Conventional Banking System Research Articles

A Comparative Evaluation of Profitability of Conventional Banks versus Islamic Banks in Bangladesh

Generally two types of banking system exist in Bangladesh: conventional banking system and Islamic banking system. The conventional banking system consists of interest based banking system. On the other hand Islamic banking system is free of interest. As a result their profitability also differs. The purpose of this study is to compare the profitability of conventional banking system with that of Islamic banking system. Total 270 bank-years are considered as sample from the 30 listed banks of DSE of which 23 are conventional and 7 are Islamic banks during the period of 2010 to 2018 (3rd quarter for 2018). The result of this study is that conventional banks are more profitable than Islamic banks. Conventional banks’ Return on Assets (ROA) and Profit Expense Ratio (PER) is significantly higher than those of Islamic banks but there is no significant difference in Return on Equity (ROE). Moreover it is also found that for conventional banks Total Equity to Total Assets (TETA) and Deposit to Total Assets (DTA) significantly affect ROA but for Islamic banks only Total Equity to Total Assets (TETA) affects ROA significantly. For conventional banks Deposit to Total Assets (DTA) affects ROE significantly and for Islamic banks Total Equity to Total Assets (TETA) and Debt Equity Ratio (DER) affects ROE significantly. This result may help these two sectors to know their position so that they can improve their present conditions. Besides, the regulatory authority will find it easier to incorporate new rules and regulations for those banking system. Further research can be done using the data of other countries where Islamic banking system exists.

The regulatory technology “RegTech” and money laundering prevention in Islamic and conventional banking industry

This study aims to illustrate the impact of adopting Regulatory technology (RegTech) innovations in banks on money laundering prevention effectiveness using Bahrain as a case study. Bahrain has strived to position itself as the banking center of the Arabian Gulf, hence the results of this novel research are informative of the practices in the region. The primary data for this study was collected through a survey instrument distributed to 100 bankers working in Bahrain with expertise in compliance. The results of multivariate analysis indicate that transactions monitoring through RegTech and cost- and time-saving aspects of RegTech, drive money laundering prevention effectiveness to a highly statistically significant extent. However, electronic know your customer (KYC) technologies are insignificant as drivers. This research not only sheds light on the efficacy of RegTech but also raises general awareness concerning the adoption and integration of RegTech platforms for fighting money laundering. In particular, the findings provide specific insights about the deployment of RegTech capabilities in banks in regional banking centers of modest scale.

Basel Regulations and Banks’ Risk-efficiency Nexus: Evidence from Dynamic Simultaneous-equation Models

ABSTRACT This study is designed to investigate the causality links binding the risk and efficiency factors within both of the Islamic and conventional banks contexts, highlighting the effect of regulatory standards and protocols. Relying on previously elaborated theoretical priors guidelines, a particular set of five regulatory tools has been considered, namely, capital requirement, official supervisory power, bank activities associated restrictions, deposit insurance and market discipline as well as private monitoring. Empirical results provide evidence that the same regulations appear to differently affect both of the distinct banking models. Overall, empirical investigations show that deposit insurance and market discipline stand as the unique regulatory instructional frameworks likely to help in reducing the risk-taking behavior of both of the Islamic and conventional banking systems, while different results have been attained in regard of the for bank efficiency dimension.

On The Road To Fairness For All

Equitable economic development is an essential element in order to achieve justice and equality in a multi-ethnic society. The reality of Malaysia, which is a country of multi-ethnicity, multi-religion and multi-cultural societies, demands a concept of justice and equality that is different from other countries, particularly the ones with homogenous societies. The highest law of the land places Islam, the religion associated with one of the main ethnicity, as the official religion of the nation and allowed the duality of economic system, in particular banking system, whereby conventional banking system exists side-by-side with the Shariah-compliant, Islamic one. By reviewing the pertinent literature on the development of Islamic banking, the reviewed cases on Islamic banking and its contributions to Malaysian society regardless of ethnicity and religion. The discussion in this paper therefore will be directed towards highlighting the laws and cases on Islamic banking and its implication to enhance the application of Islamic banking laws to consumers regardless of ethnicity and religion, in order to maintaining fairness and justice in a multi-ethnic society.

