Bank Financing and Risk: The Case of Islamic Banks

Abstract

The paper assesses the risk implications of rapid Islamic financing growth after the Global Financial crisis and whether financing — risk relations are more reflective of large Islamic banks. Employing a panel regression methodology and a sample of 72 Islamic banks from 14 countries over the period 2010–2019, our analysis indicates that Islamic financing growth does lead to credit risk deterioration up to two years ahead. We note further that Islamic banks are “too small to succeed” in that the risk effect of financing growth is more apparent for small Islamic banks. But, once an Islamic bank reaches a certain size threshold, it demonstrates ability to manage and mitigate credit risk arising from its financing activities. Based on these results, we conclude that Islamic banks need to be bigger.