The procyclicality of loan loss provisions in Islamic banks: Do managerial discretions matter?

Wahyoe Soedarmono, Sigid Eko Pramono and Amine Tarazi
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Sigid Eko Pramono: bank indonesia - bank indonesia

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Abstract: This paper is the first to examine whether the loan loss provisioning behavior of Islamic banks is procyclical. From a dynamic panel data methodology, the empirical results show that loan loss provisioning in Islamic banks is indeed procyclical, as higher economic growth leads to a decline in loan loss provisions. A closer investigation is also conducted to examine whether capital management, income smoothing, or signaling behavior can alter the procyclicality of loan loss provisions. Specifically, our results document that only capital management behavior can overcome the procyclicality of loan loss provisions. This paper therefore advocates the importance of strengthening discretionary behavior in Islamic banks in terms of capital management using loan loss provisions, particularly during economic boom.

Keywords: Islamic banks; loan loss provisions; procyclicality (search for similar items in EconPapers)
Date: 2016-03-01
New Economics Papers: this item is included in nep-mac and nep-sea
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