Riba Threat in al-Quran and Economic Crises

Every threat said by Allah in the Holy Al-Quran is definitive and could not be denied by human’s logical think and their limited effort. The threat that clearly stated in verse 279 Surah al-Baqarah to those riba practitioner, should bring its own interpretations and meanings that were justified by scholars and modern experts This paper relies on secondary sources from several books of tafsir, explainations of related contemporary Islamic scholars and also views from economic experts pertinent to riba practice implications that hit world economy so far, in effort to establish a linkage between them with the word of ‘harb’ as revealed in the verse. Hence, this paper finds that riba as practices widely in modern conventional banking system had brought negative impacts on economic sectors where it simultaneously effected on human activities. The term of inflation, deflation, recession and crisis always been heard and said since the early of 20th century until today

Relationship between Capital Structure and Profitability: Dual Banking Perspective

This study looks into the relationship between the capital structure and profitability of Islamic and conventional banks, listed on the Karachi Stock Exchange extracting data for 250 observations between 2006 and 2016 from their financial statements. The paper uses regression analysis to check the proposed relationship. We found a strong correlation between Debt-to-Equity (D/E) ratio and Return on Equity (ROA) in conventional banks while no significant relationship existed in Islamic banks. The findings can be explained in terms of the different deposit mechanisms employed by the two systems i.e. the conventional banking system considers all deposits as liabilities of the banks while on the other hand Islamic banks only write the current accounts as a debt. The Modaraba-based deposit accounts of Islamic banks are considered as equity. This paper contributes theoretically to the current body of Islamic finance literature in Pakistan. On the practical side, the study suggests that Islamic banks can increase their savings deposits as they pose no risk and have equity-like features.

ANALISIS PENGARUH KEBIJAKAN KEUANGAN DAN TATA KELOLA TERHADAP NILAI PERUSAHAAN INDUSTRI MANUFAKTUR YANG TERCATAT DI BURSA EFEK INDONESIA PERIODE TAHUN

ABSTRACT
 The development of Syariah Banking system in Indonesia in several years is fast enough, based on the data in the beginning of years 2015, which is profitably in 198,25 (Billion) IDR was increased to 258,10 Billion) IDR for September 2016, it is assumed to increased in 30,19 %. The profit was taken from three Syariah Banking system (202,76 (Billion) IDR with 78,56 % market share), while the comparative of Syariah banking system toward conventional banking system is 29,518 (Billion) IDR that has just reached 0,87 %. The market share is increased 0.07 % compared with September 2015 that is 0,80 %. There is anfluctuative increasing until 2016. This research aims at finding out : (1) the share holding is positively and significantly influencing toward the Mudarabah deposit, (2) the level of money interest is negatively and significantly toward the Mudarabah deposit. Data of this research is taken from the monthly report of PT. Bank Muamalat Indonesia and Indonesian Bank (BI). The data analyzed by using multiple regression method.
 This research is a case study at PT. Bank Muamalat Indonesia Tbk. The study population is the Financial statement and balance sheet of PT. Bank Muamalat Indonesia and data that is taken from Indonesian Bank (BI) about Mudarabah deposit, the level of share holding and the level of money interest during 2016-2018. Variables which are explored in this research includes the share holding, the level of money interest and Mudarabah deposit. Data was collected by using documentation.
 The result of this research has shown us that there is a positive and significant influence from the level of share holding and the level of money interest of Mudarabah deposit. The level of money interest has a negative and significant influence toward the Mudarabah deposit.

