was found to be higher in countries that are oil exporters
than oil importers. The oil price decline impacted the GCC
countries which are oil exporters, and to stabilize their
economic growth, they have to set measures to cut oil production, generate other sources of revenues, and implement
the Value Added Tax (VAT) in 2018. The commercial banks
in the region came under financial distress as the foreign
investments declined, so prices fell, and the construction
developers had to sell-off in regional markets that increased
mortgage defaults along with the drop in oil prices that
resulted in sharp decline in the stock market. IMF recommended that the MENA countries’ governments offer the
commercial banks deposit guarantees and reform the monetary policy to strengthen the banking systems (Habibi
2009).
The implications of the central banks’ monetary policy in
the MENA region contribute to a fiscal policy that aims to
increase the national GDP growth. Developments of the
banking sector and the financial liberalization helped to
improve capital efficiency and to sustain the growth rates of
investments and savings, trade and population; all these have
positive and significant contribution to the economic growth,
inflation, government size, and help overcome banking crisis
impact on the economic growth of countries in the MENA
region (Rachdi et al. 2015). The implementation of Basel III
rules will affect all the countries in the MENA region, as the
scope of Basel III guidelines and the implementation processes are on a fully consolidated basis for banks acting
internationally. Adopting the Basel III rules is promoted by
the Bank of International Settlements (BIS) as it is beneficial
to the MENA region countries in terms of future crisis and
risk avoidance, but at the same time is critical because it
implies transitional costs which can be challenging to adopt
(Gray et al. 2013).
The previous studies have investigated the performance
of the two banking systems—conventional banking
(CB) and Islamic banking (IB) in the MENA region—the
risk related to their assets, and the effect of financing modes
on the equity composition. Using a sample of 92 banks in
the Gulf Cooperation Council (GCC) region, during the
period 2006–2009, Amba and Almukharreq (2013) investigated the effect of the financial crisis on the profitability of
the IBs versus CBs. No evidence was found to support the
common view that Islamic banking has better weathered the
recent financial crisis. In another study, Olson and Zoubi
(2016) argue that the previous studies differentiate between
the two banking systems (CBs and IBs) based on the concept
of how the risk is linked to their assets and the effect of
financing modes on the equity composition. They find the
banking systems’ principles and the operational modes to be
dissimilar, and so are their performance; they examine
whether the Global Financial Crisis (GFC) has led to a
convergence in performance between CBs and IBs in the
MENA region. Their study confirms that IBs were more
profitable and more financially stable than CBs prior to the
GFC.
The main objective of this paper is to analyze the difference in the performance of CBs and IBs in the MENA
region, and more specifically, in the UAE, over the period
from 2005 to 2015, which covers precrisis, crisis, and
postcrisis periods, including the recovery and the regulatory
requirement reforms that impact on the UAE banking system’s performance (in terms of cost efficiency and profitability). The cost efficiency of the UAE banks was found to
be significantly different between CBs and IBs. Moreover,
the evidence shows that the impact of bank-level characteristics and capital adequacy measures on a bank’s cost
efficiency is strong in both types of banks. In contrast, the
analysis finds that profitability is not significantly different
between CBs and IBs, and the crisis seems to have a limited
impact on bank profitability in both types of banks.
2 Literature Review
This study draws on the findings of previous research papers
that investigated the performance of the two banking systems (IB and CB) and compare the performance of the two
banking systems in different geographical regions and
countries, including the MENA region, and more specifically, the United Arab Emirates (UAE) country, in terms of
profitability and cost efficiency. They investigate the impact
of specific bank-level characteristics, capital adequacy, risk
measures, ownership structure, or crisis on the banking
system’s performance.
Alharbi (2015) observed that the number of Islamic banks
has boosted over the years around the world, and some CBs
either have fully converted to Islamic banking or established
Islamic windows. Numerous regulatory bodies of Islamic
finance industry have been established; such examples are
the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) established in 1990 to audit
and govern financial institutions and ensure their compliance
to the Islamic Shari’ah standards, and the Islamic Financial
Services Board (IFSB) in 2002 to set Islamic financial
guidance and ensure stability.
