Islamic Versus Conventional Banking: Characteristics and Stability Analysis of the Malaysian Banking Sector

Purpose: The main purpose of this paper is to investigate the impact of capital ratio and liquidity risks and the effects of the Global Financial Crisis (GFC) periods on financial stability of conventional and Islamic banks before, during, and after GFC in the year of 2008 five GCC countries. To examine empirically the comparison between conventional and Islamic banks based on financial stability and soundness, as well as capitalization and liquidity in the light of the adverse effects of GFC and oil prices declining during the period of (2000-2017).Design/methodology/approach: By using time series data, this study employs Pedroni’s panel cointegration analysis to test the long run relationship between financial stability of conventional banks and Islamic banks as a dependent variable and independent variables including financial crisis under three periods; pre (2006-2007), during (2008-2009) and post (2010-2011) crisis. As well as employing Generalized Least Squares (GLS) to examine the effects between independent variables which are GDP, inflation, financial crisis periods, oil prices fluctuations risk, banking competition, financial sector development, liquidity risk and capital adequacy ratio and dependent variable which is financial stability of conventional and Islamic banks in GCC countries before (2000-2006) during (2006-2009) and after (2010-2017) crisis.Findings: The findings of this research suggest that there is a long run relationship between financial stability of conventional and Islamic banks and capital ratios, liquidity risk and other independent variables. As well as study’s findings support some previous studies and it generally concludes that Islamic banks were performed better during the crisis than conventional banks. Whereas Islamic banks were more stable during crisis as their business model helped to limit the adverse effects of crisis in 2008, they were also more capitalized and less exposure to liquidity risk. Nevertheless, decrease in Islamic banks’ liquidity led some Islamic banks in GCC countries to declare significant losses in 2009.Originality/value: The result of the study contributes towards understanding the determinants of financial stability of both Islamic banks and conventional banks during financial crisis periods. It is important for policy ramifications by the Central Banks in GCC in terms of treating both types of banks differently to mitigate against future financial crises.

The main difference between Islamic and conventional banking is that Islamic banking works on profit and loss while conventional banking work is interest based. The aim of this research study is to measure and compare the financial performance of Islamic and conventional banking in Pakistan during 2006 to 2015. This study is to examine and to evaluate the performance of 5 Islamic banks (Meezan Islamic Bank, Bank Islami Limited, Al Baraka Islamic Bank, Dubai Islamic Bank Limited and Burj Bank Limited) and 5 conventional banks (Muslim Commercial Bank Limited, United Bank Limited, Askari Bank Limited, Allied Bank Limited, Habib Bank Limited) in terms of profitability, liquidity, risk, capital and efficiency. We used quantitative and qualitative data for comparison of Islamic and conventional banks. Collection of data consists on both primary as well as secondary sources. Primary data has been gathered from interviews and Secondary data has been gathered from the balance sheets and income statements of the sampled banks for the period of 2006 to 2015.Financial ratios such as profitability ratios, liquidity ratios, solvency ratios, capital ratios and efficiency ratios are used for measure of the financial performance of both banking sector. The results indicate that Islamic banks are less profitable, more liquid, less risky and less efficient. There is no significant difference in terms of capital between Islamic and conventional banks.

Does the Financing Model of Islamic Banks make them More Stable: A Comparative Analysis of Returns, Stability and Risk in Between Diversified, Interest, and Inventory Based Earning?

Banking is one of the essential elements of economic sustainability. Indonesia has two banking systems: banking with conventional principles and banking with sharia principles. Differences in the regulation of the system can affect the results of the bank's performance. So, it is necessary to analyze the comparison of bank performance to determine the significance of the differences. This research aims to present the findings of a financial performance analysis carried out on Islamic and conventional banks' financial statements in 2016-2020. This study analyzes by looking at financial performance ratios consisting of Capital Adequacy Ratio (CAR), Return on Assets (ROA), Return on Equity (ROE), Operating Costs, and Operating Income (BOPO), and Financing Deposit Ratio (FDR). ) using SPSS. 36. The results obtained are significant differences between CAR, ROA, ROE, BOPO, and FDR of conventional and Islamic banks. Islamic banks' CAR, ROE, BOPO, and FDR values are better than conventional banks, while conventional banks' ROA is better than Islamic banks.
 Keywords: Conventional Banks, Financial Performance, Islamic Banks

