Provision for Bad & Doubtful Financing and Contingency Reserve Management: Assessing Resilient and Stable Islamic Banks

Banks will not be resilient and stable if the provision for bad and doubtful financing (PBD) and contingency reserve (CR) failed to play its role as bank operational buffers whenever there is an economic condition disorder. Every firm has to face the financial uncertainties and the sudden shock of economic activity disorder, which will directly affect their operations. The management of PBD and CR is necessary to make the bank well protected. To verify the resiliency and stability of the Islamic bank, hence, this paper empirically examines the bank management of PBD and CR. An unbalanced panel data analysis was conducted on 67 Islamic banks from various countries for the period of 2000-2014. The empirical evidence shows, although the bank PBD does fulfil the resiliency and stability behaviour conditions, the insignificant relationship of the M2 growth and CPI growth to the PBD growth need some consideration from the banks and policy makers. The finding also provides an indication that only the current year profit growth behaviour is positively correlated to the CR growth. The findings recommend the Islamic bank PBD and CR management need to be sound to make it more resilient and stable.