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Article
Publication date: 3 April 2009

Taufiq Hassan, Shamsher Mohamad and Mohammed Khaled I. Bader

This paper aims to investigate the differences in mean cost, revenue and profit efficiency scores of conventional versus Islamic banks. It also aims to examine the effect…

5856

Abstract

Purpose

This paper aims to investigate the differences in mean cost, revenue and profit efficiency scores of conventional versus Islamic banks. It also aims to examine the effect of size and age on cost, revenue and profit efficiency of the sampled banks.

Design/methodology/approach

This study evaluates a cross‐country level data compiled from the financial statements of 40 banks in 11 Organisation of Islamic Conference (OIC) countries over the period 1990‐2005. The data were collected for each year available from the BankScope database. The DEA nonparametric efficiency approach originally developed by Farrell was applied to analyse the data.

Findings

The findings suggest no significant differences between the overall efficiency of conventional and Islamic banks. However, it was noted that, on average, banks are more efficient in using their resources compared to their ability to generate revenues and profits. The average bank lost an opportunity to receive 27.9 percent more revenue, given the same amount of resources. Similarly, the average bank lost the opportunity to make 20.9 percent more profits utilising the same level of inputs. Clearly there is substantial room for improvement in cost minimisation and revenue and profit maximisation in both banking systems. The size and age factor did not significantly influence the efficiency scores in both banking streams.

Originality/value

This research is substantially different from the prior work in this area in three main ways. First, it investigates cost, revenue, and profit efficiency, whereas previous studies focus on cost, profit, or cost and profit efficiency. Also, no previous studies have compared conventional and Islamic banks. Second, this study distinguishes differences among big versus small, and old versus new banks, which allows more detailed insights on the efficiency issue. Third, the age issue in Islamic banks has been addressed, so far undocumented.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 2 no. 1
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 4 March 2019

Muhammad Fuad Farooqi and John O’Brien

This paper aims to provide a comparative study of the Islamic versus conventional banking sector risk by using market data generated from the sample of publicly listed…

Abstract

Purpose

This paper aims to provide a comparative study of the Islamic versus conventional banking sector risk by using market data generated from the sample of publicly listed Islamic and conventional banks in the Gulf Cooperation Council (GCC) region.

Design/methodology/approach

The authors introduce a market-based measure of bank stress and test this indicator against the Tier 1 Capital Ratio using Granger causality tests.

Findings

The authors find that the market-based measure is a leading indicator of banking stress when compared to the accounting-based Tier 1 ratio and thus is relevant to the Basel regulation’s Pillar 3.

Research limitations/implications

This paper only looks at Islamic vs conventional banks in the Gulf region, and the authors would like to extend this analysis to a broader range of financial institutions, especially in the European and North American markets.

Social implications

Developing a measure that signals bank stress ahead of typically used measures can help regulators, bank management and investors identify oncoming problems and issues before these become too big to manage.

Originality/value

The results from this analysis provides insight into the offsetting impact from two drivers (beta and book-to-market ratio) of the cost of equity capital for the conventional vs Islamic banking sectors.

Details

Journal of Islamic Accounting and Business Research, vol. 10 no. 2
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 18 October 2021

Turki Alshammari

This paper aims to examine the effect of state ownership on bank performance for all banks in the Gulf Cooperation Council (GCC) countries during the period 2003 – 2018…

Abstract

Purpose

This paper aims to examine the effect of state ownership on bank performance for all banks in the Gulf Cooperation Council (GCC) countries during the period 2003 – 2018, for two distinct banking systems: the conventional and the Islamic banking systems.

Design/methodology/approach

To achieve the goal of the study, this paper uses a mean t-test to examine the mean difference of the related variables for both banking systems, and a regression test (using the GMM method) to explore the effect of state ownership on bank performance.

Findings

The most important result of the analysis is that state ownership has a significantly positive influence on bank performance for conventional banks but not for Islamic banks, in the GCC area.

Originality/value

This study adds to the scarce related literature comparative empirical results with respect to the impact of ownership on the performance of two different banking systems: the conventional system and the Islamic banking system in the GCC area. This study is likely to have implications for policymakers in terms of developing rules relevant to the governance of GCC’s two banking systems that can help to support the stability of the whole banking sector.

