The global financial crisis :response of fourteen Islamic banks -

Abstract

Islamic banking is one type of banking system that complies with Islamic regulations and abides by the principles of Sharia'. This sector has witnessed growth over the past few decades and had its own individual response to the Global Financial Crisis that hit the world in 2008. The aim of this project is to investigate the response of fourteen Islamic banks to the crisis. The choice of banks wasn't restricted to the Arab world, it extended to Malaysia and the United Kingdom in order to capture a more general picture. The project is divided into two parts. The theoretical part introduces the basic principles of Islamic banking, its history, and its financing tools and securities. It also covers Islamic corporate governance and risk management. This part also presents an overview of the Global Financial Crisis as well describing a number of its causes and consequences. The second part is empirical and includes two approaches are adopted. Following the collection of financial data of the fourteen Islamic banks under study, a weighted average is calculated for each of the profitability, liquidity, credit quality, and capital adequacy ratios based on the relative size of each bank. The variation in the trend of the average profitability ratios indicated that banks as a group responded negatively to the crisis, however, tended to catch up in terms of their Net Profit Margin and Return on Equity. Their average liquidity ratios revealed that these banks aimed to avoid liquidity risk, while their credit quality ratios revealed a deterioration in their portfolio over the years of the crisis. Capital adequacy ratio showed a decreasing trend as well. The second approach focused on the regression of a number of these ratios on a group of macroeconomic and financial indicators. Adopting the fixed effects method, the macroeconomic indicators had no effect on any of the ratio except the Capital adequacy, whereby the financial indicators did influence a number of ratios as discussed in the project. Finally, we discuss th