Assessing the Effect of Asset Quality, Income Structure and Macroeconomic Factors on Insolvency Risk: An Empirical Study on Islamic Banking System of Pakistan

Abstract

The current study is motivated to determine the insolvency risk in Islamic banking system of Pakistan for the years 2007 to 2015. To determine the insolvency risk in Islamic banks of Pakistan, variety of bank specific and macroeconomic variables were used to estimate the impact. The results were obtained using OLS estimation. The results reveal that asset quality of Islamic banking system does not significantly impact insolvency, whereas, interaction with CAR significantly impact asset quality. The structure of income has also no impact on insolvency, but using interaction it influence insolvency risk. Whereas, macroeconomic variables are partially significantly affecting insolvency risk, but interaction with CAR does not impact as an explanatory variable. Our study also reveals that policy makers shall focus on policy building for Islamic banks in Pakistan.