Details

Journal of Islamic Accounting and Business Research, vol. 13 no. 1
Type: Research Article
ISSN: 1759-0817

Keywords

Book part
Publication date: 8 November 2010

Wahida Ahmad and Robin H. Luo

Many banking efficiency studies have focused on conventional banks. Recently, Islamic banks have opened in many countries and operated in similar fashion to traditional…

Abstract

Many banking efficiency studies have focused on conventional banks. Recently, Islamic banks have opened in many countries and operated in similar fashion to traditional banks. This chapter measures and compares Islamic banking efficiency to conventional banking efficiency represented by three European countries – Germany, Turkey and the United Kingdom. The study covers the period from 2005 to 2008 in measuring the X-efficiency using the non-parametric method, known as Data Envelopment Analysis (DEA). It reveals that Islamic banks are technically more efficient than conventional banks but are beset by lower allocative efficiency. This results in lower cost efficiency for Islamic banks in comparison to the more conventional banks in Europe.

Details

International Banking in the New Era: Post-Crisis Challenges and Opportunities
Type: Book
ISBN: 978-1-84950-913-8

Book part
Publication date: 19 November 2018

Ahmad Azam Sulaiman @ Mohamad, Mohammad Taqiuddin Mohamad and Siti Aisyah Hashim

Purpose – This research analyses the stability of a number of banks operating in Malaysia by using descriptive statistical analysis based on internal variables. These…

Abstract

Purpose – This research analyses the stability of a number of banks operating in Malaysia by using descriptive statistical analysis based on internal variables. These include the characteristics of the bank, capital adequacy ratio, ratio of profitability, liquidity ratio and the ratio of bank operations.

Methodology/approach – Each bank’s stability is studied using z-score analysis. Data are sourced from the balance sheets and income statements of the banks from 2000 to 2011.

Findings – The results indicate that characteristics of a bank do influence a bank’s performance. There are significant differences in financial ratios between Islamic and conventional banking. Islamic banks provide a lower loan loss of capital to cover impaired loans than conventional banks. This provides high capital based on the mean value obtained. The capital ratio allows both sets of banks to meet the capital adequacy ratio set by the Central Bank of Malaysia. Meanwhile, in profitability ratios, conventional banks have higher returns on higher assets, whereas Islamic Banking has higher returns on higher equity. Only 8 Islamic banks and 11 conventional banks are highly stable banking institutions in Malaysia.

Originality/valueIslamic and conventional banking systems in Malaysia need further improvement to deal with unexpected economics crises and increased competition between the two. Hence, Islamic banking must be refined, especially for improving their stability to attract more investments for further development and performance.

Details

New Developments in Islamic Economics
Type: Book
ISBN: 978-1-78756-283-7

Keywords

Article
Publication date: 14 November 2016

Genanew Bekele, Reza H. Chowdhury and Ananth Rao

The purpose of this paper is to consider borrower-specific characteristics to understand the factors affecting both the probability and quantum of loan default by…

1213

Abstract

Purpose

The purpose of this paper is to consider borrower-specific characteristics to understand the factors affecting both the probability and quantum of loan default by individual borrowers under Islamic and conventional banking.

Design/methodology/approach

Borrower-specific characteristics that explain the probability of default may not necessarily be similar factors that determine the quantum of default. The authors therefore apply a Box-Cox double hurdle model to treat both the probability and quantum of default in a two-step approach. The authors also explain the differences in default risk and quantum of default between Islamic and conventional banking borrowers from their behavioral perspectives following the Sharia principles in financial transactions between lenders and borrowers. The authors use borrower-specific information of two separate bank branches of the United Arab Emirates that solely deal with either Islamic or conventional banking products.

Findings

The paper demonstrates that the probability of default and the quantum of default appear to be influenced by different set of client-specific factors. The results suggest that the probability of default does not vary significantly between Islamic and conventional banking borrowers. The evidence also shows that Islamic banking defaulters, compared to those in conventional banking, repay a large quantum of overdue when their financial leverage improves. However, they do not tend to reduce their outstanding quantum of overdue faster than conventional banking defaulters.

Research limitations/implications

Availability of data from only two bank branches may limit the explanatory power of empirical findings.

Practical implications

The study findings will enable the Islamic and conventional banks to appropriately address Basel Capital requirements based on the borrowers’ behavior.

Social implications

The study findings have the potential for Islamic and conventional financing institutions to be more flexible with equity in their lending practices.

Originality/value

Religious beliefs are crucial in borrower’s default behavior in Islamic banking.

