Banking System in the MENA Region:
A Comparative Analysis Between
Conventional and Islamic Banking
in the UAE
Fiona Mrad and Miroslav Mateev
Abstract
This paper investigates the banking systems in the MENA
region and compares the performance of conventional and
Islamic banks in the UAE, using descriptive, correlation,
and multiple regression analyses to analyze their efficiency and profitability. The analysis uses a sample of
352 observations from 32 banks, for 11 years (2005–
2015). We find a significant difference in cost efficiency
between conventional and Islamic banks in the UAE. The
impact of bank-level characteristics and capital adequacy
measures on a bank’s cost efficiency is strong in both
types of banks. Risk-taking has a strong influence on the
cost efficiency of conventional banks, but this effect is
insignificant for Islamic banks. We find that profitability
is not significantly different between conventional and
Islamic banks. The effect of capital adequacy measures on
a bank’s profitability is strongly significant only in the
group of conventional banks. However, Islamic banks’
profitability is more responsive to risk-taking. We are
suggesting that since Islamic and conventional banks are
governed by different rules and principles, then setting up
and implementation of regulations should be different for
each type of bank to improve their financial performance,
compliance standing, and risk assessment. We also
recommend that banking systems in the MENA region
should increase their ability to adapt applicable reforms
and share the Islamic banking principles and instruments
as they are more efficient toward the social responsibility
and the risk effects.
Keywords
MENA region Á Conventional banking Á Islamic
banking Á Cost efficiency Á Profitability Á
Financial crisis
1 Introduction
The Middle East and North Africa (MENA) region has faced
several key challenges and conflicts over the last decade and
is still recovering from interacting crises ensued from
political issues, civil wars, terrorism, economic crisis, oil
prices, and revenues decline (Ghenimi et al. 2017). As a
result, the increase in volatility of commodity prices and
inflation have caused monetary policy to be less accommodative which in turn led to increasing the potential risk
and policy uncertainty over the long run, especially in the oil
trading markets; reforms were essential to boost and rebound
potential outputs in the economic growth over the long term
(Lassoueda et al. 2017). The MENA countries are enduring
challenges and setting economic agendas, reforming policies, and government effectiveness to reach political stability, economic growth, and sustainability (Ghenimi et al.
2015), but because of the uncertainty, it is very challenging
for these countries to adequately tackle the issues with risk
and corruption (Shaukat et al. 2017).
Over the last decade, the Islamic banking and finance in
the MENA region recorded a rapid growth of 10–12% on an
annual basis, and increased coverage of Shari’ah compliance
by financial institutions, banks, capital markets, and insurance companies (The World Bank 2015). Islamic finance is
based on Shari’ah principles with emphasis on equity, ethicality, sustainability, economic and social responsibility,
avoidance of oppression, and risk sharing (Addawe 2012).
The impact of the financial crisis in 2008–2009 caused panic
in the region’s banking system and highlighted the banking
system’s behavior toward risk. The financial crisis impact
F. Mrad Á M. Mateev (&)
American University in the Emirates, Dubai, UAE
e-mail: miroslav.mateev@aue.ae
F. Mrad
e-mail: mrad.fiona@yahoo.com
© Springer Nature Switzerland AG 2020
M. Mateev and J. Nightingale (eds.), Sustainable Development and Social Responsibility—Volume 1,
Advances in Science, Technology & Innovation, https://doi.org/10.1007/978-3-030-32922-8_6
61
A Comparative Analysis Between
Conventional and Islamic Banking
in the UAE
Fiona Mrad and Miroslav Mateev
Abstract
This paper investigates the banking systems in the MENA
region and compares the performance of conventional and
Islamic banks in the UAE, using descriptive, correlation,
and multiple regression analyses to analyze their efficiency and profitability. The analysis uses a sample of
352 observations from 32 banks, for 11 years (2005–
2015). We find a significant difference in cost efficiency
between conventional and Islamic banks in the UAE. The
impact of bank-level characteristics and capital adequacy
measures on a bank’s cost efficiency is strong in both
types of banks. Risk-taking has a strong influence on the
cost efficiency of conventional banks, but this effect is
insignificant for Islamic banks. We find that profitability
is not significantly different between conventional and
Islamic banks. The effect of capital adequacy measures on
a bank’s profitability is strongly significant only in the
group of conventional banks. However, Islamic banks’
profitability is more responsive to risk-taking. We are
suggesting that since Islamic and conventional banks are
governed by different rules and principles, then setting up
and implementation of regulations should be different for
each type of bank to improve their financial performance,
compliance standing, and risk assessment. We also
recommend that banking systems in the MENA region
should increase their ability to adapt applicable reforms
and share the Islamic banking principles and instruments
as they are more efficient toward the social responsibility
and the risk effects.
Keywords
MENA region Á Conventional banking Á Islamic
banking Á Cost efficiency Á Profitability Á
Financial crisis
1 Introduction
The Middle East and North Africa (MENA) region has faced
several key challenges and conflicts over the last decade and
is still recovering from interacting crises ensued from
political issues, civil wars, terrorism, economic crisis, oil
prices, and revenues decline (Ghenimi et al. 2017). As a
result, the increase in volatility of commodity prices and
inflation have caused monetary policy to be less accommodative which in turn led to increasing the potential risk
and policy uncertainty over the long run, especially in the oil
trading markets; reforms were essential to boost and rebound
potential outputs in the economic growth over the long term
(Lassoueda et al. 2017). The MENA countries are enduring
challenges and setting economic agendas, reforming policies, and government effectiveness to reach political stability, economic growth, and sustainability (Ghenimi et al.
2015), but because of the uncertainty, it is very challenging
for these countries to adequately tackle the issues with risk
and corruption (Shaukat et al. 2017).
Over the last decade, the Islamic banking and finance in
the MENA region recorded a rapid growth of 10–12% on an
annual basis, and increased coverage of Shari’ah compliance
by financial institutions, banks, capital markets, and insurance companies (The World Bank 2015). Islamic finance is
based on Shari’ah principles with emphasis on equity, ethicality, sustainability, economic and social responsibility,
avoidance of oppression, and risk sharing (Addawe 2012).
The impact of the financial crisis in 2008–2009 caused panic
in the region’s banking system and highlighted the banking
system’s behavior toward risk. The financial crisis impact
F. Mrad Á M. Mateev (&)
American University in the Emirates, Dubai, UAE
e-mail: miroslav.mateev@aue.ae
F. Mrad
e-mail: mrad.fiona@yahoo.com
© Springer Nature Switzerland AG 2020
M. Mateev and J. Nightingale (eds.), Sustainable Development and Social Responsibility—Volume 1,
Advances in Science, Technology & Innovation, https://doi.org/10.1007/978-3-030-32922-8_6
61