The Effect of Islamic Financing and Macroeconomic Variables on the Credit Risk of Private and Public Banks in Iran

One of the main indicators for increasing attention to Islamic finance (Cheque or documents) is its consistency with Islamic religious law, that cause to fair conduct and protect sanctity of contracts. The purpose of this study was to investigate the effect of macroeconomic variables and Islamic financing method (Cheque or documents) on the risk of private and public banks of Iran including 15 banks during the period of 2005-2006. For this purpose, Tobit panel data method is used to estimate the model. The estimation results show that Cheque or documents, inflation, government ownership have a undesirable effect on the banks' risk-taking. As the government's share of bank ownership grows, so does the risk of banks. While the log of GDP (ln GDP) and the ratio of total expenditures to total assets has a desirable effect on the banks' risk-taking. In other words, with the increase in the income of individuals, the credit risk of banks in Iran decreases. finally, in order to reduce the credit risk of banks, it seems necessary to increase the banking activities of the private sector compared to the government