NAVIGATING CREDIT RISK IN ISLAMIC BANKS: A MULTIDIMENSIONAL ANALYSIS OF NON-PERFORMING LOANS

Purpose — This study examines the determinants of non-performing loans (NPLs) in Islamic banks. The research aims to identify bank-specific and macroeconomic factors that influence NPLs and explores the effects of the institutional environment, product development, and credit concentration on credit risk. Design/Methodology/Approach — The study employs panel data analysis, utilising secondary data from 2008–2022 from the World Bank, Refinitiv Eikon, FitchConnect, and the AAOIFI website. Multiple regression models are used to isolate the impact of specific variables on NPLs in Islamic banks. Findings — The results indicate that return on assets (ROA), liquidity ratio (LIQ), net interest margin (NIM), and net charge-off ratio (NCOFF) are significant bank-specific determinants of NPLs. Higher ROA and LIQ reduce credit risk, while higher NIM and NCOFF increase it. Macroeconomic factors such as gross domestic product (GDP) growth and inflation significantly affect NPLs, with economic downturns and high inflation intensifying credit risk. Political stability mitigates risk, while credit concentration in sectors such as real estate increases NPLs. A positive relationship between AAOIFI membership and NPL suggests compliance challenges. Originality/Value — This study provides a novel examination of the determinants of NPLs in Islamic banks across 30 countries and addresses under-researched areas such as the institutional environment, product development and AAOIFI membership. It integrates these dimensions with traditional bank-specific and macroeconomic factors to provide new insights into credit risk. Research Limitations/Implications — The unavailability of NPL data from earlier years results in an unbalanced sample. Future research should explore the impact of fintech and ESG (environmental, social, and governance) factors on credit risk management in Islamic banks. Practical Implications — The findings offer valuable insights for policymakers and banking practitioners aiming to enhance credit risk management in Islamic banking. Integrating fintech and ESG principles can improve risk profiles and foster sustainable banking practices.