
Is Credit Risk Really Higher in Islamic Banks? (Boumediene A.)Islamic Banking Risktaking and Risk Management
Abstract 
It is usually argued that Islamic Banks have higher credit risk than Conventional Banks. This article explores this assertion empirically. A definition, identification of credit risk, and the way to manage it, are given to each Islamic financial tool. Then, a measure of this risk is performed on nine Islamic Banks and nine Conventional Banks, using Contingent Claims Analysis (CCA) methodology. Merton’s model (1974), based on Black & Scholes’ (1973) option pricing framework, allowed the measure of the DistancetoDefault (DD) and Default probability (DP) for those Banks from 2005 to 2009. Results show that Islamic Banks have a mean DD of 204 significantly higher than conventional Banks (DD = 15). Mean DP equals 0.03 and 0.05 respectively. It responds to the question of the article: Islamic Banks have lower credit risk than conventional Banks. Later in the paper, cumulative logistic probability distribution has been used to derive DP from DD, instead of a cumulative standard normal distribution. Results are more satisfying; the distribution of DP of Banks in the sample has larger tails which responds to the critic against the use of a normal distribution. 
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Boumediene A. (2010) "Is Credit Risk Really Higher in Islamic Banks?", pp. 1  37 

