Comparative Analysis of Factors Effecting Credit Risk in Islamic and Conventional Banks of Pakistan: A GMM Based Approach

Abstract

This paper examines the relation between bank-specific variables and macroeconomic indicator towards credit risk. To determine this relationship, use dynamic panel data GMM method to find which factors affecting credit risk in Pakistani banks. The panel data is collected from 4 fully fledged Islamic banks and 5 conventional banks which have Islamic business window from 2011 to 2021, taking macroeconomic variable, GDP Growth, unemployment rate and inflation rate, bank-specific variable such as diversification, capital adequacy ratio, size, return on asset and total asset with log. Credit risk is computed by non-performing finance which is dependent variable. Various techniques and econometric tools used to find which variable positively affects credit risk (NPF). In order to effectively manage credit risk, it is hoped that the findings will highlight factors affecting credit risk in Islamic banks.