This paper aims to explore the impact of Islamic windows on the lending behavior and credit risk of commercial banks in Tanzania.
The study applies feasible generalized least squares regression analysis on a quarterly panel data of 25 commercial banks from 2010 to 2022. It draws on agency and capital buffer theories to understand factors influencing banks’ lending behavior and credit risk.
Islamic window adoption significantly increases lending. Capital and liquidity lower lending and credit risk. Inefficient management reduces lending and increases credit risk. Deposits and profitability increase lending and decrease credit risk. Listed banks face higher lending and credit risk. Banks with Islamic windows, higher capital, liquidity, and deposits have elevated credit risk. Both banks’ credit risk exceeds the threshold of the Central Bank of Tanzania.
The Islamic windows reduce the principal–agent problem. Regulators should continue enhancing frameworks for both banks and, more so, for conventional banks because of higher credit risk. Emphasizing high capital buffers is crucial for these banks’ stability. Managers should endeavor to curtail the extent of lending amid higher liquidity.
To the best of the authors’ knowledge, this is the pioneer empirical study in Tanzania examining the effects of Islamic windows on bank lending and credit risk.
