Performance differences between Islamic and conventional banking forms

Turki Alshammari

doi:10.21511/bbs.12(3-1).2017.08

Abstract

This paper strives to recognize the possible performance differences between the two popular banking forms in the Gulf Cooperation Council (GCC) countries. Applying different methodologies on the data that span the period 2003–2015, this study docu¬ments significant differences with respect to the period, countries, and performance measures. Specifically, conventional banks in GCC countries outperform their Islamic counterparts in profitability. Also, bank specific factors such as liquidity, capital ad¬equacy, bank size and growth all affect the profitability. In addition, GCC conventional and Islamic banks were isolated from the 2008 subprime crisis even though their prof¬itability seems to be decayed differently over the period of the economic downturn.

Highlights

The recent global financial crisis has attracted the attention to the Islamic banking as a different type of banking that mitigates the mismatch of short-term, on-sight demand deposits contracts with longterm uncertain loan contracts (Cihak et al, 2010)
This paper analyzes the performance of both Islamic, as well as conventional banks in Gulf Cooperation Council (GCC) countries
GCC economic environment is very integrated as many economic policies are highly coordinated among GCC countries

Summary

INTRODUCTION

The recent global financial crisis has attracted the attention to the Islamic banking as a different type of banking that mitigates the mismatch of short-term, on-sight demand deposits contracts with longterm uncertain loan contracts (with equity elements) (Cihak et al, 2010). After carrying out some diagnostic tests, they document a structural break in the data, which confirms the effect of the crisis on banks performance They find a significant positive relation between profitability and capital adequacy, financial risk and operational efficiency. Because the significance of the influence of the profitability is less confirmed, as only Deposits to sources of profitability on bank performance may Equity ratio is significant (considering ROA) and not be consistent across different performance only Loan to Equity ratio is significant (considermeasures and across the banking form, Table 5 ing ROE) This conclusion is in line with that of presents a comparison of the effect of profitability Hussein et al (2014), but comes contrary to the sources on both ROA and ROE for both Islamic evidence provided by Altamimi et al (2015).

C CTA ETA DTE LTE FTA IGR LNTA Adj R OBS

Findings

CONCLUSION