MURABAHA-RELATED CREDIT RISK AND FINANCIAL PERFORMANCE OF ISLAMIC BANKS IN AFRICA
Abstract
The uniqueness of Murabaha (cost-plus) financing has suggested another theoretical relationship between credit risk and the financial performance of banks. While studies from Asian countries supported this assertion, empirical analyses from Africa reported conventional findings on the credit risk effect on performance. These conflicting reports were partly due to the exclusion of factors specific to Murabaha financing in past studies in Africa. This study was conducted to assess the effect of credit risk on the financial performance of Islamic banks in Africa. Data were collected from annual reports of the selected Islamic banks for nine years from 2012 to 2020. A fixed-effect regression model was estimated after conducting the preliminary tests of Breusch Pagan Lagrange Multiplier (BP/LM) and Hausman. The study found that non-performing Murabaha (0.0220) and provision for impairment of Murabaha financing (0.3506) have positive effects on return on assets. The results were found to be significant at a 5% level of significance. Based on this finding, it was concluded that credit risk exposure that arises from Murabaha (transactions) financing tends to improve the financial performance of the banks. Therefore, the study recommends that Islamic banks increase their financing of Murabaha transactions to boost their profitability and compensate for high credit risk exposure.
JEL Classification Codes: G21, G32.
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Copyright (c) 2021 Muftau A. Ijaiya, Abdulrazaq T. Jimoh, John A. Attah, Biliqees A. Abdulmumin, Aliyu I. Nafiu
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