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.

The Business Cycle as a Moderator of Financing for Financing Risk of Islamic Commercial Banks in Indonesia

“…The study also revealed that the proportion of Musharaka, approximately 37%-39%, can increase the risk of Islamic Bank financing to the maximum level. In line with these findings, Murabaha financing in the African region also reduced financing risk (Ijaiya et al, 2021). Another study also confirmed that Musharaka could reduce financing risk, while mudharaba and Murabaha can increase financing risk (Omer Mustafa, 2020).…”

“…Therefore, Murabaha financing significantly positively affects financing risk (Azizah & Mukaromah, 2020;Mutamimah & Saputri, 2022;Omer Mustafa, 2020). This contradicts the findings Ijaiya et al (2021), which reveal that Murabaha contracts can improve Islamic banks' financial performance. H1: Mudharaba Financing affects the Financing Risk of Islamic Banks H2: Musharaka Financing affects the Financing Risk of Islamic Banks H3: Murabaha Financing affects the Financing Risk of Islamic Banks The Effect of Financing Risk on Financial Performance…”

“…In addition, the high distribution of Murabaha funds in the household consumption sector can potentially increase financing risk (Financial Service Authority, 2021; Mutamimah & Saputri, 2022). This contradicts the finding of Ijaiya et al (2021), which reveals that Murabaha contracts can improve Islamic banks' financial performance.…”

Using the Tobin Q model to evaluate the impact of credit risks on the bank’s market value during the corona pandemic

“…This study proves that the shareholder market value can be affected by three types of risks: credit rating, capital adequacy ratio and loan to deposit ratio (Kiambati, 2020). Ijaiya et al ’s (2021) study argued the influence of credit risk on the financial performance of Islamic Banks in Africa in optimizing the bank profit. Its result found that a lack of profits was (0.0220).…”

“…The profit financing provision decreased (0.3506). However, it has a positive effect on an asset’s return, with a level of significance of 5% (Ijaiya et al , 2021). In the Vietnamese commercial banks, LE and DIEP (2020) study indicated that credit risk affected the lending structure.…”