The performance of Islamic banks


Islamic banking is arguably the premier event to have occurred in the banking arena of Arab countries, Islamic countries and even at the international level since the 1980s. This sector has attracted additional attention since the global financial crisis, and this because of its reliance on a different system to that used by conventional banks.Furthermore, with the integration of Islamic banking into the financial mainstream it has become necessary to consider the effectiveness of such banks, banking experience and evaluate the degree to which the performance of these banks compares with their conventional competitors. This study will look at how Islamic banks have faced the latest developments in the world of finance and economics, because there are many advantages in Islamic banks compared to conventional banks, and these features lend themselves to the domestic and global financial system to provide the financing needs of modern society. This study will seek to determine the extent to which Islamic banks keep abreast of the latest financial developments, analysing any advantages that they may offer over-and-above those available via conventional banks. Also, the feasibility of Islamic banks forming the basis for a domestic and global financial system that could serve the financing needs of the contemporary society is assessed.

On the other hand, should be examined the Islamic banking system for more success, so that banks that failed or had some failure to re-examine its policies and methods. Through the study of Islamic banking theory and practices it will be possible to draw a number of conclusions and recommendations that could benefit investors, regulators and the banks themselves. This study conducts financial analysis with the use of financial ratios to draw comparison between the performance of Islamic and conventional banks.

Research Aims:

The aims of the study can be summarised through the following research question:

Do Islamic banks in the Gulf Cooperation Council outperform conventional banks in terms of return on average assets and return on average equity, and how representative are these measures?

Aims and Objectives of the study:

There are several goals for this study:

  1. To understand the nature of Islamic banks.
  2. To measure the performance of Islamic banks.
  3. To compare the performance of Islamic banks with that of conventional banks.
  4. To measure and compare the profitability of Islamic banks with that of conventional banks.

Rationale and Justification for the study:

There are several similar studies to this in the empirical literature but the current study is of significance because there has been relatively little research conducted into Gulf Cooperation Council banks as a whole, and especially evaluating the performance of Islamic banks compared with conventional banks.

This study will evaluate the performance of Islamic banks in terms of profitability as a whole and also perform additional analysis, comparing them with conventional banks, which can be accessible and easily understandable by any person without specialist knowledge. This will help non-academics if they were considering investing in Islamic banks or conventional banks and will also offer an insight for bank supervisors and the financial research community.


The study is based on the analysis of 40 Banks, 15 of which are Islamic and 25 conventional institutions and the sample will be selected by choosing the banks which have the largest total assets, also we will need to investigates the determinants of profitability in Islamic and conventional banks from the Gulf Cooperation Council banks during the period from 2003 - 2008. The data will be collected from the Bankscope database. This study will employ two types of analysis of financial ratios (return on average assets and return on average equity) with the purpose of evaluating and comparing the performance of Islamic banks with that of conventional banks. Moreover, this dissertation will adopt the performance measures methodology which was used by Alnashwan (2008).

Banks that have been selected, according to the highest total assets*:

Research structure:

This study will be divided into five chapters. Chapter One is the Introduction, which is itself divided into six parts. Firstly, the research problems are identified, followed by the aims and objectives of the study, rationale and justification for the study, research methodology and finally the conclusion. Secondly, Chapter Two is the Background, which is divided into three parts, the first of which recounts the empirical literature (Literature Review) and this is followed by the definition and history of each Gulf Cooperation Council member (GCC), Islamic banks and Conventional banks and a comparison is made between Islamic banks and conventional banks. Finally, the financial system in the GCC is described in detail. Chapter Three is Data and Research Methodology, which is divided into five sections starting with data sources and the definition of the financial analysis and its importance, the definition of the performance measures used, the measurement problems, the rationale and hypothesis and finally the conclusion. Chapter Four is Findings and Results, which is divided into three sections starting with comparing the average profits of all Islamic banks and also conventional banks for each year and then using the regression equation for performance measures and finally the conclusion. The fifth chapter is the Discussion and conclusion and will discuss the resolutions and recommendations reached. This is followed by a conclusion of the study.

Plan of the Study:

This research will be submitted by 30th September 2010 and will take approximately four months to complete. The proposed timetable for completing this research is as follows:

Revising literature review and proposal 30th of April

Collecting and analysing the data 31 of May

Background and history of GCC and Banks End of June

Findings and Results 15 of July

Writing the first draft and delivering it to the supervisor 30th July

Rewriting and revising the first draft During August

Submitting the final draft 30th of September

Literature Review

The Performance of Gulf Cooperation Council Islamic Banks in Comparison with conventional Banks during 2003-2008.


