Is islamic banking a successful alternative to conventional banking? a comparison of two banking systems

Abstract

This study aims to identify the similarities and differences between Islamic banking and Conventional banking systems on issues related to risk taking behaviour. Because of the differences in the nature of transaction instruments, goals and the obligation between the institutions, it is important to differentiate which banking system is more efficient in terms of: risk assessment; and decision-making on lending. Two focus groups in five different countries in the Middle East region (Bahrain, Qatar, United Arab Emirates, Jordan and Libya) were selected to participate in this study. Primary and secondary data collection methods were used to obtain required information for the purpose of analysis. Data Envelopment Analysis (DEA) was applied to the banking groups separately in order to isolate technical efficiency scores (large, medium and small banks' categories). The analysis revealed that Islamic banks-with medium and small bank size-operate and allocate their resources with a higher degree of efficiency than all other banking.