A comparative study of Islamic and conventional
banks after the crisis
Bachelor Thesis
Thomas van Oorschot 10004945
Supervisor: Leva Sakalauskaite
Content
1. Introduction 3
2. Literature 4
2.1 Islamic and conventional banking 4 2.2 The development of Islamic banks 8 2.3 Pre-‐crisis (2005-‐2007) 9 2.4 Crisis (2007-‐2010) 10
3. Data and methodology 13
3.1 Introduction 13 3.2 Data sample 13 3.3 Variable definitions 14 3.4 Model 15 4. Results 16 5. Discussion 20 6. Conclusion 22 7. References 23
1. Introduction
Conventional banks became under pressure after the global financial crisis. A further growing interest in Islamic banking was the consequence. Academics and governmental decision makers saw the advantages of Islamic banking (Beck, Demirgüç-‐Kunt, and Merrouche 2010). Islamic banking is based on the sharia law. Islamic banking seems to be able to relieve mismatches of the conventional banks, like short-‐term investments, on sight demandable deposits contracts with long term uncertain contracts (Beck,
Demirgüç-‐Kunt, and Merrouche 2010).
Islamic banks have been growing since the first financial institution was found in 1963. The first Islamic institution was founded in Egypt. After the first institution in Egypt came Islamic institutions with more financial areas like finance, mortgage, insurance, banking and assets management business (Ahmed 2008). The first Islamic bank called the Dubai Islamic Bank in 1975. From the moment Islamic financial
institutions grew with 10-‐15 percent per year since 2004. Islamic financial institutions operate in 51 countries (Ahmed 2008).
This paper identifies a comparative analysis between Islamic and conventional banks in the period from 2005 until 2014. The impact on Islamic banks and
conventional banks during the pre crisis and crisis (2005-‐2010) is taken into account with existing scientific articles. Since the great depression in 1930, the financial crisis 2007-‐2010 is the greatest recession (chang, p.2). With different dependent variables this paper accomplishes the difference between the crisis and the period after the crisis. The sample consists of the 10 largest conventional and Islamic banks in the GSC Muslim countries. The model is based on a period from 2010 till 2014 and compared Islamic banks and conventional banks in the GSC Muslim countries. The regression tries to identify if there are any differences between Islamic banks and conventional banks during this period. The research question is as follows: Has the performance of Islamic and conventional banks changed after the crisis in the period 2010-‐2014?
Beck, Demirgüç-‐Kunt, and Merrouche found significant differences between Islamic and Conventional banks in business orientation, cost efficiency, asset quality and stability in the crisis. They made the comparison in different countries during the crisis. Beck, Demirgüç-‐Kunt, and Merrouche took a sample of countries with conventional banks and Islamic banks and compared them. During the crisis, in 2010 Beck, Demirgüç-‐
Kunt, and Merrouche find evidence of differences between conventional banks and Islamic banks. Islamic banks have a higher liquidity relative to conventional banks. This gives an explanation why Islamic banks perform better than conventional banks. The stocks were more stable. Is this still the conclusion?
Chapter 2 explains the differences between Islamic banks and conventional banks. Chapter 3 contains their performance during the pre crisis and crisis found in academic articles. The data found in the regression are explained in chapter 4. Chapter 5 concludes.
2. Literature
2.1 Islamic and conventional banking
In the present economy, financial intermediations are crucial. Banks intermediates the funds. Banks acquire information and give information, banks contract financial
products and banks make and remake financial claims (El Hawary et al., 2004, p.4). The main functions of financial intermediaries are asset transformation, brokerage, settling the payments and risk transformation (El Hawary et al., 2004, p.5).
Islamic banks as financial intermediation following a specific regulation. Islamic banking products follow the rules of sharia. Islamic people with a strong religious conviction live conform the sharia law. The implication is that these products don’t violate the Koran (Beck, Demirgüç-‐Kunt, and Merrouche 2010). The first rule is called Riba and say that it is not allowed to demand interest payments for a financial
transaction. It’s also not possible to invest in conventional interest products. The Koran requires a profit, loss and risk sharing arrangement. An investor pays a fixed amount (fee) for a service (Beck, Demirgüç-‐Kunt, and Merrouche 2010). It is also not possible to trade in financial risk products, such as derivative products. Furthermore investor can not insure against losses and it is illegal to invest in gambling products, pork or alcohol (Cihak and Hesse, 2008, p.8). Insurance will eliminate the whole idea profit loss risk sharing. Investments in gamble, pork or alcohol products are forbidden by the Koran. A final characteristic of Islamic banks following the rules of sharia, is that Islamic banks buy and sell products: in the mortgage market, the houses are property of the banks (Cihak and Hesse, 2008, p.9) .
