Loan Loss Provisioning in OIC Countries: Evidence from Conventional vs. Islamic Banks

Using a sample of 291 banks from 35 OIC (Organization of Islamic Cooperation) member Muslim countries with 2078 bank year observations from 2003 to 2010, we analyze if bank earning management in terms of Loan Loss Provisioning (LLP hereafter) is affected by the banking nature whether Islamic or conventional, by the bank accounting standards whether rule-based local Generally accepted accounting principles (here after local GAAP) or principle-based International Financial Reporting Standards (hereafter IFRS), and by the bank listing status. We argue that Islamic banks may exhibit lower signs of earning management, as the Sharia’h Supervisory Boards (SSB hereafter) in Islamic banks may work as an additional tier into the governance system. On the use of accounting standard, we argue that banks using IFRS standard may exhibit lower evidence of earning management, as IFRS requires managers to disclose more accounting information compared to local GAAP. We report mixed evidence supporting these arguments.