Islamic versus conventional banks in the GCC countries: A comparative study using classification techniques

This paper contributes to the empirical literature on Islamic finance by investigating the feature of Islamic and conventional banks in Gulf Cooperation Council (GCC) countries over the period 2003–2010. We use parametric and non-parametric classification models (Linear discriminant analysis, Logistic regression, Tree of classification and Neural network) to examine whether financial ratios can be used to distinguish between Islamic and conventional banks. Univariate results show that Islamic banks are, on average, more profitable, more liquid, better capitalized, and have lower credit risk than conventional banks. We also find that Islamic banks are, on average, less involved in off-balance sheet activities and have more operating leverage than their conventional peers. Results from classification models show that the two types of banks may be differentiated in terms of credit and insolvency risk, operating leverage and off-balance sheet activities, but not in terms of profitability and liquidity. More interestingly, we find that the recent global financial crisis has a negative impact on the profitability for both Islamic and conventional banks, but time shifted. Finally, results show that Logit regression obtained slightly higher classification accuracies than other models.     

Islamic and conventional banks' soundness during the 2007–2008 financial crisis

The recent global financial crisis has induced a series of failure of many conventional banks and led to an increased interest in the Islamic banking business model. This paper attempts to answer empirically the following question: What was the effect of the 2007–2008 financial crisis on the soundness of Islamic banks and their conventional peers? Using the Z-score as an indicator of bank stability, our regression analysis (covering a matched sample of 34 Islamic Banks (IBs) and 34 conventional banks (CBs) from 16 countries) shows that there is no significant difference in terms of the effect of the financial crisis on the soundness of IBs and CBs. This finding reveals that IBs are diverging from their theoretical business model which would have allowed them to keep the same level of soundness even during the crisis.     

Efficiency in Islamic vs. conventional banking: The role of capital and liquidity

We show that higher capital and liquidity ratios increase the efficiency of conventional and Islamic banks. Using conditional quantile regressions, we further show that the effect is stronger for highly efficient, small, highly liquid, and highly capitalized conventional banks. We also find that more capitalized and liquid banks were efficient during the 2008/2009 financial crisis and the Arab Spring. Our findings support the view that the constraints imposed by Shari'a law may widen the efficiency gap between the two bank types, at the expense of Islamic banks. Furthermore, our findings suggest that the efficiency of conventional banks not only depends on bank capital and liquidity, but also on the level of bank efficiency while the relationship is inconclusive for Islamic banks. These findings provide insight into how capital and liquidity can shape bank efficiency. They suggest that higher capital and liquidity buffers serve a constraint on policymakers and may function very differently depending on the level of bank efficiency.     

Payout policy and ownership structure: The case of Islamic and conventional banks

Using a sample of Islamic and conventional financial institutions domiciled in 16 countries for the period 2000–2015, we examine how ownership structure affects dividend policy. Our main findings indicate that ownership identity is important in explaining dividend policy in these banks, albeit in different patterns. In particular, the results suggest that government ownership seems to exert negative effects on dividend payouts in both types of banks, which is in line with the preference of governments towards bank stability. With respect to family ownership, the impact is negative for conventional banks but positive for Islamic ones, consistent with agency theory. These results are to some extent similar in the case of foreign ownership where it is associated with a higher payout policy in Islamic banks, but not significant in conventional ones. Our results are robust to an array of additional analyses including propensity score matching.     

Political systems and the financial soundness of Islamic banks

We investigate whether and how political systems affect the financial soundness of conventional and Islamic banks. Using factors extracted from principal component analysis, we find that Islamic banks underperform their conventional counterparts in more democratic political systems but outperform them in hybrid and Sharia’a-based legal systems. The findings reflect the challenges Islamic banks face in Western countries in terms of perception, financial infrastructure, and regulatory constraints while mirroring the recognition of their specificities and their cultural and religious compliance with Sharia’a law in Muslim countries. The findings are robust to a battery of alternative estimation techniques and methods of correcting standard errors.     

Capital and Earnings Management: Evidence from Alternative Banking Business Models

This paper examines whether institutional characteristics distinguishing Islamic from conventional banks lead to distinctive capital and earnings management behavior through the use of loan loss provisions. In our sample countries, the two banking sectors operate under different regulatory frameworks: conventional banks currently apply the “incurred” loan loss model until 2018 whereas Islamic banks mandatorily adopt an “expected” loan loss model. Our results provide significant evidence of capital and earnings management practices via loan loss provisions in conventional banks. This finding is more prominent for large and loss-generating banks. By contrast, Islamic banks tend not to use loan loss provisions in either capital or earnings management, irrespective of the bank's size, earnings profile, or the structure of their loan loss model. This difference may be attributed to the constrained business model of Islamic banking, strict governance, and ethical orientation.     