The Islamic banks have developed some products following the rules of sharia. These specific products in the Islamic financial system avoid the concept of interest and imply a certain degree of sharing risk.
Source: El Hawary et al. (2004, p.7)
This system shows that the Islamic financial system can be split into two components namely, transactional and intermediation contracts. Transactional contracts are real sector contracts and include exchange, trade and financing of economic activities. Intermediation contracts are contracts in the most efficient and transparent way. The combination of both gives instruments for investors (El Hawary et al. 2004, p.7). Transactional contracts are essentially used for trade. There are three kinds of transactional contracts namely asset based securities, equity participation and miscellaneous contracts.
1. Asset-‐based securities
Asset based securities can be split into two contracts. The first one is trade-‐financing contracts. Murabaha, Bay salam and Bay Mua’ajal have shown examples. Transactional contracts are like asset back securities (El Hawary et al. 2004, p.8.). An asset back security is a security that pooled a group of small illiquid assets, these assets cannot be
sold individually. Islamic instruments are claims against individual assets and
collateralized against real assets. The financial claim is against a real asset and is short term. This gives low risk (El Hawary et al. 2004, p.8). The second asset-‐based contract are collateralized securities. Depositors are looking for short to medium maturity
securities like ijara (leasing) and istisna. The most common used contract of asset-‐based securities is Murabaha contact. This is an honest contract following the sharia. The seller and buyers know exactly the costs and the profit what the buyer has to pay. A cost plus profit contract. The profit will be seen as a fee in the Islamic world (El Hawary et al. 2004, p.8).
2. Equity participation
On the other side, Islamic banks have equity participation contracts. A capital owner contributes equity in return for a profit loss contract with a ratio determined before the transaction takes place. (El Hawary et al. 2004, p.8.) An equity participation contract is Mushuraka. In a Musharaka contract the bank makes an agreement with one or more investors. The profits and shares are for the investors. All participants are working partners (El Hawary et al. 2004, p.8).
3. Miscellaneous.
This contract is meant to promote social welfare (Qard Hassana) (El Hawary et al. 2004, p.8).
The last kinds of contracts are financial intermediations contracts like mudaraba, kifala, amana, takaful, wikala and ju’ala. Maduraba. The most common used contract is the Muduraba contract (El Hawary et al. 2004, p.9.). A Muduraba contract is based on a partnership between two parties. One party is the financier and the other is the one who manages the investment. Both parties agree on the loss and profit ratios in a contract. The bank/entrepreneur has full control over the decisions (El Hawary et al. 2004, p.9). By a Kiflala contract a third party becomes responsible for the liability. In a Ju’ala
contract two parties agree with a fee before the transaction takes place (El Hawary et al. 2004, p.9.). One party pays the other party a fixed amount of money (fee) for the service.
A ju’ ala gives trust. This is for an investment that is not certain to utilize. By a Wakala contract one party carries out one specific task (El Hawary et al. 2004, p.9).
Source: El Hawary et al. (2004, p.13)
Conventional banks have a different financial system. Main products of conventional banks are mainly based on interest. Islamic banks don’t use the instrument interest. This is why products of Islamic banks are more complicated than products of conventional banks (Verhoef et al., 2008, p.10).
Islamic banks use another system called a profit loss structure. The depositor and the banks determine a profit ratio in a contract before the transaction takes place. The depositor will receive a part of the profit and the banks receive a part. The depositor doesn’t receive money by a loss (Iqbal, 1997, p.42).
Another difference is that Islamic banks can’t arrange a insurance for clients. Insurance is based on interest and that would harm the profit loss structure of Islamic banks, because the depositor does not meet risk in his contract (Cihak and Hesse, 2008, p.8). Furthermore Islamic banks can’t rely on a central bank as a lender of the last resort. This tool is also based on interest (Qadri, 2009, p.9).
