Conclusion
Нe objective of this paper was to examine whether Islamic banks face higher credit risk than their conventional counterparts. We used two measures for credit risk: the ratio of loan-loss reserves to gross loans (LLRGL) and the ratio of loan-loss provisions to average gross loans (LLPAGL). At the same time, we examined the relationship between credit risk and capital using the Generalized Method of Moments (GMM) in 14 MENA countries over the period 2005-2015. Нe findings suggest that conventional banks have a higher credit risk than their Islamic counterparts. Нis credit risk has a high eوٴect on the exposure of financial crises because it is capable of putting the bank in distress if it is not properly managed.
However, we have observed in parallel that, the larger the size of Islamic banks is, the higher credit risk to the extent to become very close to that of conventional banks. Нe increase of credit risk in the largest Islamic banks can be explained by the fact that the latter, in the course of their activities and operations, do not diوٴer from their conventional counterparts. Нey transfer the conventional funding framework to a context that respects Islamic law. Нeir role thus remains a financial intermediation which, by sharing profits and losses with their customers, gradually deteriorates in favor of a simple intermediation. Нis conclusion is also proven by the diوٴerence in the risk of the debt linked mainly with the financing and insolvency operations which emerged from participation activities.
