WSEAS Transactions on Business and Economics
Print ISSN: 1109-9526, E-ISSN: 2224-2899
Volume 13, 2016
Credit Cycles under Conventional, Free and Islamic Banking: An Empirical Study of Risk-Taking Behavior
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Abstract: In this article, we conduct a comparative analysis of credit cycles in various modes of banking. Defining a credit cycle as movement of credit risk, we set ourselves a task to analyse the peculiarities of attitude towards credit risk in modes of traditional, free and Islamic banking. Using correlation analysis in more than 15 countries for the years from 1769 to 1850 and from 1985 to 2014, we come to the following conclusions. The willingness to take risk by lenders depends essentially on the degree of responsibility of creditors to depositors and investors. Thus, the regime of free banking and Islamic model demonstrate sustainable stability in credit cycles and risk aversion, greater duration of credit cycles. Credit market concentration has no significant effect on the amplitude and quality of credit cycles in any mode. Effect of high requirements for capital adequacy on attitude towards credit risk is ambiguous: in case of limited liability of creditors, a positive effect is neutralized. Economic growth and an accompanying rise in prices (expectations of income growth) increase willingness to take risk only in case of limited liability of creditors. In case of full liability (free banking mode) or in terms of profit-loss sharing (Islamic model) the effect of rising yields is also neutralized.
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Pages: 11-20
WSEAS Transactions on Business and Economics, ISSN / E-ISSN: 1109-9526 / 2224-2899, Volume 13, 2016, Art. #2