The Shari’ah key principles of Islamic Banking transactions in business and trading are as follows (Alharbi 2015):
• Prohibition of interest on all payment and receipt transactions (Riba).
• Prohibition of financing immoral businesses or illicit
sectors (Haram).
1
• Prohibition of financing gambling activities and projects
(Maisar).
• Focuses on tangibility and real assets financing
(materiality).
• Prohibition of speculation (Gharar).
• Poor receive alms paid from the rich on their owned
assets (Zakat).
• Profit and loss sharing principle (Musharakah).
• Investment income sharing (Mudarabah).
• Returns and risks are lined (Sukuk).
Ibrahim (2015) compared the financial ratios of two UAE
banks throughout 5 years, 2002–2006, which is the precrisis
period. The study shows that the CB has better liquidity,
profitability, management capacity, and capital structure;
however, the IB is more stable in the market performance
indicators (market value, price earnings ratio, market value
to book value, and earnings per share).
Tabash et al. 2017 examine the profitability and the main
determinants of banks performance of 14 CBs and five IBs
based in the UAE in the precrisis and the crisis periods
(2006–2009) using Return on Assets (ROA) as a profitability
measure. The analysis shows that there is no significant
difference between the two types of banks in terms of
profitability, while there is a significant difference between
IBs and CBs in terms of liquidity, operating efficiency,
capital adequacy, and financial risk. More specifically, the
results reveal that IBs have higher operating efficiency, bank
size, and more liquidity than CBs, but have lower capital
adequacy and higher financial risk. A study of Tlemsani and
Suwaidi (2016) based on a cross-sectional analysis of 43
CBs and 8 IBs in the UAE for the period of 2007–2008
argue that during the crisis period, there was no significant
difference between CBs and IBs in terms of profitability (as
measured by ROA); IBs market share and total assets were
higher than the CBs, and they had better liquidity compared
to CBs. Ibrahim (2016) investigated the performance of the
two types of banks by examining the financial ratios on
CAMEL framework using observations for three CBs and
three IBs from 2009 to 2013. The findings show that IBs
perform better than CBs in terms of profitability, liquidity,
and efficiency but both are similar in credit risk. Faizulaye
(2011) discusses the similarities and the main differences
between conventional and Islamic banking as summarized in
Table 1.
El Massah and Al Sayed (2015) conducted an analysis
comparing the differences between five IBs and 11 CBs in
the UAE during and after the crisis (2008–2014) using
financial performance measures in four categories: profitability (Return on Assets, ROA and Return on Equity,
ROE), liquidity (Loan/Deposit, Total Loans/Total Assets,
and Cash and Portfolio Investment/Deposits), solvency
(Debt/Equity, Debt/Total Assets, and Equity Multiplier) and
credit risk (Common Equity/Total Assets, and Equity/Net
Loans). They concluded that IBs are less profitable, less
solvent, and riskier than CBs. Gebba and Aboelmaged
(2016) conducted explanatory research on 12 CBs and seven
IBs for two years (2014–2015). The study explains how CBs
and IBs are similar in terms of corporate governance and
concluded that both types of banks are characterized by high
ownership concentration. Ul-Islam and Ashrafuzzaman
(2015) analyzed the two banking systems (CBs and IBs) in
the GCC countries and found that there is no significant
difference in capital adequacy, management capability, and
earnings; a significant difference between CBs and IBs is
found in their asset quality. Furthermore, Haque and Brown
(2016) argue that ownership concentration and government
ownership have a positive influence on cost efficiency.
In conclusion, there is a limited number of previous
researches in the MENA region comparing between CBs and
IBs in terms of profitability and cost efficiency before, during, and after the global financial crisis. However, for getting
more accurate results the period should be extended to
include also the performance of banking systems after the
recovery or stability period, where the impact of the financial
crisis is still ongoing, and central banks and regulators are
imposing reforms and adjusting their policies in response to
the financial crisis, with the aim to strengthen the banking
system’s capital adequacy and liquidity in order to minimize
risks. The available comparative analysis between CBs and
IBs in the UAE is very limited; the previous studies have
compared the performance of CBs and IBs from different
perspectives using different performance indicators and different financial measurements. These studies analyze and
compare the performance of the two banking systems in
terms of profitability and cost efficiency while controlling
the specific bank-level characteristics, capital adequacy, and
risk measures, ownership structure, or crisis effects; therefore, the results are indifferent and conflicting. Moreover, the
previous studies of banking systems in the UAE lack a
comparative analysis based on more extended periods, the
size of the samples was relatively small and there was no
clear evidence on the difference in the banking systems’
1
Discouragement of the production of goods and services which
contradict with the Islam values, e.g., alcoholic beverages, non-halal
poultry, and pork. Halal: adhere to Shari’ah principles. Haram:
contradictory to Shari’ah principles.
