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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.

Suggested Citation

  • Beck, Thorsten & Demirgüç-Kunt, Asli & Merrouche, Ouarda, 2013. "Islamic vs. conventional banking: Business model, efficiency and stability," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 433-447.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:433-447
    DOI: 10.1016/j.jbankfin.2012.09.016
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    Keywords

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

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

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