How Islamic and Conventional Banks Use Discretionary Loan Loss Provision in Pakistan

Abstract

The purpose of this paper is to investigate the use of DLLP in the banking sector of Pakistan.  First, the study identifies the factors affecting the use of DLLP in Islamic banks of Pakistan. Secondly, the study also tries to examine the difference between the use of discretion in Islamic and conventional banks. The study used secondary data collection method and applied regression technique for analysis. The study provide evidence that all the factors including CAR, bank size and profitability effect the use of DLLP in Islamic banks except LD and EBTP. The study also found that conventional banks are more involved in DLLP compared with Islamic banks. The reason may be that Islamic banks in Pakistan work under Sharia supervisory board and avoid the practices of earnings management. The sharia principled are based on fairness, justice, and equal chances of profit and loss. This study may be helpful for regulators who can make policies for financial statements to be more transparent. This study can also be useful for investors to get to know how much discretion banks has made on the main accounting item.

Keywords: Loan loss provision, Discretionary loan loss provision, Islamic banks, conventional banks, Earnings Management

DOI: 10.7176/JPCR/49-03

Publication date:June 30th 2020