A Comparative Analysis of Islamic vs Conventional Banks by Evaluating Efficiency, Credit Quality and Business Model

Abstract

This study utilizes a comprehensive dataset of 62 Islamic banks and 218 conventional banks across 20 countries, having dual banking system, from 1995 to 2020 to examine differences in business models, efficiency, and credit quality between the two banking types. The study finds that IBs and CBs tend to behave differently during the sampled period in terms of efficiency, credit quality and business model. Islamic banks demonstrate superior performance than conventional banks possess better credit quality and possess more diversified business model. The better performance of Islamic banks is mainly due to their superior risk management practices as mandated by the Shariah rules. Risk and return sharing remained the key driver behind this behavior of Islamic banks. The conclusion suggests that IBs need to achieve critical mass to reduce their costs and they need to introduce more innovative instruments to deal with the changing business environment across different countries.