Testing the Influence of Macroeconomic Environment on Microfinance Banks’ Liquidity in Nigeria: A Vector Autoregressive Approach

Adequate level of liquidity is essential for microfinance banks to ensure sustainable provision of credit to less privileged members of the society that cannot access credit from conventional banking system. This study was therefore carried out to verify whether or not macroeconomic factors have impact on liquidity position of microfinance banks in Nigeria. To achieve the objective, vector autoregressive method has been adopted to analyze data on microfinance liquidity ratio, growth rate of real GDP, inflation rate and interest rate. The outcome of the study showed that the impact of macroeconomic factor on microfinance banks’ liquidity is negligible and insignificant. The study concludes that the Nigerian macroeconomic environment has no influence on liquidity of microfinance banks. Nevertheless, the macroeconomic environment should always be closely monitored. Keywords: Liquidity, Microfinance, Macroeconomic, Vector Autoregressive DOI : 10.7176/RJFA/10-24-13 Publication date: December 31 st 2019

Determinants of Inflation in Kuwait1

Despite the ability to determine whether an economy is experiencing inflation, there is no consensus on what causes it. In this study, the attempt will be made to identify the determinants of inflation in Kuwait. Kuwait was chosen on the grounds that it is a small rich country with significant surplus of money and highly dependent on oil revenues and imports of goods and services. In addition, it experiences little fluctuations in the value of its currency. Furthermore, Kuwait runs two competing banking systems: Islamic and conventional. While the Islamic banking system excludes paying or receiving interest from all its transactions, interest governs all transactions incurred by the conventional banking system. Hence, Kuwait forms a unique case to study causes of inflation. Hence, the current study examines whether inflation measured by the consumer price index (CPI) is effected by exchange rate, interest rate, taxation, imports, current account, unemployment, gross domestic product (GDP), and money supply. To identify variables affecting the level of inflation in Kuwait, annual data were collected from the World Bank Data Bank for the period between 1979-2015. The relationship between inflation and other economic variables were tested by performing a multiple linear regression analysis. The findings of the study demonstrated that changes in CPI are positively and significantly influenced by changes in interest rate spreads, imports of goods and services and money supply. Negative and significant association appeared between changes in the CPI and changes in tax revenue and current account balance. Although changes in the GDP and unemployment were among the factors that were responsible for changes in CPI, their effects were not statistically significant. Studying the determinants of inflation in Kuwait is of interest for scholars and policy makers alike. For the former, studying a rich and a small country like Kuwait with surplus of liquidity would add a new dimension to the literature. For the latter, it would assist them in adopting appropriate policies to deal with future inflationary problems. Bearing in mind that this study is covering almost four economic cycles, it will give a clear picture about the reasons underlying inflation in Kuwait.

Customers’ perceptions of selection criteria used by Islamic bank customers in Sudan: The importance of Shariah compliance

This paper attempts to investigate the importance of Shariah compliance compared to other criteria that influence the selection of Islamic banks in Sudan, a total Islamic banking system in which the “Islamic” variable is supposed to be constant. Primary data collected by self-administered questionnaires distributed to a sample of 393 respondents from bank locations in the capital of Khartoum state. The perceptions on the importance of choice criteria ranked by the respondents were analyzed using mean analysis and independent t-test. Exploratory factor analysis is employed to provide a more holistic view of the bank choice criteria. The customers of Sudanese Islamic banks prioritized Shariah compliance factors over another selection criterion. We conclude that although all banks work under the Islamic system, consumers were most concerned with the extent to which their bank services are adhering to Islamic principles. Other factors deemed important were “Experience and third-party influence”, followed by staff competency, convenience, service quality, bank reputation, and customer care. Most studies have focused on countries with mixed conventional and Islamic banking systems (Arab and other Muslim countries). This study aims to contribute to the development of a better understanding of the determinants of Islamic bank selection in Sudan, an Arab African country characterized by a strong Islamic culture and a total Islamic banking system.

