A financial examination of the differences between Islamic and conventional banks in the MENA region based on their fundamental data and performance in recent years.

Abstract

In this project, we attempt to examine the differences between Islamic and conventional banks in the MENA region, and to ascertain whether there are fundamental differences in their operations. To do so, we begin by looking at the theoretical ways in which these two types of banks are supposed to function, and then attempt to determine whether there are real differences in their practical operations by looking at a sample of MENA banks’ financial data. The empirical part of this project entails the collection of the financial data of ten Islamic and ten conventional banks operating in the GCC, which we choose as our sample of study for the MENA region. This is followed by the creation of two consolidated sets of financial statements, one for a “mega” Islamic bank and the other for a “mega” conventional bank through the summation of the abovementioned data. A ratio analysis ensues where we study major categories of a bank’s operations. Our analysis shows that Islamic banks have a superior revenue generating capacity as compared to conventional banks, supporting the widely held view that Islamic banks charge higher rates. Moreover, Islamic banks appear to have better liquidity, and more ample capital reserves, albeit with worse asset quality. Our overall analysis also shows that Islamic banks were not affected by the 2008 financial crisis to the same extent as conventional banks, if at all. Finally, we have shown that the market continues to value Islamic banks at a premium, possibly due to the aforementioned revenue generating capabilities, its safety and resilience in the face of economic downturns, and the growth potential the industry is perceived to have.