Investigating the Efficiency of GCC Banking Sector: An Empirical Comparison of Islamic and Conventional Banks

Imran Khokhar,Muhammad Nauman Khan,Mehboob Ul Hassan,Md Fouad Bin Amin

doi:10.5430/ijfr.v11n1p220

Abstract

We examine and compare the performance of 63 (21 Islamic and 42 conventional) GCC banks at two tiers, covering the period of 2010–2016. In the first tier, an industry-level analysis is conducted of each country, followed by an individual bank-level analysis in the second tier. Deposits, assets, and capital are taken as inputs to measure the outputs using data envelopment analysis techniques. At the industry level, we find that Islamic banking is at par with-if not better than-conventional banking in all terms of efficiency. Particularly, banking in Bahrain and KSA is among the best, whereas there is no scope for improvement in the UAE’s banking industry. This low performance could be attributed to a lack of standardization in products and schemes as well as the level of prudence in decision-making, governance, and operations. At the bank level, many Islamic banks perform even better than conventional banks. Most studies on GCC and MENA focus on the determinants and indicators of development and the banking industry growth in general. Uniquely, we further examine GCC banking performance at the individual bank level by incorporating the latest available data.

Highlights

Since the last quarter of 20th century, global actors have sought a feasible alternative to capitalism
In decomposing the banking industry into Islamic and conventional levels, we find again that Saudi Arabia and Qatar lead in share size in Islamic banking, with $28 714mn and $17 315mn, respectively, in their assets buckets
We examined and compared the performance of Islamic and conventional banking at an individual and industry level in the GCC

Summary

Introduction

Since the last quarter of 20th century, global actors have sought a feasible alternative to capitalism The impetus for this search for a new paradigm has come from the series of financial crises that have occurred at a global scale, first starting from the West, and spread to other regions, such as the 2007–2008 Global Financial Crisis, which began in the U.S As a result, the global economy, as well individuals, held billions of dollars in outstanding mortgage. The gross total private sector debt amounted to twice the gross domestic product, up from 70% in the 1960. This debt has triggered economic repression, led to doubts, and has damaged stakeholders’ confidence in the reliability of the capitalist financial system. The result: a loss of global confidence in financial institutions and the capitalism

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Conclusion