The procyclicality of loan loss provisions in Islamic banks: Do managerial discretions matter?

Wahyoe Soedarmono (1) , Sigid Eko Pramono (2) , Amine Tarazi (3)

1 Universitas Siswa Bangsa Internasional, Faculty of Business / Sampoerna School of Business
2 bank indonesia
3 LAPE - Laboratoire d'Analyse et de Prospective Economique

This paper is the first to examine whether the loan loss provisioning behavior of Islamic banks is procyclical. From a dynamic panel data methodology, the empirical results show that loan loss provisioning in Islamic banks is indeed procyclical, as higher economic growth leads to a decline in loan loss provisions. A closer investigation is also conducted to examine whether capital management, income smoothing, or signaling behavior can alter the procyclicality of loan loss provisions. Specifically, our results document that only capital management behavior can overcome the procyclicality of loan loss provisions. This paper therefore advocates the importance of strengthening discretionary behavior in Islamic banks in terms of capital management using loan loss provisions, particularly during economic boom.

Mots clés: Islamic banks; loan loss provisions; procyclicality

Domaines: Economies et finances

Wahyoe Soedarmono, Sigid Eko Pramono, Amine Tarazi. The procyclicality of loan loss provisions in Islamic banks: Do managerial discretions matter?. 2016. ⟨hal-01281151⟩