead, particularly for Islamic banks with higher capitalization. However, a deeper investigation highlights that such evidence is more pronounced after the 2008 global financial crisis (GFC). Hence, strengthening prudential tools and supervision for Islamic banks with higher capitalization is necessary to mitiate moral hazard and ensure prudent lending behavior in the aftermath of the GFC. Likewise, strengthening capital requirements is not enough to ensure prudent lending behavior in Islamic banking.

Keywords: Loan growth; Capitalization; Credit risk; Financial crisis; Islamic banks (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:163:y:2020:i:c:p:155-162

DOI: 10.1016/j.inteco.2020.02.001

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