The Effect of Corruption on Banks’ Credit Risk: A Comparative Analysis Between Islamic and Conventional Banks

Corruption can increase banks’ non-performing loans (NPLs) and hence, their credit risk. This research explores whether corruption has the same impact on Islamic and conventional banks, or whether Islamic banks are protected from the adverse effects of corruption by their profit-loss sharing and sharia-compliant mode of financing. The findings confirm that Islamic banks are more protected than conventional banks against corruption. It is likely that religious commitment and the profit-loss sharing nature of financing help Islamic banks to limit the damaging effect of corruption on their credit risk. Conventional banks could benefit from anti-corruption measures and tight internal control systems to reduce corruption and, hence, the high credit risk originating from corruption.