Are Islamic Banks Really Different from Conventional Banks? An Investigation using Classification Techniques

Abstract

This paper contributes to the empirical literature on Islamic finance by doing comparison of Islamic and conventional banks in Pakistan over the period 2005-2014. We apply both non-parametric and parametric classification methods (neural network, linear discriminant analysis, and logistic regression) to investigate whether financial ratios can be used to distinguish between Islamic and conventional banks. Univariate analysis reveals that Islamic banks are less profitable, better capitalized, more liquid, and have low level of credit risk as compared to their conventional counterparts. We also find that Islamic banks have more operating leverage in comparison to conventional banks. The results from classification techniques show that the two types of banks may be distinguished in terms of insolvency risk, credit risk, efficiency, and operating leverage, but not in terms of liquidity and profitability. More interestingly, we find that the financial crisis has a negative effect on the profitability of both Islamic and conventional banks. Lastly, the results show that the neural model obtained higher classification accuracies as compared to other models used in the study.

Sosyal Bilimlerde Akademik Analiz ve Yorumlar

“…Bu durum oransal olarak İslami bankaların Türkiye'de daha etkin olduğunu göstermektedir. Bu sonuç literatürde yer alan birçok çalışmayı da destekler nitelediktendir (Alam, 2013;(Abdul ve Shah, 2018;Rashid et al, 2018).…”

Islamic Banks’ Role in Serving the Poor Unbanked Population in Pakistan

“…There are over 450 Islamic Financial Institutions (IFIs) operating in various parts of the world (Islam, Alam, & Hossain, 2014;Rashid, Riaz, & Zaffar, 2018) and their main purpose is said to be enhancing the wellbeing of humanity (Dusuki, 2008;Hasan, Ali, & Muhammad, 2018). Hence, the IFIs are expected to be working, side by side doing business for profits, to enhance social and public wellbeing by alleviating poverty and inequality (Dusuki, 2008, World Bank andIslamic Development Bank Group, 2016).…”

Corporate governance and risk management in Islamic and convectional financial institutions: explaining the role of institutional quality

“…Furthermore, it examines the role of IQ in shaping the effects of CG on risk management practices and risk-taking behaviors of both types of financial institutions. Scholars have stated that the business models, operations, financing activities and the nature and contractual obligations of both types of institutions are quite different (Nosheen and Rashid, 2020; Rashid et al , 2018; Shah et al , 2021). Therefore, to carry out the empirical analysis of this paper, we assume that the effects of CG on risk management are quite different across IFIs and CFIs.…”