Customers’ Perceptions of Selection Criteria Used by Islamic Bank Customers in Sudan: The Importance of Shariah Compliance

This paper attempts to investigate the importance of Shariah compliance compared to other criteria that influence the selection of Islamic banks in Sudan, a total Islamic banking system in which the “Islamic” variable is supposed to be constant. Primary data collected by self-administered questionnaires distributed to a sample of 393 respondents from bank locations in the capital of Khartoum state. The perceptions on the importance of choice criteria ranked by the respondents were analyzed using mean analysis and independent t-test. Exploratory factor analysis is employed to provide a more holistic view of the bank choice criteria. The customers of Sudanese Islamic banks prioritized Shariah compliance factors over another selection criterion. We conclude that although all banks work under the Islamic system, consumers were most concerned with the extent to which their bank services are adhering to Islamic principles. Other factors deemed important were “Experience and third-party influence”, followed by staff competency, convenience, service quality, bank reputation, and customer care. Most studies have focused on countries with mixed conventional and Islamic banking systems (Arab and other Muslim countries). This study aims to contribute to the development of a better understanding of the determinants of Islamic bank selection in Sudan, an Arab African country characterized by a strong Islamic culture and a total Islamic banking system.

Understanding the role of social networking platforms in addressing the challenges of Islamic banks

PurposeCustomers are increasingly interested in reading discussions, experiences, recommendations and reviews on social media platforms related to services and products in which they are highly interested. The purpose of this paper is to find the availability of user-generated content (UGC) in the context of Islamic banks and how it can enhance the level of brand engagement and purchase intention of customers.Design/methodology/approachThe methodology for this research is designed by following the features of qualitative research methods and a social constructivism approach. Furthermore, non-directive and semi-structured in-depth interviews are constructed to accumulate research data from marketing teams and customers of Islamic banks. The respondents have been carefully chosen on the basis of purposive sampling and their level of awareness related to Islamic banks.FindingsIslamic banks are more frequently using traditional marketing tools that are unable to enhance levels of information among the targeted population and prove an expensive way of marketing. The findings reveal that Islamic banks lag behind in adopting the latest information exchanging technologies compared to conventional banking systems. A lack of skilled people, reputation and trust, lack of e-marketing strategy and lower levels of investment in social media platforms are major barriers to generate UGC, brand engagement and purchase intention among the targeted market of Islamic banks.Practical implicationsThe effective and competent use of various social networking platforms can enhance UGC related to Islamic banking products and services. UGC can generate interactive communication, services reviews, feedbacks, intention to purchase, social influence, social trust and positive customer perception among the targeted population of Islamic banks. The study has summarized and offered practical recommendations to show how Islamic banks can address challenges and enjoy a high level of profitability compared to conventional banking systems.Originality/valueThe present study uncovered the steps that must be taken by the top management of Islamic banks to enhance levels of awareness, online product reviews and recommendations, e-word of mouth and purchase intentions of the targeted market. The study enhanced understanding regarding how a higher level of investment in social networking platforms, safe and secure banking systems and skilled IT professionals can address the challenges of Islamic banks. Furthermore, these factors can create positive UGC, social influence, social brand engagement and purchase intention of customers in Islamic banks. These primary factors must be considered by Islamic banks to compete with conventional banking products and services.

A Comparative Analysis of the Performance of Islamic and Conventional Banks: Does Corporate Governance Matter

The purpose of this study is to investigate the impact of corporate governance (CG) internal structure on the performance of Islamic and conventional banking system in Pakistan. To account for the problem of heteroscedasticity, this study used GLS estimation technique by using a sample of five fully fledged Islamic and 15 conventional banks for the period from 2006 to 2015. The study finds that board size and its composition largely contribute to the Islamic and conventional banking performance. However, board committees have an insignificant relationship with the performance of conventional and Islamic banks that demands further investigation into the structure and powers of the board committees. In short, this study provides evidence that corporate governance does matter for the performance of Islamic and conventional banking. The current findings are useful for the policymakers and regulators to improve the existing governance structure for achieving better performance in the financial sector.

