Credit-risk determinants of Islamic banks in Jordan: Macroeconomic conditions and monetary policy

Résumé

Islamic banking plays a critical role in mobilizing funds for the economy. The financing mechanisms used by Islamic banks are largely influenced by macroeconomic conditions due to their asset-backed nature. A substantial portion of the assets held by these banks originates from debt financing methods, including Murabahah and Ijarah. However, Islamic financial institutions are exposed to various risks, particularly financing or credit risks. This type of risk pertains to the potential financial losses that banks may encounter when a borrower fails to meet their obligations. The non-performing financing (NPF) rate serves as a key indicator for assessing this risk.

Our study investigates the impact of key macroeconomic variables and monetary policy on the non-performing financing rate of Islamic banks in Jordan. The analysis employs an autoregressive distributed lag (ARDL) model, utilizing data from the fourth quarter of 2013 through the first quarter of 2022. The results indicate that both monetary policy and economic growth significantly influence the non-performing financing rates of Islamic banks in Jordan.

Keywords: Islamic banks; Credit-risk; Macroeconomics; Monetary policy; ARDL;