Credit risk management in Islamic and Conventional banks in Pakistan

This paper investigates the underlying factors affecting credit risk in Islamic and conventional banking systems in Pakistan. It is based on secondary research data from the annual financial statements and economic databases. The purpose of the study was to examine the impact of business-specific and macroeconomic variables on credit risk. The study used panel data for both Islamic and conventional banks from 2006 to 2015. The data was analysed using descriptive statistics, t-test, OLS, panel random, and fixed effect regression to check the robustness of the model. The Husman fixed test was applied to test the application of random and fixed effect models. Results demonstrate that the fixed effect model is more appropriate, and ROE, ROA, cost efficiency, Diversification, GDP growth rate, CPI, and CCG have a negative relationship with credit risk. Cost efficiency and CPI show a significant negative relationship with credit risk, whereas leverage shows an insignificant positive relationship with credit risk (NPL). Thus, the findings revealed that credit risks are higher in Islamic banks compared to conventional banks. Also, it was revealed from the study that cost efficiency and inflation significantly affect the credit risk of Islamic banks as compared to conventional banks.