Credit Risk Management and Its Effect on Financial Performance between Conventional and Islamic Banks in Malaysia
DOI:
https://doi.org/10.33736/uraf.8597.2024Keywords:
Credit Risk Management, Bank Performance, Non-Performing Loans Ratio, Capital Adequacy Ratio, and Loan-to-Deposit ratioAbstract
Banks are essential to a nation's economic development. In order to guarantee banks can remain in the financial sector, risks must effectively be managed in this sector. The main goal of this research is to gaze into the link between credit risk management (CRM) and the financial performance (FP) of conventional and Islamic banks in Malaysia. The sample collected for this empirical study covered twelve years of data from 2011 until 2022. The sample for this study is consist of 15 conventional and 15 Islamic banks in Malaysia. Regression analyses are used to determine the impact of CRM and its components namely non-performing loans ratio (NPLR), capital adequacy ratio (CAR), and loan-to-deposit ratio (LDR) on the banks’ performance which is measured by return on assets (ROA) and return on equity (ROE). The results revealed that NPLR and CAR in conventional banks had a significant negative relationship with the profitability in terms of ROA. However, only CAR had a significant relationship with Islamic banks’ performance. Furthermore, the findings showed a significant negative association between CAR and LDR on conventional banks’ profitability as measured by ROE. Whereas NPLR and CAR significantly negative associated with Islamic banks' ROE. This study could provide empirical evidence for bank manager and regulators in Malaysia to help them better understand the risks of banks so that they can formulate better policies to promote prudent management and decision-making.
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