Islamic banks are not allowed to trade in financial risk assets, because these are
uncertain and gamble products. Islamic banks are not allowed to invest in conventional products (Verhoef et al., 2008, p.13). When an investor doesn’t have the certainty when
and if he collects a benefit, it will be seen as gambling. Furthermore an investor has to take the losses when it happens. Islamic banks are not allowed to insure against losses. The Sharia law also says that you can’t invest in alcohol, pork, gamble institutions and interest based institutions (Verhoef et al., 2008, p.13).
The final difference between Islamic banks and conventional banks is that Islamic banks purchase goods and services and sell them with a profit or loss. By these investments there is ratio confirmed between the investor and the bank (Cihak and Hesse, 2008, p.4).
2.2 The development of Islamic banks
During the last years the number of Islamic banks grew fast. In the countries of the Gulf
Cooperation Council (GCC) the market share in Islamic finance grew with 9 percent in four years since 2004 (Hassan and Dridi. 2011, p.164). The GCC is the main region of Islamic banking, with seven states located in the Arabian Gulf: Bahrein, Jordan, Malaysia, Qatar, Saudi Arabia, Turkey and the UAE. Several reasons are found for the fast grew:
1. The demand in Islamic countries for sharia products has risen.
2. The demand for more diversification by conventional investors has risen, they become more and more interested in the sharia products.
3. Islamic banks become more stable and get a more regulatory framework. 4. The capacity to develop products that meet the demand of corporate and
individual investors (Hassan and Dridi. 2011, p.163).
Scientists have noted the fast growth of Islamic banks. During the crisis the discussion started about the positive and negative of Islamic and conventional banking, because of the growth of Islamic banks.
Hassan and Dridi compared Islamic banks and conventional banks during the period 2007-‐2010. They compared their results with results from the pre-‐crisis. (2005-‐ 2007) The paper took 120 Islamic and conventional banks in the GSC countries (Hassan and Dridi. 2011, p.165.).
2.3 Pre-‐crisis (2005-‐2007)
Source: (Hassan and Dridi. 2011, p.170.)(blue: Islamic, red: conventional) The figure shows that Islamic banks have a higher capital adequacy ratio,
but lower leverage, investment portfolio assets and lower bank deposit to total deposit ratio on average (Hassan and Dridi. 2011, p.169.). This confirms an asset based financing program, weaker interbank, restricted lender of the last resort and less vulnerability because of the lower bank deposits. The low Islamic investment portfolio is explainable
because of a restriction on investments (no investments in toxic assets, bonds or institutions) and the absence of hedging instruments (Hassan and Dridi. 2011, p.169.).
At the end of 2007 the profitability over 3 years was higher for Islamic banks than for conventional banks during the same period. Despite Islamic banks have a higher not performing loan ratio, because Islamic banks don’t lend short term (evergreen loan) (Hassan and Dridi. 2011, p.170).
2.4 Crisis (2007-‐2010)
The financial crisis of 2007/2008 has affected a lot of banks globally (Kassim and Majid, 2010; Smolo and Mirakhor, 2010, Ellaboudy, 2010). The crisis started in the US
mortgage market. Many banks collapsed. The crisis spread globally (Abraham and
Zhang, 2009). Some economic experts say that Islamic banks were not or less harmed by the crisis. Some even say the crisis could be avoided if all banks had adopted the sharia way of thinking (Abraham and Zhang, 2009). Kia and Darrat say that: “ the Islamic banking system is more crisis proof than conventional banks”. Islamic banks grew after the crisis. Beck compared Islamic and conventional banks during the crisis (Beck, 2010). He took a sample of 7 countries of the GCC with both Islamic and conventional banks. The study concluded that Islamic banks are more crisis proof, less profitable and less liquid.
Profitability
The figures below show the profitability in 2007-‐2008, 2007-‐2009 and the average between 2008 and 2009. Profitability is measured as the profit level in dollars. In 2008 Islamic banks did better in all countries except Malaysia, Qatar and UAE (Hassan and Dridi. 2011, p.173.). Islamic banks as a whole did better in 2008.. Islamic banks did worse than conventional banks in 2009.
