Muhammad Sobarsyah, Wahyoe Soedarmono, Wahdi Salasi Apri Yudhi, Irwan Trinugroho, Ari Warokka, Sigid Eko Pramono
We assess the effect of loan growth and capitalization on credit risk in Islamic banking. Using a sample of Islamic banks from 29 countries, our empirical results reveal that higher loan growth exacerbates credit risk one year ahead, particularly for Islamic banks with higher capitalization. However, a deeper investigation highlights that such evidence is more pronounced after the 2008 global financial crisis (GFC). Hence, strengthening prudential tools and supervision for Islamic banks with higher capitalization is necessary to mitiate moral hazard and ensure prudent lending behavior in the aftermath of the GFC. Likewise, strengthening capital requirements is not enough to ensure prudent lending behavior in Islamic banking. © 2020 CEPII (Centre d'Etudes Prospectives et d'Informations Internationales), a center for research and expertise on the world economy
Hasanuddin University, Faculty of Economics and Business, Makassar, Indonesia; Sampoerna University, Faculty of Business, Jakarta, Indonesia; Sebelas Maret University, Faculty of Economics and Business, Surakarta, Indonesia; State University of Jakarta, Faculty of Economics, Jakarta, Indonesia; Bank Indonesia, Department of Islamic Economics and Finance, Jakarta, Indonesia; Universidad Autónoma de Madrid, Centro Internacional “Carlos V”, Madrid, Spain; Tazkia University College of Islamic Economics, Bogor, Indonesia
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