Credit Risks in Islamic and Conventional Banks in the Middle East and North Africa: A Scientific Study at Damascus University

 Changes in financial markets have imposed many risks on the financial sector in various countries of the world, as risk constitutes a large part of banking work, especially with the increase of competition, the volume of banking transactions, and technological developments.

In this context, a scientific study was conducted at the Higher Institute for Administrative Development at Damascus University entitled: “Cushion hypothesis and credit risk: Islamic versus conventional banks from the MENA region”, in which the researcher presented an alternative explanation for the determinants of credit risks faced by banks, especially those located in Islamic regions.

According to the study, although conventional banks and Islamic banks may share state and social cushioning systems, Islamic banks are strictly prohibited by moral and religious principles from gambling with depositors’ funds, even if there is a cushion available to bail them out. However, banks belonging to collective societies, such as those in the MENA area, may be inclined to take more risks due to the perception of having a larger safety net to protect them in the event of failure.

The study utilized data of 320 banks from 20 countries, covering the period from 2006 to 2021. The results of the study’s analysis showed that Islamic banks are less exposed to credit risks compared to conventional banks, confirming that the imposition of ethical limitations on the cushioning mechanism would prompt Islamic financial institutions to adopt more cautious strategies, emphasizing operational efficiency and implementing a robust risk monitoring system to mitigate potential risks.

This study points out the implications of credit and liquidity management in Islamic banks and the risk management strategies used by Islamic banks, which can serve as a valuable reference for other banks.