Islamic vs. conventional banking: Business model, efficiency and stability

Abstract

This is the accepted version of the paper.This version of the publication may differ from the final published version. Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large crosscountry variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality. Permanent repository link Cover Letter *Detailed Response to ReviewersWe compare conventional and Islamic banks across 22 countries with both bank types. Abstract: How different are Islamic banks from conventional banks? Does the recent crisis justify a closer look at the Sharia-compliant business model for banking? When comparing conventional and Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large cross-country variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality.JEL classification: G21; G01; Z12

Comparative Performance Analysis between Conventional and Islamic Banks in Bangladesh- An Application of Binary Logistic Regression

“…Banks require to maintain high liquidity ratio in order to keep liquidity risk low. Past studies such as Bourkhis and Nabi (2013); Beck et al (2013) and Khediri et al (2015) find that Islamic banks maintain high liquidity ratio than conventional banks. This is due to fact that Islamic banks an only invest in shariah approved halal project.…”

“…A bank also becomes the default if its assets fall short of liabilities. Olson and Zoubi (2008); Beck et al (2013) and Khediri et al (2015) find that Islamic banks have low credit risk than conventional banks. The low credit risk of Islamic banks can be attributed to different reasons.…”

“…The studies focusing comparative efficiency between Islamic banks and conventional banks Olson and Zoubi (2008); Srairi (2013); (Beck et al (2013); Johnes et al (2014))find that Islamic banks are less efficient than conventional banks. The low efficiency of Islamic banks can be attribute to some reasons.…”

“…This characteristics of Islamic bank reduces the chance to involve in speculative behavior (Gharar) which is strictly restricted in Islamic finance. Moreover, Islamic finance bans gambling (mysir) which requires to ensure symmetry of information between banks and entrepreneur which ultimately reduces moral hazard and adverse selection of Islamic banks (Abedifar et al, 2013;Beck et al, 2013).…”

“…Most of the research of Islamic finance are theoretical in nature focusing on Islamic fundamentals and the vehicles of Islamic banking (Bashir, 1983;Karim, 2001;Siddiqi, 2006;Chong & Liu, 2009;Khan, 2010;Faye et al, 2013;Said et al, 2013;Magd & McCoy, 2014). Empirical studies on Islamic banking can be grouped on regulatory, management and supervisory challenge (Murjan & Ruza, 2002;Jobst, 2007); efficiency (Abdul-Majid et al, 2010;Belanes & Hassiki, 2012;Rosman et al, 2014); Profitability (Hassoune, 2002;Ben Khediri & Ben-Khedhiri, 2009;Farook et al, 2012); Stability and concentration (Bourkhis & Nabi, 2013;Mohammed et al, 2015); Risk exposure (Abdul Karim et al, 2014;Farook et al, 2014;Ghosh, 2014;Saiti et al, 2014;Shaban et al, 2014;Daher et al, 2015); and Comparative performance of Islamic banks with conventional banks (Beck et al, 2013;Bourkhis & Nabi, 2013;Srairi, 2013;Ho et al, 2014;Johnes et al, 2014;Khediri et al, 2015). However, increased attention of Islamic banking across the world require to know the comparative strength and bank level performance between Islamic banks and conventional banks.…”