Competition in dual markets: Implications for banking system stability

This paper investigates whether Islamic and conventional banks' stability is differently impacted by competition in dual markets where the two bank types operate alongside each other. Using a sample of 123 Islamic and 647 conventional banks from 29 countries for a period between 2010 and 2018, we find robust evidence that competition erodes the stability of conventional banks only. The stability of Islamic banks is not impacted specifically where religion is more prevalent. Focusing more deeply on religiosity and the institutional environment, such as the ease of doing business and economic freedom, we also find that such factors matter in differently shaping the competition-fragility nexus for the two types of banks.     

The governance,risk-taking,and performance of Islamic banks

We examine whether the difference in governance structures influences the risk taking and performance of Islamic banks compared to conventional banks. Using a sample of 52 Islamic banks and 104 conventional banks in 14 countries for the period from 2005 to 2013, we conclude that the governance structure in Islamic banks plays a crucial role in risk taking as well as financial performance that is distinct from conventional banks. Particularly, we show that the governance structure in Islamic banks allows them to take higher risks and achieve better performance because of product complexities and transaction mechanisms. However, Islamic banks maintain a higher capitalization compared to conventional banks. These results support the research on Islamic investment and risk taking. Our results add a new dimension to the governance research that could be a valuable source of knowledge for policy makers and regulators in the financial services sector.     

Islamic vs. conventional banking: Business model,efficiency and stability

How different are Islamic banks from conventional banks? Does the recent crisis justify a closer look at the Sharia-compliant business model for banking? When comparing conventional and Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large cross-country variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality.     

Time series analysis of financial stability of banks: Evidence from Saudi Arabia

Islamic banks are characterized by their compliance to Islamic laws and practices, primarily the prohibition of interest and the trading of loans. During the 2008–2009 financial crisis, when a large number of conventional banks announced bankruptcy, no Islamic bank failures were reported. However, there is no clear consensus in the literature on the question of whether Islamic banks are more or less stable than conventional banks. To shed some light on this issue, we studied a sample of Saudi banks using quarterly data over a period centered on the 2008 financial crisis. Careful analysis of the data suggested first of all that many of the variables typically used in financial stability studies may be non-stationary, a methodological point largely ignored in the literature. Using time series methods suitable for this type of data, we concluded that individual heterogeneity may matter more than either the conventional or Islamic nature of the banks. Concentrating on the largest banks, we find the Islamic banks contribute positively to the stability of the system.     

Market discipline by bank creditors during the 2008–2010 crisis

We investigate whether uninsured depositors, insured depositors, and general creditors exhibit evidence of quantity market discipline during the recent financial crisis. To establish which types of creditors expect to incur loss, we evaluate the FDIC's expectations about losses to creditors at banks that failed between 2008 and 2010. Our results show that quantity market discipline tends to begin far enough in advance to signal to both banks and supervisors that corrective actions can and should be taken. Furthermore, creditors are able to distinguish between banks of different risk levels. Our findings support several policy implications for encouraging market discipline.     

Using partial least square discriminant analysis to distinguish between Islamic and conventional banks in the MENA region

The deterioration of bank profitability poses a threat not only to the interests of consumers and internal staff members but also affects investors who may equally suffer from significant financial losses. It is important to establish an effective system which assists investors in their investment choices. In prior literature, traditional models have been developed, but achieved short‐term performances such as logistic regression and discriminant analysis. This paper applies a partial least squares discriminant analysis (PLS‐DA) to distinguish between conventional and Islamic banks in the Middle East and North Africa (MENA) region based on the financial information for the period 2005–2011. This method can successfully identify the non‐linearity and correlations between financial indicators. The results demonstrate superior performance of the proposed method. On one hand, our model can select all financial ratios to distinguish between banks and at the same time identify the most important variables in the distinction process. On the other hand, the proposed model has high levels in terms of accuracy and stability.     

Stakeholder Returns of Islamic Banks Versus Conventional Banks

Sharia principle shaping the Islamic banking model is most determinant on collection and deployment of funds with its ban on interest. This study aims to look at the results of funded activities in isolation for a healthier comparison between Islamic and conventional deposit banks with respect to their financial stakeholders. The differences are reflected as lower asset returns and lower returns for depositors of Islamic banks. These differences sustain throughout normal and crisis periods. Our findings show that despite differences in asset structures and returns, Islamic banks retain similar returns for shareholders to position themselves close to and in competition with their conventional counterparts.     

Firm valuations and board compensation: Evidence from alternative banking models

This study examines whether the board of directors' compensation schemes affect stock market valuations for banks in a dual banking system (Islamic and conventional banks). We employ an international sample of 11 countries for the period 2010–2015. Our results show that for the full sample (i.e. irrespective of the bank type), board of directors' compensation has a significant and positive impact on stock market valuations. For different bank types, we find that the positive effect of the board of directors' compensation on market valuations holds only for conventional banks, with insignificant evidence for their Islamic counterparts. We, also, examine the impact of Shari'ah supervisory board's compensation on Islamic banks value. Our results show that investors positively perceived and priced information related to this boards' compensation.     

