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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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.


The results of our study have numerous implications for bank management and the different stakeholders (investors, customers...). This study identified several factors that may help bank managers to improve their financial outlook by controlling risk level and profitability. These factors could as well help to understand how macroeconomic indicators affect both banking risk and profitability, in particular Islamic banking. Likewise, portfolio managers can use these results to support their decisions to include Islamic banks in their assets portfolios to mitigate potential risk.

Professor Mohamed Ali Trabelsi
Faculty of Economics and Management of Tunis, University of Tunis El Manar

Read the Original

This page is a summary of: Profitability and risk in interest-free banking industries: a dynamic panel data analysis, International Journal of Islamic and Middle Eastern Finance and Management, November 2017, Emerald, DOI: 10.1108/imefm-05-2016-0070.
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