The effect of national culture on default risk in banks : a comparison of Islamic vs conventional banks

Abstract

This thesis examines the role of national culture in shaping bank default risk, with a focus on the difference between conventional and Islamic banks. While previous studies document that cultural values influence corporate governance, risk-taking, and financial development, little is known about whether these effects extend to banks operating under distinct institutional frameworks. Islamic banks, which prohibit interest (riba), excessive uncertainty (gharar), speculation (maisir), and are monitored by Sharia supervisory boards, may respond differently to cultural environments compared to conventional banks. The data comprises 547 banks (499 conventional and 48 Islamic) from 74 countries over the period 2010-2023. The analysis investigates the relationship between Hofstede´s six cultural dimensions and default risk, proxied by the Altman Z-score. To account for unobserved heterogeneity while retaining timeinvariant cultural variables, the study employs the Correlated Random Effects (CRE) model. Additional robustness checks are conducted, and a moderation analysis assesses whether Tier 1 capital adequacy mitigates cultural influences on risk. The findings reveal that cultural traits significantly affect default risk in banks, but their impact is not uniform across banking models. Individualism positively affects default risk for both banking models, while uncertainty avoidance consistently reduces default risk, with stronger effects on Islamic banks. Power distance and masculinity show partial influence, whereas long-term orientation and indulgence have no significant effects, which is consistent with theoretical expectations. The moderating analysis indicates that stronger capitalization reduces the effect of some cultural dimensions on default risk.