During the boom period 2005-‐2007 the return on average equity and average assets were higher by Islamic banks than conventional banks (Hassan and Dridi. 2011, p.173.) . Normally a higher return takes more risk, thus a higher ratio. On average the return during the period from 2005-‐07 was very close to 2005-‐09 for Islamic banks. The non-‐performing loan ratios stayed higher during the period 2005-‐09 for Islamic banks (Hassan and Dridi, p.173.).
Source: (Hassan et al. 2011, p.174.)
Credit growth
In the period from 2005 till 2009 the credit growth was higher for Islamic banks than for conventional banks. From 2007 till 2009 conventional banks credit growth was half of Islamic banks. The market share of Islamic banks will grow in the future (Hassan and Dridi, 2011, p.177.). For Islamic banks there is more credit available so there is more macro stability. Academics and experts showed that after a large grow of credit a decline follows (Hassan and Dridi, 2011, p.177.). This is not the case for Islamic banks. During the crisis the credit growth of Islamic banks was also less affected, except for Bahrein and Qatar. The high credit growth was possible thanks to guidelines that ensure safe and secure loans (underwriting standards). Experts say this is why the credit growth for Islamic banks is higher than for conventional banks (Hassan and Dridi, 2011, p.177.).
Asset growth
Hassan and Dridi showed that the growth of assets was smaller for conventional banks than for Islamic banks. The asset growths of conventional banks were less than half the growth of conventional banks in the period from 2007 till 2009. The market share of conventional banks will grow in the future. Islamic banks were less affected by deleveraging (Hassan et al. 2011, p.177.). On the other side Hassan and Dridi showed that the asset growth of Islamic banks decreased faster than for conventional banks (Hassan and Dridi, 2011, p.177.). The Asset growth in 2008 and 2009 was higher for Islamic banks, but the asset growth difference in difference between both years was higher for conventional banks. Two reasons could explain this. First the weaker
performance of Islamic banks in 2009. Second the western government provide support to deposit to conventional banks (Hassan and Dridi, 2011, p.177).
External rating
The change in ratings were calculated based on long term debt by Fitch moody and S&P. Hassan and Dridi took long term debt, those debt with relative low risk has, coverage of the financial banks. They compared 2008 and 2010 ratings. So they compared the pre-‐ crisis (2008) and crisis (2010) (Hassan and Dridi. 2011, p.178.). Hassan and Dridi took the probability to default in both years. The conclusion was that the changes in
probability had higher rates for conventional banks in all countries. Saudi Arabia and Qatar didn’t change their rating policies, because of the public support (Hassan and Dridi. 2011, p.178.).
The better performance for Islamic banks in 2008 can be explained. Islamic banks use lower leverage and smaller investment portfolios. These lower rates for Islamic banks are in line with lower risk taking. Lower risk taking is less dangerous during a crisis (Hassan and Dridi, 2011, p.179.).
Another finding was that large Islamic banks did better during the crisis than small ones. In 2009 it seems that banks who lent larger parts of their portfolio have higher credit growth. Banks can lend more to consumers because of a stable macroeconomic environment. Islamic banks also have higher capital adequacy ratios. This could explain the better performance (Hassan and Dridi, 2011, p.179.).
3. Data and methodology
3.1 Introduction
This chapter tries to compare the performance of Islamic and conventional banks in 2010-‐2014. The model covers this period of time. Since the great depression in 1930, the financial crisis 2007-‐2010 is the greatest recession (chang, p.2). Since 2007 is there a decline in assets, credit, economic activity and a decline in the stock market. Dubai, a state in the United Arab Emirates (UAE) had a debt of 80 billion. Abu Dhabi had to save Dubai in 2009 (Chang,2011, p.25). The GDP has risen since 2009 for GSC countries, but the unemployment is still growing. (chang, 2011p 21). Academics confirm in articles that Islamic banks did better during the crisis and pre-‐crisis. How well do Islamic banks in comparison to conventional banks in the period 2010-‐2014?
3.2 Data sample
The data used are the banks in the GCC countries. The countries in The Gulf cooperation council are used, the collection of data makes a distinction between Islamic and
conventional banks. The first group of banks consists of Islamic banks in the 7 GCC countries. The second group consists of conventional banks in the GCC countries. All data are from Bankscope Database.
