CREDIT RISK MANAGEMENT PRACTICES BETWEEN CONVENTIONAL AND ISLAMIC BANKS AND THEIR IMPACT ON FINANCIAL PERFORMANCE

Abstract

Credit risk has been ofreal agenda to banking institutions performance because of its impact on interest income and influence to the amount ofnon-performing loans. The banking industry rely on consistent and trustworthy credit risk management system as a system fundamental way ofidentification, control and measurement of credit risk in the sector. Credit risk itself as a challenging and essential for corporate industry. The purpose ofthis study is to determine the credit risk management practices accepted by Islamic and Conventional banks and their impact offinancial performance in Pakistan. Due to significance ofthe banking industry in the constancy and competition of any nation; it is overbearing to constantly monitor and evaluate its performance. A new prototype ofbanking, Islamic banking, was introduced and was capable of achieving ofwidespread and accelerating growth oftotal assets and market share on a global basis, including Non-Muslim countries. Numerous empirical studies endeavor to measure the financial performance of the dissimilar banks in an attempt to gain more insights into Islamic banking model and the chronic reason behind its rapid success. The researcher’s explores the gaps in credit risk management practices in general available literature on risk management. The specific arrears of research were geared to identify the similarities and differences in credit risk management practices between Islamic and Conventional banks. The finding of the research, identified that Islamic banks outclassed Conventional banks in terms ofCapital to Risk Weighted assets ratio, asset quality ofthe bank, earning quality and management quality, moreover the researcher identified that Islamic banks have weaker Liquidity position as compare to conventional banks. Furthermore, significance statistical statistics were found to exist between Islamic and Conventional in Capital to risk weighted assets ratio, management quality and asset quality. Further research findings, some conclusion were made is about the study. It was found that in Islamic banks do not have all well-established credit risk management practices as in comparison of Conventional banks. By differences and monitoring it was observed that credit risk level, duration taken by the institution to know that the customer has fail to pay and how the institution deals with difficult to pay the loan on time clients. Both the conventional and Islamic banks take risks equally important with an exemption of Interest rate risk in Islamic banks as their loans do not increase interest thus they do not have a risk with the interest rates. I Furthermore, the mechanisms of loan recovery are different between Conventional and Islamic, with the Islamic banks being more flexible thus preferring to restructure the loan contrary to the conventional banks who prefer taking legal action on defaulters. Additionally, if we talk about unsecured loans Islamic banks has not started yet because as they see it as risky investments. Moreover, the management and operations activities is same of both Islamic and Conventional but with the few differences in methods and in the nature products used in appraising loans. Therefore taking into account the restrictions placed by the Shariah Complaint’s pertaining to financial constraints. Besides some instruments used by Islamic banks for credit risk management are not permitted to conventional banks. This means that the ability of Islamic banks of dealing with credit risk as well as the means available to these banks for balancing claims and assets is limited. on of Conventional banks. By differences and monitoring it was observed that credit