Financial risks and performance of conventional and Islamic banks: do reputational risk matters?

Abstract

Purpose The purpose of this paper is to shed light on the reputational risk, which is elusive and difficult to measure due to the lack of its conclusive definition. Literature supports the notion that financial risks may translate into reputational risks that pose threat to bank performance. However, empirical investigations in this context are still at their nascent stage. Design/methodology/approach This study has used a panel dataset for the sample of 24 conventional and Islamic banks regarding the period 2007–2017 by using a structural equation model. Findings The results of this study show that reputational risk partially mediates the relationship between financial risks and the performance of conventional banks. However, for Islamic banks, the reputational risk remains insignificant as a mediator. This study provides significant implications to risk managers in banks, regulators and academics to understand the role of reputational risk linked to financial risks for the improvement of bank performance. Originality/value This study aims to add to the literature by measuring reputational risk through the shareholders reputational score index, which is used as a mediator to determine whether financial risks of banks affect the performance of conventional and Islamic banks in Pakistan.