This study analyses the data of the 20 credit worthiest Islamic and conventional banks. Only 100% Islamic and 100% conventional banks were taken for the sample. A credit worthy bank has a high credit rating. The worthiness of a debtor, the ability to pay the debt back and the likelihood a bank will default. Banks are internationally comparable with credit rating agencies. The distinction is as follows: the banks have at least BBB.
• >A-‐: High credit quality following Fitch rating: ‘’ ‘A’ ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings’’.
• > BBB: Good credit quality following Fitch rating: ‘’BBB’ ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity’’.
3.3 Variable definitions
This model compares the performance of conventional and Islamic banks. The regression uses the financial ratio return on equity to compare the performance of financial intermediaries.
Return on equity
ROE is a measure of return on equity of bank i, in period t. The return on equity measures the profitability. ROE has been in most studies a dependent variable (Alkassim, 2005, Bashir and Hassan, 2004, Hassoune, 2002). Following Chen (2011) the return on equity measures: ‘’ The firm’s operating results or earning per dollar of capital input based on General Accepted Accounting Principles
(GAAP)’’.
The comparison of different banks uses variables to measure the performance of Islamic and conventional banks. These financial variables measure the quality of a bank.
1. Assets
The first independent variable is assets. Asset quality is a measure to compare the performance between conventional and Islamic banks. This model uses total assets from Bankscope. An increase in asset value indicates a higher value of performance. A higher performance gives higher revenues (hassoune,2002). A strong asset growth indicates that Islamic banks will grow in the future.
Furthermore Islamic banks were less effected by deleveraging (Hassan and Dridi, 2011, p.179.).
2. Equity
The second independent variable is equity. Islamic banks take an equity position. Banks makes funds available for investors in the form of mudurabah and musharaka contracts. Equity is a measure to compare the performance of Islamic banks. An increase in equity will increase the profits (Akacem, et al. 2002, p.129.).
3. Deposits
Deposits are the third variable. Deposits are very important for banks. According to the view of Abduh (2011) : ‘’However, to increase its financial intermediaries’ activities and thus improve their roles towards economic growth, banks need inflow money. Shareholders’ money per se is not sufficient. Banks need inflow money from the people so that be able to give loans or financing to promote productivity and economic growth and at the same time to gain profit for
themselves through interest or margin applied. This is why deposits are very important for banks as well as for economy of a country’’.
4. Liabilities
Islamic and conventional banks have different balance sheets and thus different liabilities (Sun, et al. 2015,p.333). These different managements give different revenues. Bankscope Database uses Liabilities&Equity.
5. Leverage
Leverage is the fifth independent variable. The leverage ratio is calculated by the liabilities divided by the assets. Khediri (2015) found that Islamic banks have higher leverage then conventional banks. This results in different credit and risk. He also found that Islamic banks with higher leverage were more stable in the crisis. Leverage could explain the difference in profitability. 6. The dummy Islamic banks
The dummy Islamic is the last independent variable. This variable gets a 1 for Islamic banks and a 0 for conventional banks. This will separate the two kinds of banks and distinguish them. The dummy should explain the difference in
profitability and answer my research question.
3.4 Model
The return on equity is measured by 6 financial variables. The model uses a linear regression. The default rate is not included in the model, because in other studies they exclude the default rate to calculate the profitability (Hassan and Dridi, 2010,p.180). The model is:
(1) 𝑹𝑶𝑬 = 𝜶 + 𝜷𝟏 ∗ 𝑳𝒏𝑨𝒔𝒔𝒆𝒕𝒔 + 𝜷𝟐 ∗ 𝑳𝒏𝑬𝒒𝒖𝒊𝒕𝒚 + 𝜷𝟑 ∗ 𝑳𝒏𝒅𝒆𝒑𝒐𝒔𝒊𝒕𝒔 + 𝜷𝟒 ∗ 𝑳𝒏𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝜷𝟓 ∗ 𝑳𝒆𝒗𝒆𝒓𝒂𝒈𝒆𝒓𝒂𝒕𝒊𝒐 + 𝜷𝟔 ∗ 𝑫𝒖𝒎𝑰𝒔𝒍𝒂𝒎𝒊𝒄 + 𝜺
Where 𝜶 is a constant of the model. Beta 𝜷 represents the coefficients of the variables. The error term 𝜺 measures the errors of this model.
