Abstract:

The purpose of this paper is to examine the risk and stability characteristics of Islamic banking, because in Islamic banking it is quite difficult to manage risk according to sharia. This study will find out that how to mitigate the risk involved in different products of Islamic banking by using a simultaneous modelling framework on a sample of 6 Islamic banks in Pakistan. State bank of Pakistan introduce different regulation that must be considered while managing risk according to Islam. We will apply Regressing analysis on secondary data of related variables. The placeholders of dependent variable, credit risk are: the ratio of problem loan to gross loans (PLGL), the ratio of loan-loss reserves to gross loans (LLRGL) and the ratio of loan-loss provision to average gross loans (LLPAGL).For insolvency risk apply Z-score measure which is widely used. Our control variables are Bank size, Market share, Growth rate of gross loan, Non-interest income, Profitability, i.e. return on average assets, the share of non-earning assets in total assets, ownership structure, bank age and level of experience, Banking industry and macroeconomic indicators and Year dummies. Our result estimation is that Islamic banks will benefits less from negative impact of assets size on both of their credit and insolvency risks.