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Off-Balance Sheet Risk : Evidence from Malaysian Islamic and Conventional Banks

Wahida Ahmad, Faridah Najuna Misman (La Trobe University, Australia)

Abstract:

Off-balance sheet activities in banking generate different impact towards its risks. Specifically, this paper studies the impact of off-balance sheet activities towards bank risk such default risk, liquidity risk and leverage risk for Islamic and conventional banks in Malaysia. The aim of this study is to examine the effects of individual off-balance sheetactivities tiwards bank risks as well as to compare their off-balance sheet attitudes between Islamic and conventional banking operators in Malaysia. The study consist of three years unbalanced panel data from 2006 to 2008. The quantitative analysis using General Least Square estimation to these two different groups of banks provides mixed results. The empirical evidences reveal significant relationship between off- balance sheet activities with default risk, liquidity risk and leverage risk in different manner. The inclusion of dummy variable distinguished the effects of off- balance sheet activities on liquidity and leverage risk between Islamic and conventional banks. In general, different framework of Islamic and conventional banks in Malaysia lead to different treatment of off-balance sheet activities in controlling bank risk. Thus the findings provide interesting comparison among Islamic and conventional banks in Malaysia.

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JMIFR - Vol 9, No.1 2012 - Part 6.pdf

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