The main aim of this chapter is to introduce the previous researches or studies which were done on the topic of comparing Conventional Banking and Islamic Banking.
Background or Review of the Literature
There are many researches done in the same area regarding the comparison of Conventional and Islamic banking in various different countries. Some of the studies done have been mentioned below:
Faisal A. Alkassim (2005), did a research on profitability of both the banking systems i.e. Conventional and Islamic in Gulf Cooperation Council (GCC) countries. In his research sixteen Islamic and eighteen Conventional banks were taken and the data was gathered from Bankscope database. The study was done for the years 1997 to 2004. For his regression analysis 9 variables were used. These variables were: Total Loans to Total Assets, Total Equity to Total Assets, Return on Equity, Return on Assets, Deposits to Total Assets, Non-Interest Expense to Total Expense, Total Assets, Total Expense to Total Assets and Net Interest Margin. Performance wise, the results were quite similar to each other. The results for the GCC countries were found out be very similar to the results of the previous research done by Ben Naceur (2003) for Conventional banks and Bashir and Hassan (2004) for Islamic banks. Moreover, in terms of the relationship of total assets with profitability, it proved to be positive for Islamic banks whereas it was negative for Conventional banks. Profitability had a negative relationship with total equity for the Conventional banks whereas, it was positive for the Islamic banks. For both the banking systems, total loans showed a positive relationship.
Akhtar, et al. (2011), did a research in Pakistan between Conventional Banks and Islamic Banks by doing a comparative study to find out the liquidity risk management between both the banks. This study which was done comprised 4 years, which covered the period of 2006-2009. The significance of capital adequacy, Return on Assets, networking capital, Return on equity and size of the firm with liquidity risk management between Islamic and Conventional banks in Pakistan was studied. For this research, a total of 12 banks were selected of which 6 banks were Islamic and the other 6 were Conventional. The data was gathered from the respective bank's financial statements for the analysis. According to the results, it was found out that for both the banking models, there was an insignificant but a positive relationship between the networking capital and the size of firm with the liquidity risk. From the results, it was also found that the Return on Assets for Islamic banks and the capital adequacy for the Conventional banks had a positive relationship at 10% significance level.
Saleh and Zeitun (2006) conducted a research on the performance of the Islamic banking in Jordan. The study was done by selecting the first and second Islamic banks of Jordan, Jordan Islamic Bank for Finance and Investment (JIBFI), and Islamic International Arab Bank (IIAB). Tests had been conducted on profit maximization, liquidity and capital structure. Based on the results of the analysis it was found out that these banks had an increased efficiency, and also that they had an expanded their investments and activities across Jordan. It was also found that both banks had significantly focused on the short-term investments rather than long-term investments. The study also revealed that the Bank for Finance and Investment (JIBFI) had increased lending activities which resulted in higher profitability than International Arab Bank (IIAB). From the findings it showed that the banks have a high profitability and a high growth in credit facility.
Hassan and Hussein (2003) did a research in Sudan to determine the efficiency of banking system for the period of 1992 to 2000. There were 17 banks involved in this study for the research. The tools for analysis that were used in the study were nonparametric Data Envelopment Analysis (DEA) and parametric (cost and profit efficiency) technique. These methods were used to study the 5 main efficiency measures: cost, pure technical, scale efficiency, technical and allocative. The cost and profit efficiency was found out to be 50% and 55% respectively for the period of 1992 to 2000. The recommendation provided by the researchers were that in order to increase the efficiency of the banks, managing and allotting of the inputs is to be handled in a better way.
Thorsten Beck, et al. (2010) also did a research comparing the Conventional banks and Islamic banks on the basis of efficiency, asset quality or stability and the business model. This research was done on a broad cross-country sample which included countries like Bangladesh, Malaysia, Jordan, Egypt, Indonesia, United Arab Emirates, Turkey, to name a few. The data was gathered from Bankscope to analyze the period from 2005-2010. Loan-deposit ratio and two other indicators are used to compare the business orientation between the Conventional banks and Islamic banks. The bank's stability was measured using the z-score. On the basis of the analysis done, the research concluded stating that Islamic banks have higher capitalization and higher liquidity reserves. This has had a positive result on the banks overall performance as compared to the Conventional banks during the recent economic crisis.
Hassan (2006) did a research on a panel of banks from all over the world to find out the efficiency of Islamic banks. The study was done on the period from 1995 to 2001. The sample size for the research which was used to analyze was 43 Islamic banks from 21 Islamic countries in the world. Stochastic Cost Frontier (SCF) approach was used to calculate the cost efficiency. Alternate profit efficiency was used to calculate the profit efficiency. The 5 main Data Envelopment Analysis (DEA) efficiency measures: cost, pure technical, scale efficiency, technical and allocative were correlated and computed against the conventional accounting measurements of performance. After analyzing the results using these tools, a conclusion was drawn that on an average, Islamic Banks are relatively less efficient as compared to Conventional banks in the remaining part of the world. It was also found out that Return on Equity and Return on Assets are highly correlated to these efficiency measures. These efficiency measures can in turn be used to measure the performance of Islamic banks by using it together with the conventional accounting ratios.
A study by Samad, A. (2004) in the same area was done in Bahrain. The research was mainly looked upon the areas of credit risk, profitability and liquidity. There were 9 different types of ratios which were used for the research. They were:
For Credit Risk - Equity to Net Loan Ratio, Total Impaired Loans to Gross Loan Ratio and Equity to Asset Ratio.
For Profitability - Return on Equity, Cost to Income Ratio and Return on Asset Ratio.
For Liquidity - Liquidity Assets to Deposit and Short-term Fund Ratio, Net Loan Deposit and Borrowing and Net Loans to Assets.
A t-test was applied to the ratios for both the banking systems in Bahrain, Conventional and Islamic for the period of 1991 to 2001. From the results it was concluded that for liquidity and profitability measure, there is not much difference between the performances of both the banking systems in Bahrain. However, there was a significant difference that was to be noted for their credit performance.
Moin, M. Shehzad (2008) did a research comparing the performances of Islamic banks with Conventional banks in Pakistan. 5 Conventional banks of Pakistan were compared to the Meezan Bank Limited (MBL), which is also the first Islamic Bank of Pakistan. The period of study was from 2003 to 2007. The main area of study for the research was risk, profitability and liquidity of the banks. The various different ratios used for the purpose of study were: Debt to Equity Ratio, Asset Utilization Ratio, Loan to Asset Ratio, Loan to Deposit Ratio, Return on Asset, Income to Expense Ratio and Return on Equity Ratio. F-test and t-test were used to find the significance of differential performance. According to the results of the tests, it was concluded that as compared to the Conventional Banks, MBL Islamic Bank was supposedly less efficient, less risky and less profitable. On the other hand, it was found that there was no difference between the two banking systems when it came to liquidity. It was also pointed out by the author that MBL Islamic Bank was improving over time.
