Stress Testing for Credit Risk Exposure in Islamic Banks

In this study, we investigate the link between default loans and macroeconomic and bank-specific variables to assess exposure of Islamic banks to credit risks, and then design stress testing scenarios to assess the banking system’s resilience to adverse shocks. The results suggest that credit risk exposure of Islamic banks in Sudan is mainly affected by bank-specific variables, which include changes in total assets, total deposits, and total loans; all of them have a negative and significant impact on the probability of default loans. The study also indicates that the macroeconomic variables, which include growth of domestic product, change in exchange rate premium, and change in money supply, have positive but insignificant effects on the risk of default loans. The study concludes by pointing out that the Islamic banking system in Sudan is more vulnerable to bank-specific risk exposure rather than macroeconomic indicators.