Determinants of credit risk in Bangladeshi and Malaysian Islamic banks

In order to achieve sustainable long-run growth by Islamic banks, it is vital to focus on the risk management practices of Islamic banks, especially in managing credit risk.This study considers both macroeconomic and bank specific variables that affect the credit risk of Islamic banks in Bangladesh and Malaysia. Using ordinary least squares techniques, we find three significant determinants of credit risk in Islamic banks in Bangladesh, namely, the loan to deposit ratio, cost inefficiency, and size. In contrast, two additional variables significantly affect the credit risk of Islamic banks in Malaysia,namely, credit growth and the returns on assets. In addition, we find macroeconomic factors do not exert any significant impact on the nonperforming loans of Islamic banks in either of these countries.