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Liquidity risk, credit risk and stability in Islamic and conventional banks

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  • Hassan, M. Kabir
  • Khan, Ashraf
  • Paltrinieri, Andrea

Abstract

The aim of this paper is to provide a thorough assessment of Islamic banks’ (IBs) liquidity risk compared to conventional banks (CBs). We firstly investigate the relationship between liquidity and credit risk. Employing a simultaneous structural equation approach, on a comprehensive dataset of 52 IBs and CBs, from selected Organization of Islamic Cooperation Countries for the period of 2007–2015, we find that credit risk and liquidity risk have negative relationship. We then investigate the relationship between liquidity risk and stability, finding a negative relationship just for IBs. We finally show that Islamic banks are better than conventional in managing risks.

Suggested Citation

  • Hassan, M. Kabir & Khan, Ashraf & Paltrinieri, Andrea, 2019. "Liquidity risk, credit risk and stability in Islamic and conventional banks," Research in International Business and Finance, Elsevier, vol. 48(C), pages 17-31.
    • Handle: RePEc:eee:riibaf:v:48:y:2019:i:c:p:17-31
    DOI: 10.1016/j.ribaf.2018.10.006
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    More about this item

    Keywords

    Islamic banks; Liquidity risk; Credit risk; Stability; Z-score; Distance to De; fault;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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