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The procyclicality of loan loss provisions in Islamic banks: Do managerial discretions matter?

Author

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  • Wahyoe Soedarmono

    (Universitas Siswa Bangsa Internasional, Faculty of Business / Sampoerna School of Business)

  • Sigid Eko Pramono

    (bank indonesia - bank indonesia)

  • Amine Tarazi

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

Abstract

This paper is the first to examine whether the loan loss provisioning behavior of Islamic banks is procyclical. From a dynamic panel data methodology, the empirical results show that loan loss provisioning in Islamic banks is indeed procyclical, as higher economic growth leads to a decline in loan loss provisions. A closer investigation is also conducted to examine whether capital management, income smoothing, or signaling behavior can alter the procyclicality of loan loss provisions. Specifically, our results document that only capital management behavior can overcome the procyclicality of loan loss provisions. This paper therefore advocates the importance of strengthening discretionary behavior in Islamic banks in terms of capital management using loan loss provisions, particularly during economic boom.

Suggested Citation

  • Wahyoe Soedarmono & Sigid Eko Pramono & Amine Tarazi, 2016. "The procyclicality of loan loss provisions in Islamic banks: Do managerial discretions matter?," Working Papers hal-01281151, HAL.
    • Handle: RePEc:hal:wpaper:hal-01281151
    Note: View the original document on HAL open archive server: https://unilim.hal.science/hal-01281151
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    References listed on IDEAS

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    1. Alandejani, Maha & Asutay, Mehmet, 2017. "Nonperforming loans in the GCC banking sectors: Does the Islamic finance matter?," Research in International Business and Finance, Elsevier, vol. 42(C), pages 832-854.

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    Keywords

    Islamic banks; loan loss provisions; procyclicality;
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