Aim - This paper investigates the Bank-particular and country-level factors of the capital adequacy ratio of conventional and Islamic banks in the MENA region in a comparative manner.Methodology -Data for all variables related to banks were collected from the Fitch database, while the data for macroeconomic was collected from the Bloomberg database, World's bank database, and Transparency International website. Control variable used to account for differences in bank characteristics and macroeconomic conditions for the MENA region countries. Descriptive analysis was used to describe data and a two regression models are applied to test a population of 334 banks (282 conventional banks and 52 Islamic banks) from 2010 to 2019 from 17 countries in the MENA region namely; Algeria, Bahrain, Morocco, Egypt, Jordan, Kuwait, Qatar, Oman, Saudi Arabia, Lebanon, Tunisia, Syria, Israel, Yemen, the United Arab Emirates, and Gaza.Results- The pooled cross- sectional regression analysis shows that for all banks in the MENA region, the liquidity, deposits, loans, corruption index, size, and GDP are negatively associated with the capital adequacy ratio. In contrast, profitability, credit risk, and governance index are associated positively with the capital adequacy ratio. Moreover, it shows a significant distinction among the capital adequacy ratio of conventional and Islamic banks across the MENA region and conventional banks hold higher capital adequacy ratios than Islamic banks. However, the panel regression findings provide evidence that the influence of the profitability and governance index factors on the capital adequacy ratio differs significantly between conventional and Islamic banks. For conventional banks, the panel data regression analysis shows that profitability and governance quality are significantly and positively correlated with the capital adequacy ratio. While, deposits, size, and loans are significantly negatively associated with the capital adequacy ratio and liquidity and credit risk do not have any significant relationship with the capital adequacy ratio. For Islamic banks, only deposits, loans, size, and GDP show a significant adverse relation with the capital adequacy ratio. This comparison study contributes to the literature by allowing regulators to see whether the factors that influence the capital adequacy ratio as defined by Basel II criteria are identical for both banking systems or whether the difference in conceptual backgrounds of both banking systems impedes adherence to the same regulation.

Purpose The purpose of this study is to investigate the influence of capital adequacy ratio (CAR) prescribed in Basel III on the risk-taking behaviour of Islamic and conventional commercial banks in Malaysia. It also investigates the claim that the risk-taking behaviour of Islamic banks (IBs) and conventional banks (CBs) managers is identically influenced by CAR. Design/methodology/approach Secondary data for all CBs operating in the Malaysian banking sector are gathered from FitchConnect database for the 2011–2017 period. Both dynamic ordinary least squares and generalised method of moments techniques are used to estimate a panel data of 43 commercial banks, namely, 17 IBs and 26 CBs. Findings The findings of this study lend support to the favourable influence of CAR set in Basel III accord on risk-taking behaviour of both types of banks. CBs appeared to be remarkably better off in terms of capital buffers. Evidence is established on the identicality of the risk-taking behaviour of IBs and CBs managers under CAR influence. Practical implications Even though a high CAR is observed to hamper risk-taking of banks, the findings may serve as a signal to regulators to be mindful of the implications of holding a high CAR. Similarly, managers may capitalise on the findings in terms of strategising for efficient use of the considerable capital buffers. Shareholders are also concerned about managers’ use of the considerable capital buffers. Originality/value This study is among a few studies that endeavoured to provide empirical evidence on the claim that IBs mimic the conduct of CBs in light of the influence of CAR prescribed in Basel III on risk-taking behaviour, particularly banks operating within the same banking environment.

This paper examines the financial performance of Islamic and commercial banks in the United Arab Emirates (UAE). The paper gives an empirical insights and comparisons between the performance of Islamic and conventional banking sectors. The sample of the study consists of 5 fully-fledged Islamic banks and 14 conventional banks working in the UAE under the period 2011-2014. The study uses descriptive analysis, correlation, independent sample t test and multiple regression analysis to assess the performance and to compare between both types of banks. The Return on Assets (ROA) is used as proxy for profitability for both types of banks while bank size (log A), liquidity, capital adequacy, financial risk and operating efficiency as proxies for financial performance for both types of banks. The results showed that there is no significant difference between Islamic banks and conventional banks in terms of profitability (ROA) while there is a significant difference between Islamic and conventional banks in terms of liquidity, operation efficiency, capital adequacy, and financial risk. Further, the results indicated that the Islamic banks have higher operating efficiency, bank size and more liquidity than their counterparts of UAE. However, conventional banks are found to have better capital adequacy ratio than Islamic banks. In terms of financial risk, Islamic banks are found to have higher five times than conventional banks which may reflect challenges in the area of risk management in Islamic banks.
 Keywords: Financial performance, Islamic banks, Conventional banks, ROA, UAE.
 JEL Classification: A10, E60, G21

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.

