Analysis of default behavior of borrowers under Islamic versus conventional banking
Bibliographic record
Abstract
Purpose The purpose of this paper is to consider borrower-specific characteristics to understand the factors affecting both the probability and quantum of loan default by individual borrowers under Islamic and conventional banking. Design/methodology/approach Borrower-specific characteristics that explain the probability of default may not necessarily be similar factors that determine the quantum of default. The authors therefore apply a Box-Cox double hurdle model to treat both the probability and quantum of default in a two-step approach. The authors also explain the differences in default risk and quantum of default between Islamic and conventional banking borrowers from their behavioral perspectives following the Sharia principles in financial transactions between lenders and borrowers. The authors use borrower-specific information of two separate bank branches of the United Arab Emirates that solely deal with either Islamic or conventional banking products. Findings The paper demonstrates that the probability of default and the quantum of default appear to be influenced by different set of client-specific factors. The results suggest that the probability of default does not vary significantly between Islamic and conventional banking borrowers. The evidence also shows that Islamic banking defaulters, compared to those in conventional banking, repay a large quantum of overdue when their financial leverage improves. However, they do not tend to reduce their outstanding quantum of overdue faster than conventional banking defaulters. Research limitations/implications Availability of data from only two bank branches may limit the explanatory power of empirical findings. Practical implications The study findings will enable the Islamic and conventional banks to appropriately address Basel Capital requirements based on the borrowers’ behavior. Social implications The study findings have the potential for Islamic and conventional financing institutions to be more flexible with equity in their lending practices. Originality/value Religious beliefs are crucial in borrower’s default behavior in Islamic banking.
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How this classification was reachedexpand
Full frame machine prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. The Gemma side is a direct model label for every work in the frame, read from the title-only record. The Codex side is a classifier learned from the 10,348 direct Codex labels and calibrated to design-weighted sample rates; fields without enough sample support carry no Codex call. Candidate is the union of the two sides; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels.
Distilled classifier scores by category (both heads)
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.002 | 0.008 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.000 |
| Bibliometrics | 0.001 | 0.001 |
| Science and technology studies | 0.000 | 0.000 |
| Scholarly communication | 0.001 | 0.001 |
| Open science | 0.000 | 0.000 |
| Research integrity | 0.000 | 0.000 |
| Insufficient payload (model declined to judge) | 0.002 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one source (direct Gemma or distilled Codex), not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".