Certainly there have been many academic studies conducted as well as articles and books written in relation to the assessment of performance in Islamic banks and conventional banks. More specifically, these have investigated risk, profitability, liquidity and efficiency in Islamic and conventional banks and several of the most important studies, articles and books relating to the subject of this study are summarised in the following section.

Alotaibi (2009) discussed the similarities and differences between Islamic banks and conventional banks in the GCC countries for a period of seven years starting in 2000, comparing liquidity, capital and risk. The sample of 194 banks included 144 Islamic banks and 50 conventional banks and financial ratios were used to analyse the return on average assets, return on average equity, the ratio of total capital, and also for analysing risk ratio of net loans to total assets. Doing so, he found that Islamic banks were less liquid than conventional banks. However, the results also show that the return on average assets and the average assets and the return on equity achieved by Islamic banks tended to be higher than that recorded by conventional banks (for Islamic banks at 47.5%, 7.92, 18.9 compare to conventional banks at 29.5%, 6.63, 18.2 respectively). In terms of risk, Islamic banks appear to be more risky than conventional banks (Risk for Islamic banks 52% compared to 45% Risk for conventional banks).

Moreover, Al-Yahia (2008) discussed several pertinent points. Firstly, he assessed the performance of Islamic banks compared with conventional banks in Jordan. Secondly, comparing the performance of two of the Jordanian Islamic banks against each other during a period of six years from 2000-2006, the researcher used two methods of analysis on the basis of Financial Ratio Analysis (FRA) and the Data Envelopment Analysis model (DBA). The results showed that conventional banks outperformed Islamic banks. The study also included a comparison between the two Islamic banks. Finally, the study recommended improving the profitability ratios and liquidity in Islamic banks in Jordan, and also recommended improving and developing customer service.

Samad and Hassan (2000) evaluated the intertemporal and interbank performance of Bank Islam Malaysia Berhad (BIMB) in terms of profitability, liquidity, risk and solvency and community involvement for 14 years from the period 1984-1997 and compared these findings with similar data for eight conventional banks. This study used rates of financial analysis to measure performance, and employed the ANOVA F-test and T test to determine significance. The results showed that BIMB was more liquid and less risky relative to a set of eight conventional banks.

Alnashwan (2008) discussed the history and the definition of Islamic banks in terms of activities and specifically focussed on the emergence of Islamic banks in the Middle East, banks that operate in accordance with Islamic principles, and banks that avoid high-risk activities. This resulted in a sample of 64 Islamic banks from across the Middle East being selected. He used in the study the financial analysis and performance measurement through the analysis of return on average assets (ROAA), return on average equity (ROAE) and uses the regression equation, testing the hypotheses to determine the validity of the results. The results to the few differences in performance between Islamic banks and conventional banks, the differences do not affect each of these types of banks. The results also indicated, too, that there were no clear indications on the performance of banks, and conclusions are made that the most important factors in the performance of banks is the efficiency of its administration.

Obadah (2008), discussed the definition of the performance of Islamic banks, and can identify indicators of Islamic banks. He also discussed the possibility of finding methods of development and discrimination, which could raise the performance of Islamic banks. Obadah used a descriptive and inductive approach and an analytical method was also used to analyse indicators that affect the performance of Islamic banks over a period of seven years from 1999 -2005. The sample size was only five Islamic banks, two from the UAE, two from Jordan and one from Bahrain.The study found a number of criteria related to achieving the goals of profitability and capital preservation, such as a standard marketing, financial engineering standard, the standard efficient management of profitability, criteria for liquidity management, risk management, and capital adequacy, also select multiple indicators to measure the performance of the previous criteria.


  1. Islamic banks need to adopt a unified database to facilitate the work of researchers in the evaluation of banks.
  2. Follow-up and analysis of access to common performance indicators and to ensure the quality of financial products used in Islamic banks.
  3. The need for disclosure of data on performance indicators in Islamic banks in order to facilitate the work of researchers.

