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Nonperforming loan of European Islamic banks over the economic cycle

Faten Ben Bouheni (), Hassan Obeid () and Elena Margarint ()
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Faten Ben Bouheni: Ipag Business School (Finance Department)
Hassan Obeid: European Business School - Paris/INSEEC U Research Center
Elena Margarint: National Bank of Moldova

Annals of Operations Research, 2022, vol. 313, issue 2, No 9, 773-808

Abstract: Abstract This paper investigates the variation in nonperforming loans over the economic cycle and the effect of past returns based on a nonparametric quantile analysis of the largest Islamic banks in the United Kingdom and Turkey from 2010 to 2019. The findings show a weak variation in nonperforming loans that increases with an increasing return on assets and a decreasing return on equity and decreases in an inverse scenario. As a result, the credit risk of Islamic banks is countercyclical. We suggest that the inverse relationships evidence the existence of trade-offs within bank returns and credit risk. Thus, banks’ past profitability and risk mitigation are determinants of asset quality. These findings provide support for risk-taking and risk-sharing principles in which flight-to-safety mirrors the calibration of risk factors in a disruptive economy. Our estimates indicate that nonparametric quantile regression captures considerably more variation in a risk-return analysis.

Keywords: Nonperforming loans; Returns; Economic cycle; Nonparametric quantile regression; European Islamic banks (search for similar items in EconPapers)
JEL-codes: C14 E32 G21 M40 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10479-021-04038-8

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