A Comparative Study of International Banking Risk in Open Islamic Economies

Abstract

The purpose of this paper is to test an international banking risk scoring model by applying it to a sample of international banks in open Islamic economies and to compare the results to those from a sample of banks in Western economies. The underlying objectives are to discover the extent of the importance of country-bank size and bank-country external debt in determining risk scores and to detect differences in the importance of these variables between the two samples. A further objective is to put forward an argument for better practices and governance, greater market and institutional discipline and regulation in international banking at both macro and micro-economic levels. The results of the study indicate that bank-country short-term external debt and country-bank size according to total assets make significant contributions as determinants of international of banking risk scores in key Islamic economies that include Malaysia, Indonesia, and United Arab Emirates. Moreover, in the Western sample the above variables explain a greater part of the variance of international banking risk scores.

Keywords: International banking risk, risk ratings, Asian crisis, and Asian banks

JEL Classification: G29