Hussein (2004) studied the performance of banks in the Kingdom of Bahrain, a country which enjoyed a leading position in the provision of financial services across the Gulf region. The study sample totalled sixteen banks, including eight Islamic banks and eight conventional banks. He found that the potential profits of Islamic banks outperformed conventional banks at 75% and also outperformed the conventional banks in terms of profit efficiency, achieving an estimated efficiency score of 80% compared to conventional banks that achieved only 67%. They are also comparable with the banks of the Economic Cooperation Organization and the researcher made a number of recommendations:

  1. The need to promote the Islamic banking industry in Bahrain to accept the growing demand for financial services and products.
  2. The need to encourage institutions that can provide a number of Islamic financial services for work in the market.

Yudistira (2004) analysed the performance of Islamic banks relative to that of conventional banks using a sample of eighteen Islamic banks over a period of four years starting from 1997. The researcher in the study focused on the actions of Islamic banks, operational efficiency and profitability. The study used a unique efficiency approach that was a non-parametric method using a technical analysis of the data to assist in the analysis and measurement of the efficiency of banks. The variables used in the study were the cost of staff, fixed assets, other income, total deposits in addition to total loans and assets. The study made a number of findings regarding the values of these variables showing that there is considerable variation among the Islamic banks which resulted in high standard deviations. Yudistira explained that the presence of such deviations is a natural thing because the selected sample of banks was taken from twelve countries which means that there are economic and environmental factors have an impact. With these effects taken into consideration, the findings suggest that Islamic banks operated with high efficiency in spite of some shortcomings that influenced them between 1998 and 1999. These emerged because of the financial crisis that occurred in East Asia, which led to a negative impact on many countries around the world.

Moin (2008) discussed the history of Islamic banking in Pakistan and the main objective of this study was to evaluate the performance of the first Islamic Bank in Pakistan (MBL), compared with five conventional banks. The study was undertaken to assess the performance of Islamic banks in terms of liquidity, risk, profitability and efficiency during the period from 2003 - 2007. Using a combination of analysis of financial ratios such as return on equity, the ratio of loans to deposits and return on assets, he also conducted hypothesis testing T- test and F-test. In conclusion, Moin suggested a number of results including that the Islamic bank (MBL) was less profitable and efficient, but on the other hand also less risky than its conventional peers. But with the passage of time Islamic banks have improved dramatically, and it was clear that MBL had now come close to matching the performance of the conventional banks.

The study by Hussein (2007) made a comparative analysis of the performance between Islamic and conventional banks for the period 2002-2006, based on the standards of economy, efficiency, profitability, safety and prudence. He was also analysing the determinants of profitability in the Islamic and conventional banks through the use of the linear regression model. The study relied on taking a sample of 40 banks in the Middle East, including 15 Islamic banks and 25 conventional banks. He also adopted a number of variables to measure the return on assets, return on equity, capital assets, cost to income ratio, the ratio of net loan to total deposits and the short term funding and deployment ratio. After performing the analysis, the researcher suggested that Islamic banks have outperformed the conventional banks in a number of respects in terms of profitability and efficiency, firmness and wisdom, but on the other hand has been less effective in terms of cost (economy).

The paper by Samad (2004) compared the performance of Islamic banks in Bahrain with conventional banks in terms of liquidity risk, credit risk and profitability for a period of ten years after the Second Gulf War from the period 1991-2001. The sample size in this study was twenty-one banks, six of which were Islamic banks, while fifteen were conventional banks. Three methods were used to measure Profitability Performance, Liquidity Performance and Credit (loan) Risk Performance. In addition, nine financial ratios were used for the purpose of measurement. The findings of this paper suggest that there is very little difference between Islamic banks and conventional banks with respect to liquidity risk and profitability, but for insurance against risk, the study found a significant difference in performance.

Bashir (2001) examined the efficiency of Islamic banks in the Middle East from 1993 to 1998 taking a sample of 40 banks from eight countries across the Middle East. Moreover, regression analysis was used to determine the efficiency of banks and endogenous variables were used for return on assets, return on equity and non interest margin. He also assumed that the Islamic banks were sufficiently competent. The results reached by the Bashir confirm that foreign banks were more profitable than domestic banks.

In conclusion, it can be noted from previous studies that there is a difference in the results. This difference is simple to understand and it can be concluded that most of the results suggest that the Islamic banks, especially in the Middle East, offer superior profitability, liquidity and performance when compared to conventional banks. Also, some results suggest that Islamic banks have higher risks than conventional banks, and in the end, these differences are normal because there is a difference in the sample, the period and the region being studied.

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