Islamic versus conventional banks: a comparative analysis on capital structure

Abstract

This study highlights differences across Islamic and conventional banks, with a particular focus on the determinants of their capital structure. Islamic finance surely forbids debt-based funding but it is an open question whether Islamic banks prefer internal funds or external resources. The study provides empirical support for the fact that Islamic banks, in contrast to their conventional peers, rely more on their own equity rather than on external finance including loss-profit-sharing deposits. The analysis also puts in evidence that Islamic and conventional banks can be differentiated on the basis of assets tangibility and dividend payout and not in terms of profitability, asset liquidity and credit default. Among these factors, only profitability and size influence the equity-to-asset ratio in both kinds of banks.