The Role of Financing Models and Credit Risk on Islamic Bank Stability

Abstract

The prime objective of the current study is to examine the impact of profit sharing and profit margin sharing on the financial stability of the Islamic banks in the seventeen countries listed in the Islamic banking service board. In addition to that the study has employed the credit risk as moderating factor in the relationship between the profit sharing and bank stability, and profit margin sharing and bank stability of Islamic banks. The study has used panel data methodology. The data of 142 banks from 17 countries namely seventeen countries, including Bahrain, Bangladesh, Brunei Darussalam, Egypt, Indonesia, Iran, Jordan, Kazakhstan, Kuwait, Lebanon, Nigeria, Oman, Pakistan, Saudi Arabia, Sudan, and Turkey over the period of eleven years from 2013 to 2023 is gathered from the annual reports and other sources. The GMM and FE are used as estimation techniques in our analysis. The results indicate that the interaction term PSF*CR, and PMF*CR, are in significant positive relationship with the stability of Islamic banks. The result indicates that credit risk under the presence of profit-sharing financing and profit margin financing has significant impact on the stability of sample Islamic banks in our sample countries. The results of the study indicate that evaluation of credit risk is at heart of a sound banking sector under both types of systems i.e., conventional, and Islamic banking systems. The findings of the study will be helpful for policymakers and researchers in understanding the issues related to financing models and credits risks of Islamic banks in Islamic countries.