CREDIT RISK IN ISLAMIC AND CONVENTIONAL BANKING SYSTEMS: EVIDENCE FROM NIGERIA

Abstract

Islamic banking has been characterised by high credit risk exposure as receivables take
higher portion of the banks’ assets which are only held till maturity as discounting is not
allowed. The high level of exposure may affect their performance in relation to conventional
banks. However, there is dearth of research on the comparative analysis of credit risk
exposure of Islamic and conventional banks in Nigeria. This study therefore investigated the
level of credit risk of Islamic banks in comparison with that of conventional deposit money
banks in Nigeria. Data were collected from annual reports of the selected banks and
analysed via Wilcoxon Signed Ranks Test. The study found that Islamic banks had
significantly lower loss provision ratio than conventional banks (ų= 2.99<4.89; p=0.001).
Non performing financing was also found to be significantly lower for Islamic banks than
conventional banks (ų= 4.99<5.27; p=0.220). However, Islamic banks had higher but
insignificant level of cost to loan asset (ų= 16.67<11.72; p=0.530). Based on these findings,
the study concluded that Islamic banks have lower level of credit risk exposure than their
conventional counter-parts in Nigeria. The study thus recommended moderate provision for
loss financing to reduce cost and enhance profitability.