Author(s): Mahfod Aldoseri
The bank system, including both conventional and Islamic banks, always seeks to keep financial risk to minimum. The purpose of the present study is to determine the effect of credit risk upon the performance of Saudi banking sector as it seeks to highlight the aspects of differences and similarities between the Islamic and conventional banks in their treatment of credit risk management. This research aims to evaluate the current position of credit risk management in both Islamic and conventional banks in Saudi Arabia. It recommends employing some determinants to identify this risk and the relationship between this risk and the variables. Furthermore, it aims to realize which type of bank performs better regarding credit risk. The sample of the study is made up of four conventional banks and four Islamic banks as the data have been collected from the annual reports of these banks. The data of the study covered a period lasted for ten years, specifically from the period extended from 2009 to 2018 as the data helped to find the correlations between credit risk and performance.. The indictors of the credit risk used in the current study include the ratio of Loan Provision to Total Loans (LP/TL), the ratio of Loan Provision to Non-Performing Loans (LP/NPL), the ratio of Loan Provision to Total Assets (LP/TA), and the ratio of Non-Performing Loans to Total Loans (NPL/TL). A regression model was used to find the relationship between the banks’ performance and the indicators of credit risk. The study finds that conventional banks have the best practices for dealing with the ratio of total loans to total issues. Additionally, the study concludes that financial performance is influenced by risk management practices and the extent to which the banks develop the strategies to face different risks.