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The Effect of Corruption on Banks’ Credit Risk: A Comparative Analysis Between Islamic and Conventional Banks

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  • Hatice Jenkins

    (Department of Banking and Finance, Eastern Mediterranean University, Famagusta, Northern Cyprus via Mersin 10, Turkey)

Abstract

Corruption can increase banks’ non-performing loans (NPLs) and hence, their credit risk. This research explores whether corruption has the same impact on Islamic and conventional banks, or whether Islamic banks are protected from the adverse effects of corruption by their profit-loss sharing and sharia-compliant mode of financing. The findings confirm that Islamic banks are more protected than conventional banks against corruption. It is likely that religious commitment and the profit-loss sharing nature of financing help Islamic banks to limit the damaging effect of corruption on their credit risk. Conventional banks could benefit from anti-corruption measures and tight internal control systems to reduce corruption and, hence, the high credit risk originating from corruption.

Suggested Citation

  • Hatice Jenkins, 2025. "The Effect of Corruption on Banks’ Credit Risk: A Comparative Analysis Between Islamic and Conventional Banks," Development Discussion Papers 2024-08, JDI Executive Programs.
  • Handle: RePEc:qed:dpaper:4624
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    References listed on IDEAS

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    More about this item

    Keywords

    Corruption; Islamic banks; Conventional banks; Credit risk; NPLs;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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