PurposeThe 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/approachThis 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.FindingsThe 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/implicationsFrom 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 implicationsThe 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/valueThe 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.

This paper investigates the bank efficiency as a basis performance measurement in the Conventional and Islamic banks in Indonesia in the period of January 2008 – September 2013 using quarterly-published report data of Central Bank (Bank Indonesia) with 6 Conventional banks and 3 Islamic banks in Indonesia as the samples of the research. The Bank efficiency in this research is measured using financial ratios and macroeconomics as determinants of Return on Assets (ROA) and non-parametric approach DEA (Data Envelopment Analysis). In term of variables that determine ROA using panel least square by estimating Fixed Effect Method (FEM), the findings reveal that there are significant effects of Loans to deposit ratio (LDR), Operational efficiency ratio (OER) and GDP growth rate to ROA and there are no significant effects of Capital Adequacy ratio (CAR), Size and inflation rate in the Conventional banks in Indonesia. On the other hand, all the independent variables have significant effect to ROA, except financing to deposit ratio (FDR) in the Islamic banks in Indonesia. GDP growth rate is the highest coefficient among the determinant variables used in this research that affect ROA of both Conventional and Islamic banks and the weakest coefficient that affects ROA is CAR in the Conventional banks and FDR in the Islamic banks. The findings of DEA indicate that the bank inefficiency is caused of not-well function of banks and managers of banks are not able to use the firms’ given resources.

Evaluating the performance efficiency of banks and monitoring their activity is essential to their survival in light of the rapid growth of risks facing them, since many financial crises were caused by them. Therefore, measuring banks performance by knowing their strengths and weaknesses enable regulators and managements to correct deviations before it is too late. The positive role played by the Islamic banking system cannot be ignored for financing and investment services in various financial, economic and social activities. In recent years Islamic banks were able to impose themselves to become a difficult number in the composition of the financial cycle and economic growth in the world, as evidenced by the rapid growth of these banks in all countries, Muslim and non-Muslim. This transformation is recognition of the success of the Islamic experience. This study aimed to evaluate the financial performance of Islamic and conventional banks in Palestine over the period 2017–2018 prior to the corona virus crisis using CAMEL model. The results show that there are no clear significant differences in performance between Islamic and conventional banks in Palestine during study period. Both conventional and Islamic banks have powerful and satisfactory capital levels comparative to the firm's risk profile and consistent with Palestinian Monetary Authority (PMA) regulations. In terms of asset quality, Islamic banks kind of are better in managing their asset portfolio than conventional banks which considered less risky. However, there were no significant differences in profitability ratios, liquidity ratios and efficiency ratios.

Commercial banks can be said to be the major contributor to the financial market mechanism in Bangladesh. Two forms of commercial banking systems are functioning here: the conventional banking system and the Islamic banking system. The two banking systems differentiate each other according to their compliance with different norms, values, beliefs, and religious views while conducting business. Conventional banks follow borrowing and lending mechanisms while Islamic banks follow trading and investment mechanisms. Conventional banks provide and receive interest while receiving deposits and providing loans respectively. However, Islamic banks neither pay nor accept interest since it is prohibited in Islam. Rather they do business on the profit and loss sharing concept. The purpose of this experiential study is to compare the performance of both the banking streams and to discover the superiority of any one or at least to find out which one is performing better than the other in which area(s). For the intended performance comparison, all the public limited conventional commercial banks and all the (except one) Islamic commercial banks have been included in the calculation of financial ratios for the years 2007 to 2011. The researcher has calculated six profitability ratios including Return on Equity (ROE), Return on Assets (ROA), Net Interest Margin (NIM), Cost to Income Ratio (COINR), Net Profit Margin (NPM), and Earning Per Shares (EPS); four liquidity ratios containing Liquid Assets to Customer Deposits & Short Term Funds Ratio (LdCDSF), Loans to Deposits (LTD), Loans to Deposits & Borrowing (LTD&B) and Loans to Assets (LTA); four credit risk ratios comprising Capital to Assets Ratio, Common Equity to Assets Ratio (EQTA), Total Equity to Loan Ratio (EQL) and Non-Performing Loans to Loans (NPL). In addition to ratio calculation, the solvency of both the banking streams has also been calculated using a model called Bank-o-meter. The analysis concludes that conventional banks are dominating in profitability and liquidity whereas Islamic banks are leading in credit risk management and solvency maintenance.

