Article

Classification And Management Of Non-Performing Loans Of Islamic Banks And Conventional Banks: A Comparative Study

12/2009; DOI: 10.11113/jt.v51.156
Source: OAI

ABSTRACT

This paper compares the classification and management of non-performing loans between Islamic banks in Malaysia and conventional banks in the UK and Japan. The objective of this paper is to investigate if there are differences in the classification and management of non-performing loans in Islamic banks as a result of the existence of the Investment Account Depositors (IADs). The nature of profit and sharing loss agreement has made the position of IADs in an Islamic bank unique. This uniqueness, however, has posed some degree of risk where in case the bank incurs a loss, the IADs are liable to share this loss. This has made the investment of IADs very risky and is subject to the potential problem of asymmetric information. This paper finds that the Islamic banks define and manage their non-performing loans differently from the conventional banks in the UK and Japan. The analysis shows that even though Islamic banks have special characteristics, the classification and management of its non-performing loans are quite lenient. This is evidenced in the way non-performing loans are defined, the way loss provision is made and the level of disclosure made by an Islamic bank.

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    • "Moreover, they conclude that religion considerations can mitigate the problem of bad loans. Mokhtar and Zakaria (2009) conduct a comparative study on the classification and management of non-performing loans in Islamic banks in Malaysia and conventional banks in the UK and Japan. They find that Islamic banks are quite indulgent in their classification and management of bad debts. "
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    ABSTRACT: Islamic banking is developing rapidly around the world and is increasingly recognized as a viable alternative mode of financing especially these last years when capitalism has shown its limits and weaknesses. However, this astronomical growth of banking and Islamic finance was associated with a high level of corruption that plagues many Muslim countries. This ailment of corruption can deter Islamic banking to be a better effective and meaningful pathway for poverty reduction and economic development. The purpose of this paper is to investigate the impact of corruption on the soundness of Islamic banks (IBs). Using a panel of 69 IBs over the period 2008–2010, we provide robust evidence that the corruption level aggravates the problem of impaired financing.
    Full-text · Article · Aug 2015