4. Results
This chapter discusses the results from the model. The model calculates the differences in return on equity by conventional and Islamic banks from 2010-‐2014.
To compare the return on equities, all the data were acquired from Bankscope. The data is obtained from 7 countries in the GSC. The following countries are included in the sample: Saudi Arabia, Kuwait, Qatar, UAE, Bahrain.
Islamic banks Conventional banks
Al Rajhi Bank National Commercial Bank
Kuwait Finance House Emirates NBD
Dubai Islamic Bank Samba Financial Group
Abu Dhabi Islamic Bank National Bank of Kuwait Albaraka Banking Group B.S.C. First Gulf Bank
Masraf Al Rayan Riyad Bank
Noor Islamic Bank Qatar National Bank
Emirates Islamic Bank Saudi British Bank
Aref Investment Group Emirates Bank International
Table 1
Table 2 shows results of the first regression with all variables. The R² in this regression is 49,76%. In the model 49,76% of the variables are explainable.
The dummy Islamic banks shows that Islamic banks have a higher return on equity. The return on equity is 0,14 higher for Islamic banks. The independent variable
dumislamic is significant at 1%. Assets, equity and liabilities are not significant. Islamic banks have slightly lower leverage. The difference between Islamic banks and
conventional banks cannot be explained by the slight difference in leverage. The regression concludes the higher the leverage, the lower the return on equity.
Table 2
Leverage
Islamic banks Conventional banks
0.97646 0.977558
Table 3
On average conventional banks have a higher deposit rate then Islamic banks. Financial intermediaries need cash inflow to promote economic activity and productivity and to give loans. The credit and asset growth were higher during the crisis for Islamic banks. After the crisis conventional banks need to grow again. Economic growth is only
possible with a grow in deposits. This is maybe an explanation for the deposit rate for conventional banks on average, the average deposit growth for conventional banks is higher in the period 2010-‐2014. This higher deposit rate means that conventional banks take more risk.
Average deposits growth 2010-‐2014
Islamic banks Conventional banks
0.350222
0.402934
Table 4
Deposits
Islamic banks Conventional banks
6.107305
7.657447
Table 5
The correlation of the model explains the theory in table 6. The independent variables are explainable and logical.
Table 6
Assets, equity and are insignificant in table 2. Table 7 excludes liabilities. Assets and Equity get a value of -‐0,03*assets and -‐0,12*equity. The t value asset is now -‐0,32 and was -‐0,68. Assets are still not significant at 1%, 5% and 10 %. Equity had a t value of 0,10 and equity’s t-‐value is now -‐1,44. Equity is not significant at 1%, 5% and 10%.
Table 7
The model in table 8 puts liabilities back in the model and left out equity. Assets gets a value of -‐0,93 and was -‐0,68. Assets get a more negative value. The t-‐value lowers from -‐ 0,68 to -‐1,87. Assets is now significant at a value of 10%. Liabilities gets a value of 0,79 and was 0,92. Liabilities get a lower value. The t-‐value rises to 1,59 from 0,66. Liabilities is still not significant at 1%, 5%, and 10%.
Table 8
The model in table 9 left equity and liabilities out of the regression. Assets gets a value -‐ 0,14. Assets gets a t-‐value of -‐2,10 instead of -‐0,68. By an increase of 1, decreases return on equity with 0,148. When a bank uses more assets, the return on equity will be lower. All independent variables are significant in table 9. The return on equity will decline by a rise in asset and leverage. A positive profit was expected by a higher amount of assets. Bigger banks appear to be more profitable. The return on equity will rise by a higher amount of deposits. Furthermore on average an Islamic bank has a higher return on equity in the years 2010-‐2014. This gives a new regression with a R² of 47,82%.
