Mohamed Ali Trabelsi and Naama Trad
The purpose of this paper is to examine whether Islamic finance could replace or complement the traditional financial system and could guarantee stability in times of crisis.
Abstract
Purpose
The purpose of this paper is to examine whether Islamic finance could replace or complement the traditional financial system and could guarantee stability in times of crisis.
Design/methodology/approach
To achieve the aim, the authors examined both risk-taking and profitability of 94 Islamic banks (IBs) 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 IBs as measured by return on assets and return on equity, and risk divided into credit risk measured by impaired loans/gross loans and total equity/net loans, 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.
Findings
Using dynamic panel data econometrics (generalized moment method system), the authors estimated five regressions and found the following results: bank capital is found to be the main indicator that contributes to maximizing profitability and stability of IBs and reducing their credit risk. However, the study of liquidity and asset quality determinants often leads to inconclusive results. Nevertheless, they found that Gulf region-operating IBs are more profitable, more solvent and less risky than those operating in the South East Asian region. At the macroeconomic level, the authors could not find a significant relationship between inflation rate and IBs profitability. However, unlike for IBs in Southeast Asia, the authors found that inflation rate improves IBs stability and reduces their credit risk level.
Practical implications
The results of this 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 IBs in their assets portfolios to mitigate potential risk.
Originality/value
This study contributes to the existing literature in two ways. First, this paper provides fresh data and recent information on Islamic banking in Gulf Cooperation Council 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.
Details
Keywords
Naama Trad, Houssem Rachdi, Abdelaziz Hakimi and Khaled Guesmi
This paper aims to focus on the main determinants of the performance and stability-banking sector in the Middle East and North Africa (MENA) region during the global financial…
Abstract
Purpose
This paper aims to focus on the main determinants of the performance and stability-banking sector in the Middle East and North Africa (MENA) region during the global financial crisis. Using a data set of 13 countries with both of 77 Islamic and 101 conventional banks during the period 2006-2013, empirical results show that specific variables allow explaining the change in the level of performance and stability for conventional and Islamic banks. However, the effect of some banks’ characteristics is not the same for the two bank groups. For the macroeconomic effect, it is observed that inflation exerts a negative effect on the bank performance except for conventional banks when it increases the profitability.
Design/methodology/approach
Using a data set of 13 countries with both of 77 Islamic and 101 conventional banks (CvB) during the period 2006-2013 and performing the generalized method of moments (GMM) method, the findings provide comprehensive evidence for the bank systems studied which are of interest also to policy makers and practitioners.
Findings
The main finding is that after the international financial crises of 2008, many worldwide banks have been experiencing crises in contrast to Islamic banks (IsB) which remain Gen more stable and more profitable. Foreign banks had a higher degree of exposure to risk, given their higher number of subsidiaries in the developed economies. As for the determinants of profitability, the bank-specific variables allow to explain the change in the level of performance and stability for conventional and Islamic banks. However, the effect of some banks characteristics is not the same for the two bank groups. For the macroeconomic effect, it is observed that inflation exerts a negative effect on the bank performance except for CvB when it increases the profitability measured by the return on assets (ROA). It is also found that the growth rate acts positively when the dependent variable is the ROA and negatively when the performance is measured by return on equity.
Originality/value
The inflation rate exerts a negative effect only on the ROA. This study differs from previous contributions in that it is tested the hypothesis of determinants of bank profitability and stability for both conventional and Islamic banks in the MENA region. It is of great interest to both policymakers and investors, with respect to regional development policies and dedicated portfolio investment strategies in each emerging region respectively. The authors adopted several ratios from the empirical literature on bank profitability and stability. Using a data set of 13 countries with both of 77 Islamic and 101 CvB during the period 2006-2013 and performing the GMM method, the findings have significant contributions to the literature by comprehensively clarifying and critically analyzing the current state of profitability and stability for both banks.