Do Islamic banks use loan loss provisions to smooth their results ?
Do Islamic banks use loan loss provisions to smooth their results ?
by: Neila Boulila Taktak & Sarra Ben Slama Zouari & Abdelkader Boudriga
EM Strasbourg Bussiness School
(Université de Strasbourg)
with
European Research Group
“Money, Banking & Finance”
Financial and Monetary European Integration Group
Workshop on Islamic Finance
in Strasbourg
What Islamic Finance does (not) change
March 17th,, 2010,, EM Strasbourg Business School
Abstract:The purpose of this research is to examine issues about income smoothing practices in Islamic banking sector. Islamic banks offers a unique environment to test income smoothing, compared to conventional banks actives in many other countries, since they perform under Sharia laws and they adopt the dynamic provisioning policy. This study, explores first income smoothing practices on a sample of 66 Islamic banks over the period (2001-2006) using Beidleman and Eckel coefficients. Second, it focuses on detecting artificial smoothing practices by loss provision for loans and investment in Murabaha, Musharka, and Mudarabah. Results confirm the income smoothing practices by Islamic banks. 75% of the banks for the sample have a determination coefficient between 0.5 and 1 and 44% have a variation coefficient less than 0.5. However, this smoothing is not practiced through LLP. The variable earnings before taxes and provisions is not significant in all specifications. These findings reveal the Islamic specificity of income smoothing in banking sector and the importance of the dynamic provision policy which requires special attention from supervisors and regulators as a tool to improve financial stability.
Keywords: Islamic banks, income smoothing, loss provision for loans and investment in Murabaha, Musharka, and Mudarabah.
source: http://www.em-strasbourg.eu/ems/ems-workshop-on-islamic-finance-33.html