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Convergence in bank performance for commercial and Islamic banks during and after the Global Financial Crisis

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  • Olson, Dennis
  • Zoubi, Taisier

Abstract

This study examines whether the Global Financial Crisis (GFC) has led to a convergence in performance between Islamic and commercial banks in the Middle East, Africa, and Southeast Asia (MENASA) region in recent years. Using the largest sample to date for 1996–2014, we find that Islamic banks (IBs) initially weathered the onslaught of the GFC better than commercial banks (CBs) in 2007–2008. Then, as the crisis spread to the real economy in 2009, profitability declined substantially for IBs relative to CBs. Beta and sigma convergence tests suggest convergence toward the mean for all banks and all financial ratios. The speed of convergence is generally slower for Islamic banks but the difference has declined in the aftermath of the GFC. The recently developed more robust Phillips and Sul (2007a) log-t test for convergence shows little convergence over the whole sample period, but for the years 2010–2014, all banks appear to be converging toward similar levels of profitability as measured by ROA and ROE. The log-t test shows convergence in profitability across all banks (IBs and CBs) in the post-crisis period. However, it does not show convergence across all asset composition and risk measure—meaning that IBs and CBs still operate differently even if they are moving toward similar profitability results. Club convergence results indicate a lack of convergence over the whole sample, but quite strong convergence across all banks post-crisis. However, some clusters, such as the Southeast Asia region does not display convergence in profitability ratios—suggesting that the GFC has differentially impacted various countries and regions.

Suggested Citation

  • Olson, Dennis & Zoubi, Taisier, 2017. "Convergence in bank performance for commercial and Islamic banks during and after the Global Financial Crisis," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 71-87.
  • Handle: RePEc:eee:quaeco:v:65:y:2017:i:c:p:71-87
    DOI: 10.1016/j.qref.2016.06.013
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    More about this item

    Keywords

    Islamic and commercial banks; Bank performance; Financial crisis; Convergence tests; Speed of adjustment;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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