A comparison of conventional versus Islamic banking customers attitudes and judgment

This investigates the impact of customer attitude and judgment regarding conventional and Islamic banking system in Pakistan. This study attempts to find out, how the customers of Islamic banks perceive about Islamic banking practices in terms of Shariah compliance and conventional banking system regarding earning more profits. This study consists on primary data through a well design questionnaire. Four hundred and thirty (430) questionnaires were distributed among different customers of all three types of banking, such as Islamic, conventional and stand-alone branches in order to investigate customer’s attitude and judgment toward banking system. The findings indicate that overall 28% of Islamic banking customers don’t know the essential concept of Islamic financial institution’s in Pakistan. Furthermore, 54% customers of conventional banking show their interest to convert their accounts toward Islamic banks.

     

Risk governance and financial stability: A comparative study of conventional and Islamic banks in the GCC

While the linkage between bank governance and financial stability has been discussed widely, empirical explorations of the strength of this relationship are scant. This paper examines the specific role of risk governance in promoting financial stability in banks. Using hand-collected data, it develops a Risk Governance Index (RGI) to measure the strength of risk governance structures and then examines its impact on four main indicators of financial stability for conventional and Islamic banks in the countries of Gulf Cooperation Council (GCC). The results from the dynamic panel models using two-step GMM method suggest that risk governance significantly contributes to the enhancement of the key financial stability measures. The RGI for Islamic banks is found to be smaller than their conventional counterparts and the regression results indicate that risk governance in Islamic banks has a negative impact on stability indicators. While the business models of Islamic banks have features that can enhance stability, poor risk governance can potentially negate this positive feature.     

Bank Capital: Lessons from the Financial Crisis

Using a multicountry panel of banks, we study whether better capitalized banks experienced higher stock returns during the financial crisis. We differentiate among various types of capital ratios: the Basel risk‐adjusted ratio, the leverage ratio, the Tier 1 and Tier 2 ratios, and the tangible equity ratio. We find several results: (i) before the crisis, differences in capital did not have much impact on stock returns; (ii) during the crisis, a stronger capital position was associated with better stock market performance, most markedly for larger banks; (iii) the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk‐adjusted capital ratio; (iv) higher quality forms of capital, such as Tier 1 capital and tangible common equity, were more relevant.     

伊斯兰银行业公司治理:理论与实践

伊斯兰银行业公司治理由于其自身不同的经营特点而与传统银行业治理存在较大的差异,其治理结构、代理关系较为复杂,成为英美、德日模式之外较具代表性的一种模式。本文从伊斯兰银行的治理结构及其复杂的委托代理关系出发,论述了其面临的代理问题,并就其代理问题介绍了伊斯兰银行业的公司治理实践,以期为我国的银行业治理提供一定的借鉴。     

AAOIFI reporting standards: Measuring compliance

Islamic banking and finance have grown rapidly in recent decades. Islamic banks offer a range of products, which, in complying with Islamic law, often differ from traditional Western financial products. Consequently, developing accounting standards to guide Islamic financial reporting is now an important issue. To this end, the Accounting and Auditing Organization for Islamic Financial Organizations (AAOIFI), was established in Bahrain in 1991. While the AAOIFI has published a substantial body of accounting and governance standards empirical research into compliance with these standards is lacking. This article addresses that gap. A benchmark index is constructed to measure the compliance of Islamic banks licensed and domiciled in Bahrain. The findings of the study show compliance to be very high with respect to the governance standard relating to the in-house supervisory boards of Islamic banks, and reporting the Islamic murabaha contract. In contrast, compliance with the AAOIFI's requirements regarding the zakah religious tax and the mudaraba contract is relatively low.     

The Nature and Rationale of a Conceptual Framework for Financial Reporting by Islamic Banks

Islamic banks have to abide by the revealed doctrines in Islam in conducting their business and financial transactions. They employ in-house religious advisers—often referred to as Shari'a Supervisory Board (SSB)—who issue a special report to inform users of financial statements whether or not the bank has adhered to the Islamic principles. Recently, a private standard-setting body—the Financial Accounting Organization for Islamic Banks and Financial Institutions (FAOIBFI)—has been set up to externally regulate the financial reporting by Islamic banks. The FAOIBFI has published two statements on the objectives and concepts of financial reporting to act as a framework in setting accounting standards for Islamic banks. This paper examines the FAOIBFI's approach for developing objectives and concepts of financial accounting and investigates its need for such a theoretical framework. It is argued that the FAOIBFI's objectives and concepts would not be useful in mandating accounting standards on issues that are affected by religious ruling. This does not necessarily mean that such a framework may not be useful in legitimating the FAOIBFI's role and in setting accounting standards for issues that are not governed by revealed moral doctrines although it will be subject to similar limitations to those found by other standard-setting bodies in utilising and applying their framework. However, it implies that the more the FAOIBFI sets accounting standards that incorporate religious ruling, the less it would tend to find its own objectives and concepts useful. The ambiguities that may arise from different interpretations of the religious rules will require resolutions primarily by reference to religious rather than accounting authority.