Details

Review of Behavioral Finance, vol. 8 no. 2
Type: Research Article
ISSN: 1940-5979

Keywords

Article
Publication date: 29 January 2020

Trevor Chamberlain, Sutan Hidayat and Abdul Rahman Khokhar

This study aims to investigate the differences in the credit profiles of Islamic and conventional banks in the Gulf Cooperation Council (GCC) region and attempts to…

Abstract

Purpose

This study aims to investigate the differences in the credit profiles of Islamic and conventional banks in the Gulf Cooperation Council (GCC) region and attempts to identify the factors responsible for those differences.

Design/methodology/approach

Financial data sourced from the Bankscope database for a sample of 25 Islamic and 56 conventional banks headquartered in the GCC region between 1987 and 2014 are used. The credit risk of Islamic versus conventional banks is compared using a variety of univariate (mean difference test and correlation analysis) and multivariate tests (pooled ordinary least squares (OLS) regressions with robust standard errors and year fixed effects, regressions with interaction variables and logistic regressions).

Findings

Pooled OLS regressions find that Islamic banks have lower credit risk than conventional banks. Robustness checks using logistic functions and interaction variables confirm this result. Using multiple econometric specifications, we also find that higher capitalization, greater liquidity and cost inefficiency contribute to the lower risk profile of Islamic banks.

Research limitations/implications

The study is unable to disaggregate data for banks offering both Islamic and conventional banking services and hence does not include conventional banks with Islamic windows. In addition, there are differences across countries even within the GCC region as to what is considered Sharia’h-compliant and what is not.

Practical implications

The results are of potential interest to not only researchers, but also market participants, regulators and legislators. The methods used in this study could be extended to other two-tiered banking systems and, in the case of Islamic and conventional banking, to other markets.

Originality/value

The authors use a unique sample of banks headquartered in the GCC countries, whose banking markets are similar, if not homogeneous, thus excluding operations of multinational banks. By focusing on the Gulf region, differences in the credit profiles of Islamic and conventional banks can be examined without the confounding effects of unobserved factors like culture, accounting regime or regulatory environment.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 5
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 22 June 2021

Sutan Emir Hidayat, Muhammad Rizky Prima Sakti and Raqiya Ali Abdullah Al-Balushi

The purpose of this study is to critically evaluate how conventional and Islamic banks trade off risk, efficiency and financial performance in their business models, to…

Abstract

Purpose

The purpose of this study is to critically evaluate how conventional and Islamic banks trade off risk, efficiency and financial performance in their business models, to investigate how patterns of risk and efficiency vary between conventional and Islamic banks and to critically evaluate how the profitability of conventional and Islamic banks varies following the financial crisis.

Design/methodology/approach

This study uses univariate and multivariate statistical techniques by investigating 12 Islamic banks and 34 conventional banks operating in the Gulf Cooperation Council (GCC) region has been studied over the period 2011–2018.

Findings

The results suggest that Islamic and conventional banks differ not in the levels of efficiency, risk and profitability, but rather in how risk and efficiency influence banks’ financial performance. Islamic banks are found to be less influenced by the adverse effects of credit risk, which is consistent with the risk-sharing nature of Islamic financing. However, the results only hold for return on assets (ROA) and return on equity (ROE) while the net interest margin is observed to be negatively influenced by credit risk. Lower cost-income efficiency is also found to boost ROA and ROE of Islamic banks which could be attributed to a larger share of non-interest revenues due to Sharīʿah-compliance.

Research limitations/implications

From a theoretical point of view, this study helps to understand the risk, efficiency and financial performance of Islamic banks in comparison with conventional banks.

Practical implications

The results of this study can serve bank managers, regulators and shareholders. Policymakers should encourage a more risk-sharing structure of Islamic financing as it brings less adverse effects of credit risk and increases income sustainability for Islamic banks. The present study may help bank managers to improve the financial performance of their firms by controlling risk and efficiency. The study results also have implications for shareholders and depositors of Islamic and conventional banks as they should have a predetermined position about the level of credit risk and efficiency in each banking system.

Originality/value

The foremost contribution is that this is one of the few studies to compare risk, efficiency and financial performance of Islamic and conventional banks in the GCC region. By using the latest data, this paper hopes that the findings will be more relevant than previous studies to the current situation of the banking industry in the region.

