The impact of credit risk transfer on Islamic banks lending behavior and financial stability (Research Paper)

The recent financial crisis has further emphasized the importance of investigating the application of risk management techniques in Islamic banks. Previous conventional studies have showed that banks can be less risk averse in their credit portfolio management when they apply any sort of risk transfer techniques. In this study, data from 60 Islamic banks have been collected and analyzed in a panel pooled framework to investigate the impact of credit risk transfer (CRT) techniques on the lending behavior of Islamic banks. Results have showed that Islamic banks may expand their lending portfolios when practicing some sort of credit risk transfer techniques. These results are consistent with the results achieved in conventional banking studies. Hence the study concludes that despite the theoretical differences, Islamic banks may behave like conventional banks when using some sort of risk management methods. Given the recent global financial instability, the results of this study give strong policy implications to the Islamic banks management as well as to the regulators.