Islamic vs. Conventional Banking: Business Model, Efficiency and Stability

44 Pages Posted: 20 Apr 2016

See all articles by Thorsten Beck

Thorsten Beck

City University London - The Business School; Tilburg University - European Banking Center, CentER

Asli Demirgüç-Kunt

World Bank

Ouarda Merrouche

World Bank

Date Written: October 1, 2010

Abstract

This paper discusses Islamic banking products and interprets them in the context of financial intermediation theory. Anecdotal evidence shows that many of the conventional products can be redrafted as Sharia-compliant products, so that the differences are smaller than expected. Comparing conventional and Islamic banks and controlling for other bank and country characteristics, the authors find few significant differences in business orientation, efficiency, asset quality, or stability. While Islamic banks seem more cost-effective than conventional banks in a broad cross-country sample, this finding reverses in a sample of countries with both Islamic and conventional banks. However, conventional banks that operate in countries with a higher market share of Islamic banks are more cost-effective but less stable. There is also consistent evidence of higher capitalization of Islamic banks and this capital cushion plus higher liquidity reserves explains the relatively better performance of Islamic banks during the recent crisis.

Keywords: Banks & Banking Reform, Debt Markets, Access to Finance, Financial Intermediation, Bankruptcy and Resolution of Financial Distress

Suggested Citation

Beck, Thorsten and Demirgüç-Kunt, Asli and Merrouche, Ouarda, Islamic vs. Conventional Banking: Business Model, Efficiency and Stability (October 1, 2010). World Bank Policy Research Working Paper No. 5446, Available at SSRN: https://ssrn.com/abstract=1694335

Thorsten Beck (Contact Author)

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tilburg University - European Banking Center, CentER ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Asli Demirgüç-Kunt

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Ouarda Merrouche

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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