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Determinant of credit risk of Islamic banks in Pakistan

Author

Listed:
  • Fazeelat Iqra Shaheen

    (Karachi University Business School)

  • Nadia Ameer Uddin Khan

    (Karachi University Business School)

  • Mirza Adnan Baig

    (Visiting Faculty of Karachi University Business School)

  • Mohammad Muzammil

    (Karachi University Business School)

Abstract

This study aims to investigate the influence of macroeconomic variables and bank-specific factors on the credit risk of Islamic banking in Pakistan, through the panel data regression tools. The statistical tool which is applied to the research is ordinary least square (OLS) regression model. All the assumption to be fulfilled before using OLS. The secondary data have been taken from four (04) full-fledged Islamic banks in Pakistan, from 2007 to 2021. The focus of the research is to find the impact of macroeconomic variables like Gross domestic product, inflation, and growth in the interest rate and bank-specific factors like size, return on assets, loan loss provision, capital Adequacy ratio, and Asset quality to determine the credit risk (non-performing loans) of Islamic banks in Pakistan. The result of the ordinary least square (OLS) regression model is that loan loss provisions (LLP) have a positive and significant impact on credit risk (CR) and size of bank (S), and Capital adequacy ratio (CAR) have a negative and significant impact on credit risk (CR) of Islamic Bank of Pakistan. Inflation (INF) and Gross domestic product (GDP) have a positive and insignificant impact on credit risk (CR), and growth in interest rate (INT), return on assets (ROA), and asset quality (AQ) has a negative and insignificant impact on Credit risk (CR) of Islamic Bank of Pakistan. Therefore, Islamic banks should carefully examine their specific factors, i.e. LLP, S, and CAR to manage their credit risk, particularly in monitoring loans.

Suggested Citation

  • Fazeelat Iqra Shaheen & Nadia Ameer Uddin Khan & Mirza Adnan Baig & Mohammad Muzammil, 2024. "Determinant of credit risk of Islamic banks in Pakistan," Future Business Journal, Springer, vol. 10(1), pages 1-11, December.
    • Handle: RePEc:spr:futbus:v:10:y:2024:i:1:d:10.1186_s43093-023-00271-8
    DOI: 10.1186/s43093-023-00271-8
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    References listed on IDEAS

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    1. Tariq Alzoubi & Muhanned Obeidat, 2020. "How size influences the credit risk in Islamic banks," Cogent Business & Management, Taylor & Francis Journals, vol. 7(1), pages 1811596-181, January.
    2. Steven N. Kaplan & Jeremy C. Stein, 1993. "The Evolution of Buyout Pricing and Financial Structure in the 1980s," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 313-357.
    3. Steven N. Kaplan & Jeremy C. Stein, 1993. "THE EVOLUTION OF BUYOUT PRICING AND FINANCIAL STRUCTURE (OR, WHAT WENT WRONG) IN THE 1980s," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(1), pages 72-88, March.
    4. Mohammad Alhadab & Saba Alsahawneh, 2016. "Loan Loss Provision and the Profitability of Commercial Banks: Evidence from Jordan," International Journal of Business and Management, Canadian Center of Science and Education, vol. 11(12), pages 242-242, November.
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    Cited by:

    1. Asma S. Alzwi & Jamil J. Jaber & Hani Nuri Rohuma & Rania Al Omari, 2024. "Evaluation of Total Risk-Weighted Assets in Islamic Banking through Fintech Innovations," JRFM, MDPI, vol. 17(7), pages 1-23, July.

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