The Difference Between Performance Of Islamic Banks And Conventional Banks Before And During Financial Crisis

Global Islamic banking continues to be an exciting growth story characterized by robust macro outlook of core Islamic

There are few studies on customer perceptions number of Islamic banking services. Study from Erol and El-Adour (1989) and Erol et al. (1990) is regarded as the earliest investigate the factors that influence the customer to choose Islamic banking. Using both conventional and Muslim banking customers as respondents, the study found that the provision of services quickly and efficiently, the bank's reputation and confidentiality are the most important selection criteria for bank customers who visit the Islamic banks. In their study, found religion plays a less important role in the customer's decision to deal with Islamic banks.

Banking and financial institutions are central to the survival of any economy and are highly regulated due to their intermediation and asset transformation roles. Banks strive to remain profitable and in the process are exposed to risk. Various profitability and risk metrics have been in use to evaluate the performance of banks but the 2007/2008 financial crisis has changed the way stakeholders in the financial industry assess profitability and risk performance of banks.

In most jurisdictions where Islamic banks operate, they have to compete with conventional banks involved in interest-based borrowing and lending. The legal framework governing the licensing of banks and their regulation was designed primarily for conventional institu¬tions, not least as there were no Islamic banks in existence in most cases when the banking laws were drafted. Three choices therefore arise: firstly, whether Islamic banks can be accommodated within existing legal provision, whether the existing banking legislation requires amendment or, more radically, whether new legislation is necessary.

Petrodollar flows have been among the major factors supporting the growth of the Islamic finance industry ever since the 1960s GIFF (2010). The rising petrodollar flows in global markets imply continued and increasing petrodollar investments in the Islamic finance sector. This has led to a surge of interest in the Islamic Finance sector, with more and more countries positioning themselves as strategic locations to tap into part of this abundant pool of funds. For instance, a number of countries worldwide have announced their plans to issue Sukuk (Islamic bonds) and thus meet their financing needs by attracting high net worth investors (HNWIs) and wealth from the Middle East region. HNWIs are particularly on the look-out for efficient and secure jurisdictions for investing their funds, more so in the context of the present economic downturn . Operating in a facilitative business environment and reducing cost of operations are deemed instrumental factors for market players. Accordingly, a number of jurisdictions have actively encouraged the development of their Islamic capital markets as a key strategy for attracting both HNWIs and Islamic finance businesses . In particular, it has been observed that jurisdictions from across the world are developing their Islamic capital markets by utilising the efficiency provided by Offshore Financial Centres (OFCs) to structure Shari’ah compliant products which adhere to the

While the global economic condition is still recovering from crisis, many argue that the process is uneven and susceptible to shock (Bank Indonesia, 2015). The recovery process tends to slow down as there is weakened commodity prices and foreign investment, and these factors are inevitably affecting the growth rate of Indonesia. GDP growth is falling from 6.3% in 2007 to a forecasted growth rate of 5.5% in 2015 (Asian Development Bank, 2015). In this case, as a financial intermediary, banks have a strategic role in supporting the national economic growth. It is believed that efficient banking system is essential for the country development. Therefore, a study looking at the efficiency and profitability of Indonesian banks is substantial as it will signal the growth of the Indonesian economy in the future.

Islamic financial institutions are growing faster all around the world. Most in Muslim countries, conventional and Islamic financial institutions exist side by side, interacting with one another. The development of Islamic financial institutions has the potential to play a leading role in serving the Muslim Ummah and contribute towards socio-economic development of Muslim countries in conformity with Islamic sensibilities.

Forty years ago, the Islamic banking industry was created, on a modest scale, to fill a gap in a banking system that was not listening to the fervent Muslim believers. Morocco has been following the same development in offering Islamic finance services to its citizens through Islamic windows in conventional banks. In parallel to this development of the Islamic financial industry in Morocco, it seems very crucial to evaluate critically based on Maliki law school the previous experience of Islamic windows in conventional banks. Taking into considerations, the differences between schools in the interpretation and implementation of Islamic law in economy life, the objective of this paper was to critically analysis the practice of Islamic banks in Morocco. This paper aimed at analyzing the characteristics of different schools of Islamic law and how this would affect Islamic banking. The final aim of this paper was to highlight the importance of jurisprudence/ new interpretations in developing Islamic banking. Qualitative methodology based on semi directive interviewees was the main approach for this paper. Three levels of gaps have been found out. These gaps are related respectively to Murabaha, Musharaka and Ijara. Three recommendations have been advised to fill the gaps: Absolute isolation of Fund, Sharia auditing committee And Compliance with AAOIFI Standards

In the Islamic banking system,according to sources and causes of risks, it might be an external risk which due to changes in risk policies and regulations caused by banking supervisory authorities ( regulatory risk ) or macro and external impact of benchmarks such as LIBOR interest rate factors, namely the use of determine the speed mark Islamic Bank ( known as interest rate risk ) ;There are risks to fulfill obligations related to the debtor by Islamic Banking( Credit risk ) , there are a set of risks, operational risks collectively,Islamic banks themselves , the people involved / staff, including errors, negligence and fraud, the system and the use of technology in the Islamic Banking , the proceedings and / or processes and procedures

The key differences between the Islamic Banking and the conventional banking are given below through the table.

Some studies such as [30], [31], [32], Focused on risk management and Islamic banks in the countries of Middle East. Study [32] was conducted on 421 countries Bank Middle and Far East. found that Islamic banks are less vulnerable and more stable and able to cope with the financial crisis compared to conventional banks. The study [30] sees that the most important risks to Islamic banks in the Middle East is the liquidity risk, followed by credit risk, as well as other risks the

Besides that, Islamic Banking is growing at a rate of 10-15% per year in this modern era with the signs of consistent future growth. Islamic banks have more than 300 institutions spread over 51 countries, including the United States

Omani financial regulatory bodies have finalised the amended regulatory framework for Islamic banking in the Sultanate. Alongside the GCC-based Islamic finance favourites, the reformed Islamic financial jurisdictions of MENA are entering into the limelight. Other regional developments in non-GCC countries in MENA include the Iraqi government, which has approved the establishment of the country’s first state-owned Islamic bank, the Two Rivers Islamic Bank, with an initial capital of USD21.5 million. Iraq and Libya are in the midst of designing Islamic banking legislation. Tunisia’s Islamic finance industry is expected to grow further with the efforts undertaken by that country’s government. Meanwhile, the Government of Yemen is structuring a Sukūk programme for 2014.

The challenge for Muslim countries like Bangladesh is to overcome its late entry into the market against well-established jurisdictions all over the world. Another subsequent challenge would also be to educate the masses and the other industry stakeholders regarding Islamic Problems and Prospects of Islamic Capital Market In Bangladesh 59 financial principles, products and investments. The challenge for them is to motivate authorities to provide favorable platforms and policies to make such initiatives viable. The Islamic financial operations are subjected to strange rules different from the ones applicable to the conventional operations; there are a number of challenges being faced by ICM. For instance, in many cases, the Islamic capital market has had to comply with the regulatory provisions meant for the conventional system which has an entirely different underlying objective and approach. Additionally, it should be noted that the

The paper will analyse and measure the performance of Islamic banks in comparison to conventional banks. The performances will be measured over a 5-year period from 2009 to 2015. In comparing Islamic and conventional banks, profitability and liquidity will be examined.