Farihana ShahariMd Saifur Rahman2024-05-302024-05-302020-11-109789674408558http://fem.usim.edu.my/ibaf2020-proceeding/https://oarep.usim.edu.my/handle/123456789/17402e-Proceedings of The 9th Islamic Banking, Accounting and Finance International Conference 2020 (iBAF2020) “Navigating the New Normal in Islamic Finance and Wealth Management” 10th – 11th November 2020, Malaysia Organized by: Faculty of Economics and Muamalat,USIM Page: 269-277This study resolves the gap between Profit and Loss Sharing (PLS) theory and the practice of Islamic banks in financing customers. Two-step GMM estimation technique is used in the investigation. The empirical finding of the study is consistent with the PLS theory of reducing credit risk and inconsistent with the practice of Islamic banks. Equity-based financing has been found to reduce credit risk, while bank-specific determinants such as credit growth, profitability, and cost inefficiency influence the credit risk. Furthermore, institutional development is a macroeconomic indicator that reduces credit risk. This study offers policy implications for risk-minimised decisions in financing clients.en-USIslamic Banks, equity-based financing instrument, Credit Risk, System GMMArticle269277