(Universiti Utara Malaysia)
This paper examines the factors affecting credit risk, being the main risk faced by banking institutions and systematically identifies the key factors influencing credit risk formations in Islamic banking operations in Malaysia. A comparison of these factors between Islamic and conventional banking operations is highlighted. Several policy implications are addressed to promote risk management culture in Islamic banking industry. The findings show that management efficiency, risk-weighted asset and size of total assets have significant influence on credit risk of Islamic banking, while conventional banking credit risk are significantly affected by loan exposure to risk sectors, regulatory capital, loan loss provision and risk-weighted assets. While both systems observe similar effects of leverage, funding cost, risk-weighted on credit risk Islamic banks experience different impact of management efficiency regulatory capital and loss provisions on their credit risk as compared to that of conventional banks.
Keywords: Banking institutions, credit risk, Islamic banking.