A comparati̇ve study of credi̇t ri̇sk i̇n local banks and forei̇gn banks operati̇ng i̇n Palesti̇ne

The banking system in Palestine plays a vital role in the development of the economy. Since the establishment of the PNA in 1994, the number of banks has been regularly increasing, reaching 17 banks with 232 branches and offices at the end of 2013. There are 7 local banks (2 from local banks are Islamic banks that operate in the West Bank and Gaza Strip), whereas there are 10 foreign banks operating in Palestine. Among the foreign banks, 8 are Jordanian, one is Egyptian and one is owned by HSBC. Recent trends in Palestine are comforting, as growth, besides being driven by aid inflows, is being supported by the resurgence of economic activity. The PMA with its perseverance has now put in place a well functioning banking system. Banking activity in Palestine has increased in total value. Customer deposits which amounted to 6.8 billion USD in 2010 rose to about 8.1 billion USD in 2013. Total assets increased from 8.5 billion USD in 2010 to 10.6 billion USD in 2013. The growth in direct credit facilities was from 2.7 billion in 2010 to 4.3 billion USD in 2013. Total equity went up from 8.3 billion USD in 2010 to over 10.6 billion USD in 2013. This study aims to compare credit risk between local and islamic banks and foreign banks in Palestine. It has been empirically demonstrated in this study that foreign banks have lower credit risk than local banks. Credit risk is calculated for 8 foreign banks and 7 local banks ( 2 of them are islamic banks) by using Merton's model, based on Black and Scholes's option pricing formula, which is used to measure the distance-to-default (DD), and the default probability (DP), from 2007 to 2013. Foreign banks have a higher mean distance to- default of (7,26), than Local and islamic banks (4,77). Foreign banks have a lower mean default probabilities of (3.43E-06), than Local and islamic banks (2.86E-04), is thus higher for local banks, which reflects higher credit risk. The study uses Cumulative logistic probability distributions to derive default probability from distance to default. When cumulative probabilities are used upto a threshold, the results are more satisfying: the distribution of default probability has larger tails. under the logistic distribution for 2007-2013. At the sample level, default probability is still higher for local and islamic banks at (1.67E-02) , in comparison with foreign banks, for which it is (4.23E-03). Keywords: Credit Risk, Palestine Banking System, Probability of default, Foreign banks, Local Banks