Abstract
Banking system constitutes the fundamental pillar of every economy. Banks acts financial intermediaries between sectors that have excess funds and those that are in deficit. Islamic banks operate under Sharia principles of risk sharing and interest prohibition as contrasted with conventional banks that buy capital to pool funds and sell capital to generate interest income or profit. This paper applies banks’ internal factors related to their balance sheet and income statement and using a total of 23 financial ratios pertaining to the internal factors, it attempts to compare and contrast between conventional and Islamic banks. This research explains the structure, operation and management of banks in the UAE coupled with the functioning of Islamic banks. The paper also aims to determine the profitable and efficient banks among the chosen sample. The sample includes 12 banks, equally distributed between Islamic and conventional banks using data between the periods of 2014 - 2018. The sample is broadly categorized based on profitability ratio, efficiency ratio, asset indicator ratio and risk ratios. Correlation and Regression analysis is used to determine a substantial ratio analysis between conventional and Islamic banks. Results from the study reveal indicators of financial characteristics such as profitability ratios, efficiency ratios, asset quality indicators and risk/ risk management ratios. The results clarify that Islamic banks are operationally efficient and profitable because of risks sharing and greater dependency on deposits capital. However, on an overall basis, the ratios indicate conventional banks have higher scores than their counterparts.
 JEL Classification Codes: F37.
Highlights
The history of banking in the Gulf Cooperation Council (GCC) region dates back to 1918 with the establishment of the first bank in Bahrain
While both show a positive relation, it is significantly stronger in Islamic banks 3) There is positive relation between Return on Assets (ROA) and ROD for conventional and Islamic banks 4) The correlation is mixed for ROA and Net Operating Margin (NOM) for conventional and Islamic banks
The value of F-stat is 255.01 for conventional banks and 229.45 for Islamic banks with df values (4,25) and is significant as the level of significance is less than 5% or 0.05, we can conclude that there is overall significant relationship between the predictor for independent variable Return on Equity (ROE), Profit Margin (PM), Return on Deposits (RD), Net Operating Margin (NOM) as a group and they predict the independent variable ROA significantly
Summary
The history of banking in the GCC region dates back to 1918 with the establishment of the first bank in Bahrain. Dubai Islamic Bank was the first standalone Islamic Bank established in 1975 in the UAE. Several international banks have established Islamic banking division that upholds traditional Islamic values and offers products and services compliant with Sharia principles. More than 200 Islamic banks operate in 70 countries with $ 2.6 billion in assets under management. Islamic banks witnessed its growth in South Asia and GCC countries. In contrast to the conventional banks, the principle of risk sharing lead to a better return on equity for Islamic banks. Statistical evidence shows that Islamic banks tend to achieve a higher profit margin compared to conventional banks
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