Management of Bad Debts in Islamic Banks: A Study Applied on Saudi Islamic Banks

Abstract

This study aims to know the reality of bad debts in Saudi Islamic banks and the strategies for dealing with them. It used the descriptive analytical approach using the data published in the financial reports for the period from 2011 – 2019. The study reached a number of results, the most important of which are: that Saudi Islamic banks face the problem of bad debts, and that these debts exist in the corporate sector and investors rather than the individual sector. These banks bear large allocations to cover bad debts compared with their traditional banks. For instance, the coverage ratio of non- performing funds in Al Rajhi Bank reached up to 303%, followed by Bank Albilad with 260%, followed by Al- Jazira Bank with 150%, and finally Bank Alinma in coverage rate of 125%. The results also show that Islamic banks adhere to the decisions of their Sharia bodies in dealing with non- performing debts. They allow rescheduling of indebtedness without an increase in debt or profit. They also operate with the procedure of placing and accelerating, provided that the payment is before the specified term. There is no precondition in the contract stipulating this issue They do not work with the penalty clause due to the debtor’s delay in paying the remaining instalments, whether due to Insolvency, or due to procrastination, and they can finance customers who have indebtedness to other parties. Based on the results of the study, the researcher recommended Islamic banks to reduce the financing ratios using the debit forms, in favor of the partnership forms that give a bank the right to participate in managing and, supervision. Such procedures can protection it from the delay or evasion of the other party.