THE EFFECT OF CREDIT RISK MANAGEMENT ON THE BANK PROFITABILITY: A COMPARATIVE STUDY ON THE ISLAMIC AND CONVENTIONAL BANKS ACROSS THE GCCS

Abstract

This study investigates the credit risk management efficiency and the profitability of both Islamic and conventional banks in the Global Cash Control System (GCCs) between 2007 and 2013. This study also aims to check if the banks that have the most efficient credit risk management are the most profitable banks. The study was executed on ten Islamic banks and ten conventional banks across the GCCs which were selected from. Three financial ratios of credit and two financial ratios of profitability were conducted on the banks. After that, regression analysis was done to analyze the effect of the credit management on the bank’s profitability. Mann-Whitney U test was used to evaluate the significance of the differences of each financial ratio between the banks. The study primarily used data extracted from the annual reports published by the banks in their websites which was transformed to percentage and secondary data was the literature review. The finding of the study is that Islamic banks are more profitable than the conventional banks and those Islamic banks have more efficient credit risk management techniques than conventional banks. The study recommends examining the effect of the Islamic window which is established in the conventional banks on its credit risk management and profitability. In addition, a study could be conducted to check the effect of the Qatari law which prohibits any Islamic windows established in conventional banks on the performance of those banks before and after the law execution.