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Loan growth, capitalization, and credit risk in Islamic banking

Author

Listed:
  • Muhammad Sobarsyah
  • Wahyoe Soedarmono
  • Wahdi Salasi Apri Yudhi
  • Irwan Trinugroho
  • Ari Warokka

Abstract

We assess the effect of loan growth and capitalization on credit risk in Islamic banking. Using a sample of Islamic banks from 29 countries, our empirical results reveal that higher loan growth exacerbates credit risk one year ahead, particularly for Islamic banks with higher capitalization. However, a deeper investigation highlights that such evidence is more pronounced after the 2008 global financial crisis (GFC). Hence, strengthening prudential tools and supervision for Islamic banks with higher capitalization is necessary to mitiate moral hazard and ensure prudent lending behavior in the aftermath of the GFC. Likewise, strengthening capital requirements is not enough to ensure prudent lending behavior in Islamic banking.

Suggested Citation

  • Muhammad Sobarsyah & Wahyoe Soedarmono & Wahdi Salasi Apri Yudhi & Irwan Trinugroho & Ari Warokka, 2020. "Loan growth, capitalization, and credit risk in Islamic banking," International Economics, CEPII research center, issue 163, pages 155-162.
    • Handle: RePEc:cii:cepiie:2020-q3-163-11
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    Cited by:

    1. Silvia, Ani & Viverita, V. & Chalid, Dony Abdul, 2024. "The effects of formal institutions and national culture on equity-based financing in Islamic banks," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).
    2. Su‐Chuan Liao & Tai‐Yu Lin & Tzu‐Han Chang & Yung‐ho Chiu, 2024. "Non‐performance loans, operation, and recycle efficiency analysis—Dynamic Two‐stage Directional Distance Function Recycle with Assurance Regions model," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 45(2), pages 952-974, March.
    3. Soedarmono, Wahyoe & Yusgiantoro, Inka, 2023. "Islamic bank procyclicality in an emerging market economy: Do bank size and financing contracts matter?," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 132-141.
    4. Danny Hermawan & Cicilia Anggadewi Harun & Wicaksono Aryo Pradipto & Yulian Zifar Ayustira & Alvin Andhika Zulen & Amin Endah Sulistiawati & Ade Dwi Aryani & Sintia Aurida, 2024. "Bank Behavior In Determining Supply Of Credit In Indonesia," Working Papers WP/11/2024, Bank Indonesia.
    5. Tastaftiyan Risfandy & M. Kabir Hassan, 2026. "Excess Remuneration, Governance, and Risk‐Taking in Islamic Banks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 31(2), pages 1899-1916, April.
    6. Setiyono, Bowo & Munawaroh, U’um, 2024. "Related party lending and rural bank risk: Evidence during the Covid-19 period," Research in International Business and Finance, Elsevier, vol. 67(PB).
    7. Mohamad Nizam Jaafar & Nursuraya Izwanieza Saidudi & Amirul Afif Muhamat & Norzita Abdul Karim, 2025. "Determinants of Credit Risk: Comparative Analysis of Islamic Banks and Conventional Banks in Malaysia," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 9(14), pages 1022-1032, April.
    8. Haddou, Samira & Boughrara, Adel, 2025. "How diversification shapes full-fledged Islamic bank Stability? A causal inference approach," International Review of Economics & Finance, Elsevier, vol. 102(C).
    9. M. Kabir Hassan & Md Nurul Islam Sohel & Tonmoy Choudhury & Mamunur Rashid, 2024. "A systematic literature review of risks in Islamic banking system: research agenda and future research directions," Risk Management, Palgrave Macmillan, vol. 26(1), pages 1-29, February.

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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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