(𝟐)𝑹𝑶𝑬 = 𝜶 + 𝜷𝟏 ∗ 𝑳𝒏𝑨𝒔𝒔𝒆𝒕𝒔 + 𝜷𝟐 ∗ 𝑳𝒏𝒅𝒆𝒑𝒐𝒔𝒊𝒕𝒔 + 𝜷𝟑 ∗ 𝑳𝒆𝒗𝒆𝒓𝒂𝒈𝒆𝒓𝒂𝒕𝒊𝒐 + 𝜷𝟒 ∗ 𝑫𝒖𝒎𝑰𝒔𝒍𝒂𝒎𝒊𝒄 + 𝜺
Table 9 5. Discussion
Section 2.3 compares Islamic banks and conventional banks during the pre-‐crisis. The average profitability of Islamic banks is higher in the GCC countries. The amount of default was during the pre-‐crisis for Islamic banks higher. Islamic banks have higher non-‐performing loan ratios. Islamic banks don’t provide evergreen loans. A evergreen loan is a risky fund. A short-‐term fund with no repayment in a specific period of time. Conventional banks have higher leverage ratios and higher investment portfolio’s during that period, which have a negative influence on profitability. The higher leverage and higher investment portfolios have impact on the crisis.
In section 2.4 the Islamic and conventional banks are compared during the crisis. The performance of Islamic banks is higher in 2008. This is explainable by lower risk taking of Islamic banks during the pre-‐crisis with lower leverage and investment portfolios. So is the higher performance for Islamic banks explainable following Hassan and Dridi: ‘’IBs have zero exposure to toxic assets, derivatives, and conventional financial institution securities, which were all hard hit during the crisis”. Islamic banks become more competitive since 2007. The assets and credit for Islamic banks was twice as high during the crisis. The demand for is Islamic funds is growing since 2007. The growth of demand gives responsibility and supervisory. This is why well-‐organized large banks
The conclusion of the results from the data-‐analyse is that the performance of Islamic banks is better then conventional banks also in the years after the crisis. The return on equity and dummy Islamic are positively related. The research of the
performance in pre-‐crisis and crisis in literature concludes that high leverage will have negative consequences for the profitability. Islamic banks in the GCC countries have lower leverage then conventional banks, because they don’t charge interest. The regression model shows us the same conclusion in de post crisis period. A lower leverage for Islamic banks will give a higher return on equity.
The amount of deposits of conventional banks is larger then of Islamic banks and is growing faster in de period 2010-‐2014. Hereby the return on equity should increase. However, this is not the case. A possible explanation could be that the amount of risky investment portfolios is still high at conventional banks. During the pre-‐crisis causes risky investment portfolios and higher investment portfolios a lower performance for conventional banks. This is still a problem for conventional banks.
Assets should higher the return on equity. The lower value of -‐0,148 is not explainable. A possible explanation could be the low quality of the assets.
A disadvantage of this regression is the period of time: only 4 years. The effects of the crisis, which was a severe one, are still tangible. The trust of customers in
conventional banks is not recovered yet. This has a positive effect on the interest in Islamic banks. Furthermore, the rules for credits are stricter for conventional banks. But more conventional deposit rates are growing, this would give higher return on equities in the future.
Another disadvantage is that this sample compares the banks in 7 Islamic
countries. All banks operate in the same competitive environment and are more or less regulated in the same way. This could give a mismatch in results. Conventional en Islamic banks in the GCC countries have more in common than conventional banks in western countries ans Islamic banks in GCC countries.way. Banks in the GCC countries have more in common than this paper expect.
The low R² of 47,82% could explain the coefficient of assets. Normally should assets higher the return.
6. Conclusion
This research compares the performance of Islamic and conventional banks. Islamic banks as financial intermediation following a specific regulation. Islamic banking products are following the rules of sharia. The most important consequences are that, Islamic bank are not allowed to charge interest and is a profit loss risk sharing structure. The performance of Islamic and conventional banks is measured by the
probability and compared with the crisis and pre crisis (2005-‐2010). The credit worthiest banks were selected from a sample in the GCC. A final sample of 10 100% Islamic banks and 10 100% conventional banks. The profitability is measured with the return on equity. In the years 2010-‐2014 Islamic banks were more profitable. The dummy was significant at 1%. An explanation could be that Islamic banks have no interest, no toxic assets, derivatives and conventional financial institution securities. Another explanation could be the lower leverage for Islamic banks.
Concluding there are no differences between the pre-‐crisis, crisis and the post-‐ crisis. The performance for Islamic banks is higher. This could be because of lower leverage, no interest and lower risk taking operations. A research over a longer period is necessary, because the crisis is still tangible.
7. References
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Beck,T, Demirgüç-‐Kunt,, A, Merrouche, O. Islamic vs. conventional banking: Business
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