Loan loss provision practices during economic crises: evidence from banks listed on the Damascus Securities Exchange

This study aims to examine loan loss provision (LLP) practices exercised by banks listed on the Damascus Securities Exchange during the Syrian crisis, the incentives behind such practices, and whether those practices differ between Islamic and conventional banks. A sample of eleven conventional and three Islamic banks was used during the period 2011-2018. Applying a random effect panel data model revealed that banks engaged in income smoothing activities to decrease their income when their earnings were high but not to increase their income when their earnings were low. In addition, banks that reported losses in the previous year engaged in fewer income decreasing activities than banks that reported a profit; however, no evidence was detected of their engagement in income increasing activities. As per the use of LLP to manage regulatory capital or to signal future value, the findings did not support such practices. Moreover, Islamic banks do not appear to exercise different LLP practices or to have different incentives to manipulate LLP compared to conventional banks.