The Effect of Lending Decision Quality on the Performance of Shariah Based Banks: Empirical Evidence from Bangladesh

Abstract

The study tries to find how lending decision quality impacts the financial performance of shariah-based banks from a Bangladeshi perspective. A strongly balanced panel data set of seven shariah-based banks from 2009 to 2021 have been used to run the econometric model required for this paper. The study uses the total classified loan to total loans (CLTL), Provision maintained to total loan (PLTL), Provision Maintained to Classified Loan (PMCL), and Capital Adequacy Ratio (CAR) as a proxy for lending decision quality, whereas the return on asset (ROA) and Net interest margin (NIM) serves the role of performance indicator. Bank Size is also used here as a control independent variable. This paper finds that both CLTL and Bank Size have a significant negative relationship with profitability, and PMCL shows a positive impact on performance.  The study does not find any meaningful relationship between CAR and PLTL with bank performance. The contribution from this study suggests that any additional nonperforming loan strain on the shariah-based banking system could result in catastrophic implications such as a negative return or a capital deficiency.