Profitability and Risk in Interest-Free Banking Industries: A Dynamic Panel Data Analysis

What is it about?

The aim of this paper is to examine whether Islamic finance could replace or complement the traditional financial system. To this end, we examined both risk-taking and profitability of 94 Islamic banks operating in 18 countries observed during the 2006-2013 financial crisis period. A series of bank-specific and other country-specific indicators are combined to explain profitability of Islamic banks as measured by ROA and ROE, and risk divided into credit risk measured by IMLGL and EQL, and insolvency risk measured by Z-SCORE. Indeed, a bank is stronger than another if it is stable with a higher capacity to absorb risks, on the one hand, and increased performance on the other.

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Photo by Wance Paleri on Unsplash

Photo by Wance Paleri on Unsplash

Why is it important?

Our study contributes to the existing literature in two ways. First, this paper provides fresh data and recent information on Islamic banking in GCC and South East Asian countries. Second, the obtained results helped us to conclude that the Islamic financial system cannot replace but rather supplements the traditional system. This result may be explained by the fact that Muslims look for Islamic banking products, which conventional banks are not offering.

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