title: A Comparison of Credit, Liquidity and Operational Risk Management in Islamic and Conventional Banks: Evidence from Saudi Arabia
Creators: name: Aldoseri, Mahfod
Publisher: name: Griffith University
Year: 2017
Subjects: subject: Operational risk management
subject: Credit comparison
subject: Islamic and conventional banks
subject: Saudi Arabia
subject: Bank performance

description: Like their conventional counterparts, Islamic banks face a variety of risks when conducting business, including operational, credit, liquidity, foreign exchange, interest rate, and market risk. To address these risks, banks of all types employ risk management practices as a way of improving bank performance and reducing any potential damage. The purpose of this thesis is to examine the risk management practices implemented in both Islamic and conventional banks in Saudi Arabia, the primary focus being the analysis of the relationship between risk management practices and financial performance, concentrating on the operational, credit and liquidity risks prevalent in Saudi Arabia, and the effectiveness of current risk-management strategies and practices. There is particular attention on the differences in risk management practice in both types of banks and the implications this may have for their performance and sustainability. The empirical analysis employs a sample of 12 banks operating in Saudi Arabia throughout the period from 2005 to 2014. Eight of these are conventional banks and the remainder are Islamic banks. The thesis employs a two-step approach to analyze risk management practices. In the first step, financial data is used to quantitatively determine the credit, liquidity, and operational risks faced by both Islamic and conventional banks within Saudi Arabia, the aim being to recognise the level of influence each aspect plays in risk management practices. To accomplish the objective of analysing the relationships between risk management practices and financial performance, the thesis also examines the current risk situation in both Islamic and conventional banks. The posited determinants of risk include bank size, non-performing loans (NPLs), the capital adequacy ratio (CAR), the debt-to-equity ratio (DER), asset management (ASM) and management efficiency (MGT). Mann–Whitney tests reveal no statistically significant difference between Islamic and conventional banking in terms of operational risk. Therefore, we reject the hypothesis that Islamic banks have less exposure to operational risks than conventional banks, along with the hypothesis that argues that Islamic banks are generally less exposed to liquidity risks than conventional banks. The difference between the mean values suggests that conventional banks hold more liquid assets than Islamic bank and that banks providing Islamic products and services are less exposed to credit risks than other banks. Overall, conventional banks in Saudi Arabia have a higher return on equity than Islamic banks. Conventional banks also appear to perform more efficiently than Islamic banks. This has important implications for the future business behavior of the Islamic banking sector in Saudi Arabia. In the second step, the thesis draws on a purpose-built survey to gather information relating to current risk management practices in Islamic and conventional banks. The analysis scores each Islamic bank according to its risk management practices, and compares across important categories of practice, including Understanding Risk and Risk Management (URM); Risk Identification (RI); Risk Assessment and Analysis (RAA); Risk Monitoring (RM); and Credit Risk Analysis (CRA). This enables a finer analysis of the possible reasons for any deficiencies in risk management practices using the institution-level data in the first analysis. The results demonstrate that all of these practices play an important role in determining the efficiency and effectiveness of bank risk management in the banks concerned. However, risk assessment and analysis (RAA) and risk monitoring (RM) are the most influential in determining the quality of credit, liquidity, and operational risk management. This suggests that both Islamic and conventional banks in Saudi Arabia need to concentrate more on these areas. In contrast, the most significant factor in liquidity risk management practice is comprehension of the potential risks and risk management (URM). This thesis adds to the extant literature in several ways. Foremost is that this is first study conducted specifically using Saudi Arabian banks which examines the risk management practices applied by both Islamic and conventional banks, focusing on their operational, credit and liquidity risks. The findings of this research are informative for banking stakeholders, including policy makers, regulators, the central bank, government, and bank managers, both in Saudi Arabia and other developing countries with a dual-banking system including Islamic banks. Although this thesis has contributed significantly towards our knowledge of risk management practices in banking, it does include some limitations, all of which suggest future directions for research. Most importantly, the results in part rely solely on self-reporting by participants, which may not reflect changes in credit, liquidity and operational risks over time. The cross-sectional data in the survey may also be affected by the participant previous experiences or by their psychological state at the time of completing the survey.