Comparing Islamic and Conventional Banks’ Financial Characteristics: A Multivariate Approach

68 Pages Posted: 1 Mar 2015

See all articles by Mohammad Bitar

Mohammad Bitar

Concordia University

Philippe Madiès

University of Angers - Centre de Recherches Appliquées à la Gestion (CERAG)

Ollivier Taramasco

University Grenoble Alpes; Grenoble University Graduate Business School University Pierre-Mendes-France - CERAG UMR 5820 CNRS

Date Written: February 28, 2015

Abstract

We perform principal component analysis (PCA) on an array of 20 financial ratios to explore and compare conventional and Islamic banks’ financial characteristics. In contrast to the existing literature, this is the first study to use PCA to derive four components to examine the financial characteristics of both bank types. The PCA shows that capital requirements, stability, liquidity and profitability are the most informative components in explaining the financial differences between Islamic and conventional banks. We further employ logit, probit and OLS regressions to compare Islamic and conventional banks’ financial strength. Our results show that Islamic banks are more capitalized, more liquid and more profitable but less stable than their conventional counterparts. The findings also show important differences between Islamic and conventional banks even when we decompose our sample between small and large banks. Furthermore, Islamic banks were more resilient than conventional banks in terms of capital and profitability during the subprime crisis. Our findings persist when excluding US banks and when comparing banks in countries where the two banking systems co-exist.

Keywords: PCA, Islamic banks, stability, capital, liquidity, efficiency.

JEL Classification: C21, C38, G01, G21, Z12

Suggested Citation

Bitar, Mohammad and Madiès, Philippe and Taramasco, Ollivier, Comparing Islamic and Conventional Banks’ Financial Characteristics: A Multivariate Approach (February 28, 2015). Available at SSRN: https://ssrn.com/abstract=2571631 or http://dx.doi.org/10.2139/ssrn.2571631

Mohammad Bitar (Contact Author)

Concordia University ( email )

Montreal, Québec
Canada

Philippe Madiès

University of Angers - Centre de Recherches Appliquées à la Gestion (CERAG) ( email )

Ollivier Taramasco

University Grenoble Alpes ( email )

France

Grenoble University Graduate Business School University Pierre-Mendes-France - CERAG UMR 5820 CNRS ( email )

150 rue de la chimie BP 47
Grenoble Cedex 9, 38040
France

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