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

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  • Beck, Thorsten
  • Demirgüç-Kunt, Asli
  • Merrouche, Ouarda

Abstract

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 2 ()
Pages: 433-447

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:433-447

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Financial intermediation; Islamic banking; Bank stability; Bank efficiency;

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References

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Citations

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Cited by:
  1. Laurent Weill & Christophe Godlewski, 2012. "Why Do Large Firms Go For Islamic Loans?," Working Papers of LaRGE Research Center 2012-05, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg (France).
  2. Baele, Lieven & Farooq, Moazzam & Ongena, Steven, 2011. "Of Religion and Redemption: Evidence from Default on Islamic Loans," CEPR Discussion Papers 8504, C.E.P.R. Discussion Papers.
  3. Metin AKTAS, 2013. "Stability of the Participation Banking Sector Against the Economic Crisis in Turkey," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 180-190.
  4. Sheng, A. & Singh, A., 2012. "Islamic Finance Revisited: Conceptual and Analytical Issues from the Perspective of Conventional Economics," ESRC Centre for Business Research - Working Papers wp430, ESRC Centre for Business Research.
  5. Zaheer, S. & Ongena, S. & Wijnbergen, S.J.G. van, 2011. "The Transmission of Monetary Policy through Conventional and Islamic Banks," Discussion Paper 2011-078, Tilburg University, Center for Economic Research.
  6. Sajjad Zaheer & Steven Ongena & Sweder J.G. van Wijnbergen, 2013. "The Transmission of Monetary Policy Through Conventional and Islamic Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 9(4), pages 175-224, December.
  7. Ouidad Yousfi, 2013. "Does PLS financing solve asymmetric information problems?," Post-Print hal-00785325, HAL.
  8. Joshua Charap & Serhan Cevik, 2011. "The Behavior of Conventional and Islamic Bank Deposit Returns in Malaysia and Turkey," IMF Working Papers 11/156, International Monetary Fund.
  9. Mohieldin, Mahmoud, 2012. "Realizing the Potential of Islamic Finance," World Bank - Economic Premise, The World Bank, issue 77, pages 1-7, March.
  10. Godlewski, Christophe J. & Turk-Ariss, Rima & Weill, Laurent, 2013. "Sukuk vs. conventional bonds: A stock market perspective," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 745-761.

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