Banking System in the MENA Region: A Comparative Analysis …
63
• Prohibition of interest on all payment and receipt transactions (Riba).
• Prohibition of financing immoral businesses or illicit
sectors (Haram).
1
• Prohibition of financing gambling activities and projects
(Maisar).
• Focuses on tangibility and real assets financing
(materiality).
• Prohibition of speculation (Gharar).
• Poor receive alms paid from the rich on their owned
assets (Zakat).
• Profit and loss sharing principle (Musharakah).
• Investment income sharing (Mudarabah).
• Returns and risks are lined (Sukuk).
Ibrahim (2015) compared the financial ratios of two UAE
banks throughout 5 years, 2002–2006, which is the precrisis
period. The study shows that the CB has better liquidity,
profitability, management capacity, and capital structure;
however, the IB is more stable in the market performance
indicators (market value, price earnings ratio, market value
to book value, and earnings per share).
Tabash et al. 2017 examine the profitability and the main
determinants of banks performance of 14 CBs and five IBs
based in the UAE in the precrisis and the crisis periods
(2006–2009) using Return on Assets (ROA) as a profitability
measure. The analysis shows that there is no significant
difference between the two types of banks in terms of
profitability, while there is a significant difference between
IBs and CBs in terms of liquidity, operating efficiency,
capital adequacy, and financial risk. More specifically, the
results reveal that IBs have higher operating efficiency, bank
size, and more liquidity than CBs, but have lower capital
adequacy and higher financial risk. A study of Tlemsani and
Suwaidi (2016) based on a cross-sectional analysis of 43
CBs and 8 IBs in the UAE for the period of 2007–2008
argue that during the crisis period, there was no significant
difference between CBs and IBs in terms of profitability (as
measured by ROA); IBs market share and total assets were
higher than the CBs, and they had better liquidity compared
to CBs. Ibrahim (2016) investigated the performance of the
two types of banks by examining the financial ratios on
CAMEL framework using observations for three CBs and
three IBs from 2009 to 2013. The findings show that IBs
perform better than CBs in terms of profitability, liquidity,
and efficiency but both are similar in credit risk. Faizulaye
(2011) discusses the similarities and the main differences
between conventional and Islamic banking as summarized in
Table 1.
El Massah and Al Sayed (2015) conducted an analysis
comparing the differences between five IBs and 11 CBs in
the UAE during and after the crisis (2008–2014) using
financial performance measures in four categories: profitability (Return on Assets, ROA and Return on Equity,
ROE), liquidity (Loan/Deposit, Total Loans/Total Assets,
and Cash and Portfolio Investment/Deposits), solvency
(Debt/Equity, Debt/Total Assets, and Equity Multiplier) and
credit risk (Common Equity/Total Assets, and Equity/Net
Loans). They concluded that IBs are less profitable, less
solvent, and riskier than CBs. Gebba and Aboelmaged
(2016) conducted explanatory research on 12 CBs and seven
IBs for two years (2014–2015). The study explains how CBs
and IBs are similar in terms of corporate governance and
concluded that both types of banks are characterized by high
ownership concentration. Ul-Islam and Ashrafuzzaman
(2015) analyzed the two banking systems (CBs and IBs) in
the GCC countries and found that there is no significant
difference in capital adequacy, management capability, and
earnings; a significant difference between CBs and IBs is
found in their asset quality. Furthermore, Haque and Brown
(2016) argue that ownership concentration and government
ownership have a positive influence on cost efficiency.
In conclusion, there is a limited number of previous
researches in the MENA region comparing between CBs and
IBs in terms of profitability and cost efficiency before, during, and after the global financial crisis. However, for getting
more accurate results the period should be extended to
include also the performance of banking systems after the
recovery or stability period, where the impact of the financial
crisis is still ongoing, and central banks and regulators are
imposing reforms and adjusting their policies in response to
the financial crisis, with the aim to strengthen the banking
system’s capital adequacy and liquidity in order to minimize
risks. The available comparative analysis between CBs and
IBs in the UAE is very limited; the previous studies have
compared the performance of CBs and IBs from different
perspectives using different performance indicators and different financial measurements. These studies analyze and
compare the performance of the two banking systems in
terms of profitability and cost efficiency while controlling
the specific bank-level characteristics, capital adequacy, and
risk measures, ownership structure, or crisis effects; therefore, the results are indifferent and conflicting. Moreover, the
previous studies of banking systems in the UAE lack a
comparative analysis based on more extended periods, the
size of the samples was relatively small and there was no
clear evidence on the difference in the banking systems’
1
Discouragement of the production of goods and services which
contradict with the Islam values, e.g., alcoholic beverages, non-halal
poultry, and pork. Halal: adhere to Shari’ah principles. Haram:
contradictory to Shari’ah principles.
Banking System in the MENA Region: A Comparative Analysis …
63