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Is Credit Risk Really Higher in Islamic Banks? (Boumediene A.)

Islamic Banking Risk-taking 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 Distance-to-Default (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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Libref/ Boumediene A. (2010) "Is Credit Risk Really Higher in Islamic Banks?", pp. 1 - 37
© Программирование — Александр Красильников, 2008
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