62
F. Mrad and M. Mateev
than oil importers. The oil price decline impacted the GCC
countries which are oil exporters, and to stabilize their
economic growth, they have to set measures to cut oil production, generate other sources of revenues, and implement
the Value Added Tax (VAT) in 2018. The commercial banks
in the region came under financial distress as the foreign
investments declined, so prices fell, and the construction
developers had to sell-off in regional markets that increased
mortgage defaults along with the drop in oil prices that
resulted in sharp decline in the stock market. IMF recommended that the MENA countries’ governments offer the
commercial banks deposit guarantees and reform the monetary policy to strengthen the banking systems (Habibi
2009).
The implications of the central banks’ monetary policy in
the MENA region contribute to a fiscal policy that aims to
increase the national GDP growth. Developments of the
banking sector and the financial liberalization helped to
improve capital efficiency and to sustain the growth rates of
investments and savings, trade and population; all these have
positive and significant contribution to the economic growth,
inflation, government size, and help overcome banking crisis
impact on the economic growth of countries in the MENA
region (Rachdi et al. 2015). The implementation of Basel III
rules will affect all the countries in the MENA region, as the
scope of Basel III guidelines and the implementation processes are on a fully consolidated basis for banks acting
internationally. Adopting the Basel III rules is promoted by
the Bank of International Settlements (BIS) as it is beneficial
to the MENA region countries in terms of future crisis and
risk avoidance, but at the same time is critical because it
implies transitional costs which can be challenging to adopt
(Gray et al. 2013).
The previous studies have investigated the performance
of the two banking systems—conventional banking
(CB) and Islamic banking (IB) in the MENA region—the
risk related to their assets, and the effect of financing modes
on the equity composition. Using a sample of 92 banks in
the Gulf Cooperation Council (GCC) region, during the
period 2006–2009, Amba and Almukharreq (2013) investigated the effect of the financial crisis on the profitability of
the IBs versus CBs. No evidence was found to support the
common view that Islamic banking has better weathered the
recent financial crisis. In another study, Olson and Zoubi
(2016) argue that the previous studies differentiate between
the two banking systems (CBs and IBs) based on the concept
of how the risk is linked to their assets and the effect of
financing modes on the equity composition. They find the
banking systems’ principles and the operational modes to be
dissimilar, and so are their performance; they examine
whether the Global Financial Crisis (GFC) has led to a
convergence in performance between CBs and IBs in the
MENA region. Their study confirms that IBs were more
profitable and more financially stable than CBs prior to the
GFC.
The main objective of this paper is to analyze the difference in the performance of CBs and IBs in the MENA
region, and more specifically, in the UAE, over the period
from 2005 to 2015, which covers precrisis, crisis, and
postcrisis periods, including the recovery and the regulatory
requirement reforms that impact on the UAE banking system’s performance (in terms of cost efficiency and profitability). The cost efficiency of the UAE banks was found to
be significantly different between CBs and IBs. Moreover,
the evidence shows that the impact of bank-level characteristics and capital adequacy measures on a bank’s cost
efficiency is strong in both types of banks. In contrast, the
analysis finds that profitability is not significantly different
between CBs and IBs, and the crisis seems to have a limited
impact on bank profitability in both types of banks.
2 Literature Review
This study draws on the findings of previous research papers
that investigated the performance of the two banking systems (IB and CB) and compare the performance of the two
banking systems in different geographical regions and
countries, including the MENA region, and more specifically, the United Arab Emirates (UAE) country, in terms of
profitability and cost efficiency. They investigate the impact
of specific bank-level characteristics, capital adequacy, risk
measures, ownership structure, or crisis on the banking
system’s performance.
Alharbi (2015) observed that the number of Islamic banks
has boosted over the years around the world, and some CBs
either have fully converted to Islamic banking or established
Islamic windows. Numerous regulatory bodies of Islamic
finance industry have been established; such examples are
the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI) established in 1990 to audit
and govern financial institutions and ensure their compliance
to the Islamic Shari’ah standards, and the Islamic Financial
Services Board (IFSB) in 2002 to set Islamic financial
guidance and ensure stability.
62
F. Mrad and M. Mateev