MONETARY POLICY PASS-THROUGH, EXCESS LIQUIDITY AND PRICE SPILLOVER: A COMPARATIVE STUDY OF CONVENTIONAL AND ISLAMIC BANKS OF PAKISTAN

This study investigates the comparative pass-through of policy rate to the retailprices, spillover of prices between Islamic and conventional banking systems, and theimpact of excess liquidity on these pass-throughs using data from interbank marketof Pakistan. The results suggest that the monetary policy shock affect retail prices ofIslamic banks similar to conventional banks, confirming the results of earlier studies.Moreover, there is a strong spillover between the prices of two systems; Islamicbanks are following (leading) the conventional banks in pricing the lending (deposit)products. Islamic bank has acquired advantage in the deposit pricing by taping thereligious depositors, which also may have promoted financial inclusion therebycontributing to the economic growth and improved income distribution in the society.Our findings suggest that the presence of excess liquidity have no effect on passthroughof policy rate in the Islamic system, which is contrary to the prevalent notion.However, excess liquidity significantly affects the spillovers of prices between thesystems. These results support the hypothesis that the Islamic banks are investing ininterest-based government securities indirectly via conventional banks. Our findingsmay help in enhancing the regulatory efficiency of the central banks and the conduct ofthe monetary policy in the countries where dual banking system exists.

Does service quality increase the level of banks performance

Purpose The purpose of this paper is to unfold the relationship between service quality and level of performance of conventional and Islamic banks. Also, it intends to uncover what are the features of service quality which can raise the level of performance either in conventional banks or Islamic banks. There is rare literature available that focused on comparative study between above stated banking systems based on emerging parameters of SERVQUAL model. Design/methodology/approach To meet the objectives of this investigation, research data has been from 450 customers who have had accounts and dealings with conventional and Islamic banks in the previous five years. The customers are selected based on cluster sampling from regional offices of conventional and Islamic banks. Findings The collected data have been analyzed by using confirmatory factor analysis (CFA) technique followed by common method variance (CMV), multiple regression test and independent sample t-test used to examine the parameters of service quality in the context of banks performance. The purpose of CFA is to find the model validity, while multiple regression and t-test is performed in order to examine the influence of service quality parameters on banks performance. Originality/value The study used compliance as a one of the emerging and unique dimension of service quality. This dimension is rarely investigated in the context of measuring the level of bank performance of conventional and Islamic banking systems. Findings reveal responsiveness and assurance is the strongest predictor of conventional banking performance. Compliance and reliability has significant and positive impact on the level of performance of Islamic banks. Moreover, the study has practical implications for the top management and stakeholders of conventional and Islamic banks to increase the level of performance by using SERVQUAL model.

Analisis Penerapan dan Sistem Bagi Hasil Akad Mudharabah Dalam Akuntansi Syariah

Islam is the religion that is most widely adhered to by the people of Indonesia, so it is not surprising that since before the year two thousand Islamic banks have emerged in this country, starting from Bank Muamalat which was first in Indonesia and then independent Islamic Banks to various conventional banking systems which opened the. In Islamic banking itself, there are many products offered, ranging from pure savings, financing to Islamic banking services like a conventional one, but there are fundamental principles that distinguish between the two. Therefore there is a need for further understanding of Islamic banking products Through this research, it is expected that the implementation and system of profit sharing in the Mudharabah contract in sharia accounting will be well known and in accordance with Sharia PSAK and the fatwa of the national sharia council (DSN). The results of this study are that the results of the mudharabah contract and sharia accounting are of two types, namely profit loss sharing, and revenue sharing, these two methods can be used in determining profit sharing in carrying out mudharabah contracts.

