Risk, default, and recovery in Islamic and conventional Banks: A cross-country empirical investigation during the 2007 financial crisis A Study of Default Probabilities and Recovery Rates Across Banking Models"

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Published: Jun 30, 2025
DOI: https://doi.org/10.33119/JMFS.2025.56.5
Keywords:
Islamic banking, financial crisis, risk-sharing, default rates, recovery rates, risk management

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Assil Bnayat
SGH Warsaw School of Economics

Abstract




Islamic banks showed resilience during the 2007 financial crisis, prompting interest in their risk management mechanisms. Prior studies suggest that Islamic Financial Institutions (IFIs) have lower insolvency rates than Conventional Financial Institutions (CFIs), yet empirical comparisons remain limited. The study examines default probabilities (PD), distance-to-default (DD), and recovery rates (RR) between IFIs and CFIs in the UK, Switzerland, and Turkey from 2004–2013. Despite structural differences, their coexistence in these markets allows a comparative assessment of default risk and financial stability. Using the Merton-KMV and Black-Scholes models, findings reveal that IFIs had lower default risk than CFIs, particularly during the crisis, yet recovery rates remained comparable, challenging assumptions about superiority of Islamic finance in loan recoveries. The study contributes to financial stability discourse and suggests that conventional banks may benefit from adopting Islamic risk-sharing mechanisms. Future research should explore broader regulatory implications and regional variations in Islamic finance performance.




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How to Cite
Bnayat, A. (2025). Risk, default, and recovery in Islamic and conventional Banks: A cross-country empirical investigation during the 2007 financial crisis: A Study of Default Probabilities and Recovery Rates Across Banking Models". Journal of Management and Financial Sciences, (56), 71–95. https://doi.org/10.33119/JMFS.2025.56.5
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No. 56 (2025): Journal of Management and Financial Sciences
Section
Articles
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This work is licensed under a Creative Commons Attribution 4.0 International License.

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