Exploring the nexus between Credit risk and Off-balance sheet activities of commercial banks: A case of an emerging Asian economy

Abstract

This study's primary purpose is to examine the relationship between credit risk and off-balance-sheet activities at conventional and Islamic commercial banks in Malaysia. In order to investigate and achieve the research's objectives between 2010 and 2017, a diverse group of 25 banks was chosen. The category of commercial banks includes both conventional and Islamic banking systems. Fixed effect and GMM panel estimates, followed by a series of diagnostic tests, seemed to be the most appropriate methodologies for this inquiry. According to the findings of the Husman test, endogeneity was shown to exist. In this instance, Arellano-Bond tests for zero autocorrelation may be obtained from the work's GMM analysis. In addition to establishing that the concept of market portfolio theory is accurate, the study demonstrated that off-balance-sheet performance may be improved by increasing fee-based income and, ultimately, performance, which would reduce credit risk. In addition, the results reveal a positive association between credit risk and credit risk, lending validity to the claim that financial intermediaries are required. The results of the study add credibility to market portfolio theory and financial intermediation theory. This is one of the first studies to examine credit risk and off-balance-sheet issues in Malaysia; it is also one of the earliest studies of its type. The research will aid legislators, bankers, and academics by enhancing their knowledge of these issues. The study evaluated the issue in three separate countries, taking bank-specific characteristics into consideration. Nevertheless, further study is necessary, especially with a larger sample size and under closer supervision