Analyse the Effect of Islamic Derivatives during Financial Crises of 2008 Using Data Envelopment Analysis

Abstract

There is a very broad debate recently on the competence of Islamic financial derivatives in banks as a risk management tool better than traditional financial derivatives in conventional banks. The economic crisis that occurred in 2008 was a real measure to prove or deny this claim. In terms of bank performance, this research empirically compares Islamic and traditional banks, to evaluate the feasibility and efficiency of Islamic and traditional banks. The Data Envelopment Analysis (DEA) as statistical approach used in this research. The Kuwaiti banks were selected as a case study for the period 2006-2011 because it cover the period before and after the financial crisis of 2008. The data obtained from the Scope website, the annual accounts from banks, the IMF database, PhD studies and other tools. The research showed that Kuwait’s traditional banks were higher in efficiency and performance before the 2008 financial crisis, but the Islamic banks made a better performance afterwards. However, Islamic and traditional banks are subject to a comparable degree of risk, but different in nature; and the Islamic banks are less safe to financial shocks than conventional banks are. Since Islamic banks are unable to charge a fixed, standardized return and are unable to borrow from the financial market, Islamic banks may face more risk and unpredictable asset returns. The implication of these facts of the over-management modernisation of Islamic banks is important in order to reach a higher degree of efficiency. It will give Islamic banks an advantage over the traditional bank. For traditional banks, they need to invent specific strategies to reduce costs and retain their market position.