Analytical Study of Dual banking and Earlier Efforts towards Islamization of Bank of Khyber in the light of Shariah

The proposal of interest-free banking is very old because Islam restricted the interest base transaction at very beginning after the revelation of prohibition of Interest, noble Quran called it as Riba. This prohibition is of sever nature relatively, Allah says; O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger.
 The suggestion for the establishment of such financial institutions that run according to shariah has been put in queue for about centuries. To get rid from the dominancy of conventional banking system, forced the religious scholar to take initiative in this regard and started interest free banking. It was not easy to switch entirely from conventional banking system to Islamic one as for different technical issues, leads the existent banks to start dual banking system.
 Bank of Khyber is the first Bank of Khyber Pakhtunkhwa operating as dual banking, i.e. Conventional as well as Interest free banking. This study focuses on analysis of dual banking system of bank of KHYBER in order to know the extent of conformity with shariah standards along with highlighting the earlier efforts of it towards Islamization.

The bank lending channel in the Malaysian Islamic and conventional banking system

This paper examines the bank lending channel of monetary transmission in Malaysia, a country with a dual banking system including both Islamic and conventional banks, over the period 1994: 01-2015:06. A two-regime threshold vector autoregression (TVAR) model is estimated to take into account possible nonlinearities in the relationship between bank lending and monetary policy under different economic conditions. The results indicate that Islamic credit is less responsive than conventional credit to interest rate shocks in both the high and low growth regimes; however, the sub-sample estimation shows that its response has increased in more recent years becoming quite similar to that of conventional credit. Moreover, the relative importance of Islamic credit shocks in driving output growth is notable in the low growth regime, their effects being positive. These findings can be interpreted in terms of the distinctive features of Islamic banks.

Stabilizing Business Cycles by PLS Banking and Ethic Economics

In addition to discuss economic cycle’s theories in this paper by decomposing money market into two markets of "saving-depositing" and "investment-credit facilities", we study the time structure behavior of depositor-bank-investor and conclude that the traditional banking structure creates fluctuations in money sector and interest rate. These fluctuations affect the real sector through saving and investment and undulate the economy as well. Mathematical derivations show that banking structure is one of the main factors of economic cycles. Therefore, the abolition of usury (Riba) is proposed as the solution to relate directly investment to saving via The Rastin Profit and Loss Sharing Banking. In this framework, the bank offers investment management services and obtains commission. In The Rastin Profit and Loss Sharing Banking risks are practically transferred from credit facility sector (loans) to deposit sector and bank does not face any losses. On the other hand, the creation of a strong structural relationship between the interest rate of deposits and credit facility interest rate does not let any losses to occur in the capital market while there is profit in the deposit market. This concept is against the conventional banking system in which if the borrower obtains profit or loss; he has to pay interest (profit) to the depositor.The second pathological defect of economic crisis is the excessive consumption and economic greed and similar bad habits which expand economic cycles. The adjustment of mankind behavior, according to Islamic and other divine religions ethical and mystical tuitions, will practically prevent the intensity of crises. Prevention of extravagance frees a large portion of economic resources, and therefore, the magnitude of the business cycle will be reduced, and economic stability will be relatively increased.

Are MENA banks’ capital buffers countercyclical? Evidence from the Islamic and conventional banking systems

This study investigates the relationship between the business cycle and capital buffers of both Islamic and conventional banks in the Middle East and North African region during 2000–2014. Our results, generated by adopting the two-step generalized method of moments approach, reveal three main findings. First, they support the countercyclicality of the capital buffers of both Islamic and conventional banks. Nevertheless, such behaviour varies across banks. Second, our results provide evidence of different speeds of adjustment costs, which are low (high) for Islamic (conventional) banks. They also highlight that non-performing loans have a positive effect on the procyclicality of the capital buffer. However, countercyclical behaviour is identified for conventional banks. Third, we find that other determinants (e.g. business cycle, bank size, loan growth, regulatory pressure) do not show different procyclical capital buffers for Islamic and conventional banks. Our results are interesting for regulators and policymakers implementing the Basel III guidelines.