Cushion hypothesis and credit risk: Islamic versus conventional banks from the MENA region.

Journal article

Abdeljawad, I., Rashid, Mamunur, Abu Alia, Muiz, Qushtom, R., Irshaid, Mahmoud and Sahyouni, Ahmad 2024. Cushion hypothesis and credit risk: Islamic versus conventional banks from the MENA region. PLoS ONE. 19 (7), p. e0306901. https://doi.org/10.1371/journal.pone.0306901
AuthorsAbdeljawad, I., Rashid, Mamunur, Abu Alia, Muiz, Qushtom, R., Irshaid, Mahmoud and Sahyouni, Ahmad
AbstractConventional banks are 'indirectly' allowed to take more risk under the shadow of sovereign guarantees. Banks commit moral hazards as any major banking crisis will be 'cushioned' by deposit insurance and bailed out using the taxpayer's money. This study offers an alternative explanation for the determinants of banks' credit risk, particularly those from the Islamic regions. Although conventional banks and Islamic banks may share state and social cushioning systems, Islamic banks are strictly prohibited by moral and religious principles from gambling with depositors' funds, even if there is a cushion available to bail them out. However, banks belonging to collective societies, such as those in the MENA area, may be inclined to take more risks due to the perception of having a larger safety net to protect them in the event of failure. We analyse these theoretical intersections by utilising a dataset consisting of 320 banks from 20 countries, covering the time span from 2006 to 2021. Our analysis employs a combination of Ordinary Least Squares (OLS), Fixed Effects (FE), and 2-step System-GMM methodologies. Our analysis reveals that Islamic banks are less exposed to credit risk compared to conventional banks. We contend that the stricter ethical and moral ground and multi-layer monitoring system amid protracted geopolitical and post-pandemic crises impacting Islamic countries contribute to the lower credit risk. We examine the consequences for credit and liquidity management in Islamic banks and the risk management strategies employed by Islamic banks, which can serve as a valuable reference for other banks. [Abstract copyright: Copyright: © 2024 Abdeljawad et al. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.]
KeywordsIslam; Banking, Personal; Humans; Risk; Financial Management
Year2024
JournalPLoS ONE
Journal citation19 (7), p. e0306901
ISSN1932-6203
Digital Object Identifier (DOI)https://doi.org/10.1371/journal.pone.0306901
https://doi.org/PONE-D-23-25811
Publication dates
Print01 Jan 2024
Online22 Jul 2024
Publication process dates
Deposited05 Aug 2024
Accepted26 Jun 2024
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Open
Output statusPublished
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