Investigating the Effect of Islamic Contracts on Credit Risk of Banks of Tehran Stock Exchange

One of the strengths of Islamic banking compared to the conventional banking system is the participation in the profit and loss of financial activities within the framework of partnership contracts. Proper implementation of participatory facilities requires the observance of religious, financial, and economic requirements. However, the criticism and evidence concerning the performance of Islamic banks in the provision of participatory facilities indicate their inability to properly implement and comply with the judicial and legal requirements of such facilities. Therefore, due to the growing trend of non-performing loans and their relation to Islamic contracts, we examined the relationship between Islamic contracts and the credit risk of banks. To this end, the panel regression was employed to collect data from 14 banks listed in TSE in 2009-2018. The credit risk was also measured using the ratio of non-performing facilities and Islamic contracts (participatory and transactional) based on the share of contracts in total facilities. The results of this study show that participatory contracting has a direct relationship with the credit risk of banks and transactional contracting has no significant effect on the credit risk of banks. The return on assets and the bank size have a significant negative relationship with banks' credit risk.