DO MUDARABAH AND MUSHARAKAH FINANCING IMPACT ISLAMIC BANK CREDIT RISKS DIFFERENTLY IN PAKISTAN

Abstract

Purpose: The purpose ofthis research is to determine whether Mudarbah or Musharka impacts the credit risk in Islamic banking, differently. Since, risk management has been an important domain in commercial and Islamic banking, it is important to determine its impact on credit risk management in accordance with the Islamic financing products i.e. Mudarbah & Musharka. Methodology: Mudarbah & Musharakah are both Islamic financing products however; according to nature the Mudarbah is high in risk as compared to Musharakah which is sharing the risk on equal basis among the bank and the party. To determine their impact on credit risk management the research undermines a quantitative research methodology where, data for the study is collected through secondary sources i.e. financial statements ofthe Islamic banks. The independent variables for this study include: (Mudarbah Financing, Musharka financing, SIZE ofthe bank, CAP, GDP country, Exchange rate in an economy) and the dependent variable is NPF (non performing financing). The data was taken for the period of 10 years and it includes main variables and control variables also. The analysis of this research has been carried out through descriptive testing whereas; the impact is analyzed through Regression testing. Findings & Recommendations: The findings from the research show that, Mudarbah financing has no significant impact on Credit risk management whereas; the Musharakah financing has significant impact on NPF. This relates to the fact that, since, Islamic banks are of Mudarbah financing from their total financing therefore; it didn’t using small proportion have that significant impact. Similarly the results from our research are strongly endorsed by researches like, (Mansoor Khan, & Ishaq Bhatti, 2008; Warninda, Ekaputra, & previous Rokhim, 2019).