Performance of islamic banks and conventional banks

Abstract

This paper reports policy- and design-relevant findings from a major study on the financial performance of conventional and Islamic banks across the world to assess if the latter has performed as well as the former using data over 16 years before the 2007/8 World financial crisis. This inquiry is timely and important to validate if ethic-based Islamic banking after 45 years of experience based on the twin-principles of risk-share-profit-share lending is at least as good as pre-fixed-interest-based banking. Using a world-wide matched sample of both bank types, tests on three sets of financial performance ratios reveal Islamic bank performance match those of conventional banks. If any, return to shareholders is a mere 2 percent higher in Islamic banks. This similarity is found to hold when controlled for size, age and to some extent region. Thus, it appears that the new form of bank lending has not led to any inferior performance to that of conventional banks. This helps to validate the relevance of Islamic banking as an alternative ending institution for those clients wanting profit-sharing banking in place of pre-agreed interest in lending to banks. Islamic banking is no less welfare promoting.