Details

Journal of Islamic Accounting and Business Research, vol. 12 no. 4
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 13 October 2022

Mouwafac Sidaoui, Faten Ben Bouheni, Zandanbal Arslankhuyag and Samuele Mian

The purpose of this study is to evaluate the global developments in the area of fintech solutions by analyzing Islamic and Conventional banks core accounting and market…

Abstract

Purpose

The purpose of this study is to evaluate the global developments in the area of fintech solutions by analyzing Islamic and Conventional banks core accounting and market analysis IFIs and their impact on financial inclusion within its core markets.

Design/methodology/approach

The authors collect and analyze annual accounting and market Data of the top ten largest Islamic banks and the top ten US Conventional banks, in terms of Total Asset and Market Capitalization, from Bloomberg Data.

Findings

The analysis of Bloomberg data shows higher risk-return for Islamic banks–except ROE Market measure that we suggest-than US conventional banks. Nonetheless, Islamic banking grew faster than conventional banking over the period 2006–2021. As a business model, we find that Islamic banks take more credit with more than seventy percent of their profit from loans, while US conventional banks struggle to reach seventy percent interest rate ratio. The authors’ research documents that Fintech and digitalization are driving Islamic finance growth during financial and economic downturns.

Research limitations/implications

FinTech data is not available for banks, further insights of analysis on FinTech and Innovations in the banking sectors.

Practical implications

Islamic banks continuously innovate to satisfy the users of their services and Fintech is opportune to innovation. This study could be interesting for both practitioners and academics wishing to understand and compare Islamic and conventional banking futures.

Social implications

The authors compared two banking systems, the US and Islamic Banks, which could be useful for users to differentiate between those banking operations.

Originality/value

The authors collected accounting and market data from Bloomberg of top 10 Islamic and top 10 US Conventional banks from 2006 to 2021 to examine Risk-Return, Growth and Business Model of those banks. The authors propose a new Risk-Return measure ROE-Market and its volatility.

Details

The Journal of Risk Finance, vol. 23 no. 5
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 19 June 2017

Abdul Rashid, Saba Yousaf and Muhammad Khaleequzzaman

This paper aims to empirically assess the contribution of Islamic banks toward the financial stability of Pakistan. For this, the authors investigate the relative…

1922

Abstract

Purpose

This paper aims to empirically assess the contribution of Islamic banks toward the financial stability of Pakistan. For this, the authors investigate the relative financial strength of Islamic banks and their contribution toward the financial stability. They also examine the relationship between the competitive conduct of banks and banking system stability.

Design/methodology/approach

The authors use quarterly data of ten conventional banks, four full-fledged Islamic banks and six standalone Islamic branches of conventional banks of Pakistan for the period 2006-2012. The z-score has been computed and used as the measure of stability of banks and the random effects estimator applied to quantify the impact of bank-specific variables and macroeconomic indicators on the financial stability. The empirical framework used in the paper enables the authors us to examine the differential effect of each underlying variable on the financial stability across Islamic and conventional banks. To check the robustness of the results, the authors have estimated several models with different specifications.

Findings

The regression results indicate that income diversity, profitability ratio, loan to asset ratio, asset size and the market concentration ratio of banks have significant effects on the stability of banks. Comparing Islamic and conventional banks, notable differential effects of the empirical determinants of financial stability for Islamic and conventional banks have been observed. The results suggest that Islamic banks have performed better as compared to conventional banks and contributed more effectively in the stability of financial sector. Overall, the results depict that the contribution of Islamic banks toward the financial stability has been reasonable and prospective.

Practical implications

The empirical results of the paper are very useful not only for banks’ managements but also for the investors, bank customers and policymakers. Specifically, the findings help in enhancing our understanding as to how the bank-specific variables and macroeconomic indicators are related to the financial stability of the banking system. The results also help understand the role of both Islamic and conventional banks in the financial stability. Further, the results suggest that the financial soundness can be enhanced by creating healthy competition in the banking industry. The results about macroeconomic indicators imply that protective measures are required to intensify (mitigate) the positive (negative) effect of gross domestic product (inflation) on banks’ financial stability.

Originality/value

This paper provides an overall comparative analysis of financial stability of both Islamic and conventional banks of Pakistan. First, the paper computes the z-score for each bank included in the sample, and then, it performs the regression analysis to study how bank-specific variables and macroeconomic factors are related to the financial stability of banks. Unlike the previous studies, our empirical framework enables the authors to examine the differential effect of each underlying variable on the financial stability across Islamic and conventional banks.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 10 no. 2
Type: Research Article
ISSN: 1753-8394

Keywords

1 – 10 of over 1000