This study assesses the non-performing loans of conventional and Islamic banks as well as the influence of ownership on the non-performing loans of conventional and Islamic banks. Due to fundamental differences in Islamic and conventional bank such as funding, non-performing loans might have differing effects on Islamic and conventional banks. This study utilised data of 26 conventional banks and 16 Islamic banks from Malaysia from 2012 to 2020. A Random Effect model was used to investigate the difference between conventional and Islamic banks’ non-performing loans as well as the influence of ownership on non-performing loans of conventional and Islamic banks. Results showed no significant differences for non-performing loans of conventional and Islamic banks. This result implies that despite the fact that Islamic banks may benefit from lower agency costs, this does not considerably decrease the likelihood of non-performing loans. Foreign Islamic banks shows higher non-performing loans in comparison to domestic Islamic banks. However, there were no significant differences for non-performing loans between foreign conventional and domestic conventional banks. This study suggests that Islamic bankers, particularly those intending to expand into other countries, investigate nonperforming loans, which can impact the risk of a foreign Islamic bank.

PurposeThis paper aims to shed light on the risk structure in the presence of Islamic banking. The author concentrates on the relationship between Islamic banking and conventional banking in Turkey. Islamic banking and conventional banking are considered to be different kinds of sources for funding. Returns in the conventional banking are expected to be heavily influenced by the interest rate in the money market. However, Islamic banking returns are interest-free so that interest rate changes are not expected to affect the deposit returns in Islamic banks. Interest rates in the economy are a proxy to highlight the general risk level of the economy. By looking at the causal relationship between the deposit returns of both Islamic banks and conventional banks, it is possible to address the different types of banking in the general risk structure of the economy. This is one of the first studies to address the mentioned difference in banking sector in Turkish economy.Design/methodology/approachThis paper tries to identify the direction of causality between Islamic and conventional banking term deposit rates by means of Granger Causality. Also, Granger Causality test results will guide to explore the Islamic and conventional banking deposit return linkages. The author has extended the study with vector autoregressive analysis to understand the correlation structure between conventional deposit rates and the profit–loss sharing ratio of Islamic Banks. The author has also extended this study with impulse response functions to see whether the shocks hitting into the conventional banking affect Islamic banking and vice versa.FindingsThe results suggest that there is no significant clear relationship between both banking sectors. This result can be interpreted, as Islamic banks do not adjust their profit–loss sharing (PLS) ratios pegged to the interest rate offered by conventional banks. Also, conventional banks determine their interest rate without any connection to the Islamic banking PLS ratios. Overall results of this study contradict the findings of studies which conclude that Islamic banking might not be different from the conventional banking. It is reported that inferences from pair-wise Granger causality alone might be spurious, as the analysis based on non-stationary series can be a consequence of time functional characteristics of the time series.Social implicationsThe results can be taken as counter evidence to the hypothesis “Islamic banks determine their PLS ratios based on the interest rates offered by conventional banks”. This address that the Islamic banks may offer alternative financing methodology which has different procedure. Hence, Islamic finance can be taken as an alternative method with its asset-based healthier structure.Originality/valueThis is one of the first studies to address the Islamic versus interest-based banking difference in banking sector in Turkish economy. This paper tries to identify the direction of causality between Islamic and conventional banking term deposit rates by means of Granger causality.

Purpose: The purpose of this research is to conduct a comparative analysis of CAR determinants between Islamic and conventional banks.Design/methodology/approach: The analysis is conducted using GMM on annual data for 38 Islamic banks (IBs) and 75 conventional banks (CBs) in 10 MENA countries during 2009-2013. CAR is used as a dependent variable and is measured by the Basel framework. The independent variables are: profitability; liquidity risk; credit risk; bank size; deposits to assets; operational efficiency; portfolio risk; and two macro-economic variables (GDP growth rate and average world governance indicators for each country).Findings: The results show that both IBs and CBs have a significant association between CAR and (bank size, operational efficiency, and GDP growth rate) and CAR is affected retroactively on the long-run. In IBs the results show a significant association between CAR and deposits to assets ratio. However, CBs results show an association between CAR and (profitability, credit risk, and portfolio risk). Practical implications: The empirical evidence accentuates the difference between both banking systems and the importance to enforce the application of the Islamic Financial Services Board (IFSB) proposal on IBs based in different jurisdictions. This will enhance the IBs stability and efficiency; and achieve standardization of CAR calculation between IBs. Originality/value: Filling the gap in the Islamic finance literature by trying to examine whether factors influencing CAR are similar between both banking systems or to confirm on the view that they are completely different and should not adhere to the same regulatory bodies.