| Abstract: | We examine whether Islamic financing can explain three important bank risks in a country with a dual banking system: credit risk, interest‐rate risk, and liquidity risk. Using Malaysian data, we find that commercial banks with Islamic financing have significantly lower credit and liquidity risks but significantly higher interest‐rate risk than banks without Islamic financing. There is also evidence that bank size is significantly related to credit risk; the proportion of loan sales to total liabilities and bank size are significant determinants of interest‐rate risk; and off‐balance‐sheet financing, the extent of securitization, loan volatility, bank capital, and bank size are statistically significantly related to liquidity risk. © 2005 Wiley Periodicals, Inc. |
