The Relentlessness of Credit Risk in Islamic and Conventional Banking of Pakistan
1,2 Department of Management Sciences, Preston University, Islamabad
3 Department of Management Sciences, Abasyn University
The great depression of the 20th century raised serious concerns and had undisputable impacts over the management of the world financial system. The recent past 2008 financial meltdown in the U.S and 2010 Eurozone financial crisis was not just a reminiscence of the great depression, but exposes the risks associated with the conventional financial system. Policymakers, financial experts and nonprofessionals are grappling with how best to mitigate the risks or develop a less-risky system to complement the conventional banking system, which in turn could save the world from further unforeseen global financial trauma. The current study paves the way to gauge the propensity of credit risk especially after the world financial crisis-2008 in Islamic and conventional banks of Pakistan. Methodologically, the research employs Z-Score, Altman’s Z-Score, NPL ratio, Distance to Default and Default Probabilities to gauge the magnitude and the enormity of the credit risk. The findings of the study postulate the conventional banking in Pakistan felt more credit risk in realization with Islamic banking. However, the chances to go into bankruptcy prevails both banking systems but the conventional banks have more sound financial position to absorb trauma in near future. The more integrated paradigm of conventional banks of Pakistan with the world banking system needs to curb more risk over the passion to earn more profit.
Keywords: Credit Risk, NPL, Altman Z-Score, Merton’s Model, Islamic and conventional banking, Pakistan