Modelling Non Performing Financing in an Islamic Bank

It is possible that Islamic banks face greater risk than the conventional ones do, since they apply profit-and-loss sharing scheme. Given the bank's vulnerability to the risk, they should have a reliable model to measure it. This paper builds such a model based on conditional variance regression using non-performing financing (NPF). The conditional variance will then be used to estimate Value-at-Risk as risk thresholds. The proposed model accommodates the impact of factors from both inside and outside the banks. The factor from inside the banks is the financing conducted by the banks. The factors from outside the banks are interest rate, exchange rates, common price, and industrial production index growth.