Islamic bank incentives and discretionary loan loss provisions

Sayd Farook, M. Kabir Hassan and Gregory Clinch

Pacific-Basin Finance Journal, 2014, vol. 28, issue C, 152-174

Abstract: The objective of this paper is to ascertain whether there are significant differences in the loan loss provisioning behaviour of Islamic banks as compared to conventional banks. We proposed that loan loss provisioning will be linked to the extent of profit distribution management. The results suggest that Islamic banks consistently record lower loan loss provisions. However, the association between profit distribution management and loan loss provisioning is mixed. The overall results tend to suggest that there is an inverse relationship between profit distribution management and loan loss provisions. The results also suggest that there are differential effects depending on whether the profit distribution management is for the benefit or the detriment of investment depositors. If there is a surplus of asset returns over profit distributions (positive profit distribution management), it is observed that Islamic banks increase their loan loss provisions. However, this result does not extend to the full sample containing both Islamic and conventional banks. Further, there is no effect where the profit distribution management is for the benefit of investment depositors.

Keywords: Discretionary loan-loss reserve; Islamic banks; Conventional banks; Profit distribution management (search for similar items in EconPapers)
JEL-codes: G2 P4 Z1 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:28:y:2014:i:c:p:152-174

DOI: 10.1016/j.pacfin.2013.12.006

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