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Master Thesis University of Twente Faculty of Behavioural, Management and Social sciences Master Thesis Does the banking system affect banks’ performance? Islamic vs. conventional banking Sophie B. Blasig Business Administration M.Sc. Financial Management Examination committee: First supervisor: Dr. H. C. van Beusichem Second supervisor: Dr. S. A. G. Essa Date of submission: 11.07.2017 Colloquium date: 19.07.2017 Acknowledgement I would like to express my sincere gratitude to Dr. H. C. van Beusichem for his supervision and support. I am grateful for his profound feedback and insightful comments that were pivotal for improving my master thesis. Furthermore I would like to thank Dr. S. A. G. Essa for his useful remarks and suggestions to finalize the thesis. I would like to thank everyone that accompanied me during the master degree, especially my family for always supporting me. Further, I want to thank all my friends that I met at university or already know since (primary) school for encouraging me in difficult times. During my time as a master student I learned a lot in the field of business administration and this thesis allowed me to gain additional knowledge in the field of (Islamic) banking, but I also learned a lot about myself. Conclusively, I can say that this time allowed me to progress personally in many respects. As a last point, I want to clarify that I do not intend to promote any political opinions. Gratefully, Sophie B. Blasig i Abstract In recent years, Islamic banking experienced an upturn and gained importance on the world’s financial markets. However, evidence in the literature on differences in performance with respect to conventional banks is often diverging or inconclusive. In this master thesis, both bank types are compared in terms of profitability, efficiency, liquidity, solvency and credit risk based on financial ratios. Investigated are banks from Bangladesh, Bahrain, Jordan, Kuwait, Malaysia, Oman, Qatar, Saudi Arabia and the United Arab Emirates for the years 2008 to 2015. The results of a two sample t- test reveal that conventional banks outperform Islamic banks in respect of most dimensions. Although Islamic banks are more liquid and perform better in one efficiency ratio, conventional banks prevail with respect to profitability, solvency and credit risk. A logistic regression analysis shows that banks can be significantly categorized into being conventional or Islamic based on efficiency, liquidity and credit risk ratios. Finally, ordinary least squares regressions show that the financial performance as such is determined largely similar for both Islamic and conventional banks as significant differences exist only for three out of ten ratios. Some of the findings contradict studies that were carried out before the onset of the financial crisis in 2008 and support the results of more recent studies. The results further indicate that there are differences in performance across countries, especially with respect to Islamic banks. ii Table of contents 1. Introduction ..................................................................................................................................... - 1 - 2. Literature review ............................................................................................................................. - 4 - 2.1 Tasks and purposes of banks in general .................................................................................... - 4 - 2.1.1 Banking in the countries under study ................................................................................ - 6 - 2.1.2 Differences for Islamic banks ............................................................................................. - 6 - 2.2 The rise of Islamic banking and its scope today ........................................................................ - 7 - 2.3 Principles and concepts of Islamic banking ............................................................................. - 10 - 2.4 Comparability of Islamic and conventional banks ................................................................... - 18 - 2.5 Literature review and hypothesis development ..................................................................... - 19 - 2.5.1 Consensus and ambiguities .................................................................................................. - 19 - 2.5.2 Bank performance and its dimensions ................................................................................. - 20 - 3. Methodology ................................................................................................................................. - 27 - 3.1 Country selection..................................................................................................................... - 27 - 3.2 Data collection ......................................................................................................................... - 27 - 3.3 Operationalization of variables ............................................................................................... - 28 - 3.4 Research methods ................................................................................................................... - 29 - 3.4.1 Bivariate analysis .................................................................................................................. - 29 - 3.4.2 Multivariate analysis ............................................................................................................ - 30 - 4. Data analysis .................................................................................................................................. - 32 - 4.1 Sample characteristics ............................................................................................................. - 32 - 4.2 Descriptive statistics ................................................................................................................ - 32 - 4.3 Empirical results ...................................................................................................................... - 37 - 4.3.1 Correlation ........................................................................................................................ - 37 - 4.3.2 Logistic regression analysis ............................................................................................... - 39 - 4.3.3 OLS regression analysis .................................................................................................... - 39 - 5. Discussion ...................................................................................................................................... - 50 - 6. Conclusion ..................................................................................................................................... - 54 - References ......................................................................................................................................... - 56 - Appendix A: Country information ..................................................................................................... - 63 - Appendix B: Summary of previous research ..................................................................................... - 64 - Appendix C: Logistic regression with absolute numbers .................................................................. - 67 - Appendix D: Two sample t-test with a split sample .......................................................................... - 68 - iii Table of tables Table 1: Share of Muslim population in the countries under study in 2010 ....................................... - 9 - Table 2: Share of Islamic banking per country in 2015 ....................................................................... - 9 - Table 3: Balance sheet of an Islamic and a conventional bank ......................................................... - 17 - Table 4: Studies related to the six dimensions .................................................................................. - 21 - Table 5: Variables applied in this study ............................................................................................. - 28 - Table 6: The sample ........................................................................................................................... - 32 - Table 7: Descriptive statistics ............................................................................................................ - 33 - Table 8: Correlations ......................................................................................................................... - 38 - Table 9: Logistic regression with values in percentages ................................................................... - 40 - Table 10: OLS regression: Conventional banks with ROA as dependent variable ............................ - 42 - Table 11: OLS regression: Conventional banks with ROE as dependent variable ............................. - 43 - Table 12: OLS regression: Islamic banks with ROA as dependent variable ....................................... - 46 - Table 13: OLS regression: Islamic banks with ROE as dependent variable ....................................... - 47 - Table of figures Figure 1: Distribution of Islamic banking assets 2010-2014 ................................................................ - 8 - Figure 2: ROA between 2008 and 2014 ............................................................................................. - 35 - Figure 3: ROE between 2008 and 2014 ............................................................................................
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