effect of ROA is strongly significant and positive in the
postcrisis period but negative in the precrisis and crisis
period. Similar to Table 9, the effect of capital adequacy
measures on cost efficiency is found to be strongly significant and positive in the postcrisis period and the full sample
period but less pronounced in the precrisis and crisis period.
The effect on a bank’s profitability as measured
by EARTA before, during, and after the crisis is reported
in Table 11. The effect of bank-level characteristics,
risk-taking, and ownership structure seems to be weak during the precrisis period and the full sample period. However,
we find more evidence for a significant effect on profitability
during the postcrisis period (Deposit/Assets, Income Diversity, and Non-Interest Income are all strongly significant).
Finally, the effect on a bank’s profitability as measured by
EARGL is presented in Table 12. Bank specific characteristics such as Loan/Assets ratio, Income Diversity, and
Non-Interest Income are the only bank characteristics that
strongly influence bank profitability during the precrisis and
crisis period. Capital adequacy ratios and risk measures seem
to have no effect on bank profitability in all analyzed
periods.
In conclusion, we find that bank level and other effects
are more pronounced in the postcrisis period, suggesting
some improvements after the global financial crisis, which
also saw the implementation of the Basel II framework.
These improvements indicate that the positive effect of
Basel II implementation and other developments is more
significant on bank cost efficiency than bank profitability.
6 Conclusion and Recommendations
Banking systems in the MENA region are vital and significantly contribute to the economy as a monetary strategy
instrument for governments to facilitate the development
plans and economic growth in these countries. On the other
hand, banking systems can be affected by the global economic crises and the political, economic, and social development of the countries in the region. The consequences of
the recent financial crises are still ongoing, and the banking
systems are not fully recovered. This study analyzes the
difference in the performance of CBs and IBs in the UAE,
throughout 2005–2015. We find that the profitability of the
UAE banks is not significantly different between CBs and
IBs; however, IBs profitability is more responsive to the
risk-taking as measured by distance to default Log(Z). Bank
specific characteristics have a strong impact on a bank’s
profitability only in the group of CBs. We observe a significant influence of capital adequacy measures on the
profitability of CBs, but this effect is insignificant for IBs.
The crisis seems to have a limited impact on bank profitability of both types of banks.
Additionally, we find that the effect of bank-level characteristics and capital adequacy measures on a bank’s cost
efficiency is significant in both groups of banks; yet, this
effect seems to be more pronounced in the sample of CBs.
However, we observe a significant difference in the effect of
risk-taking on cost efficiency between CBs and IBs; whereas
the lower risk is associated with an improvement in cost
efficiency in the group of CBs; this effect is insignificant for
IBs. The effect of the crisis on cost efficiency, when measured by CIR, is found to be significant in both samples of
UAE banks, but insignificant for CBs when measured by
NIM. Finally, we provide evidence that the effect of ownership structure is not significantly different between the two
banking systems. We find limited evidence that Foreign
ownership has a significant effect on both cost efficiency and
profitability of CBs but is insignificant for IBs.
As a result of our analysis, we may recommend that the
banking system in the MENA region should increase its
ability to adopt applicable reforms aligned with the regulatory rules. Since IBs and CBs are governed by different rules
and principles and can be affected differently by global
financial crises, then setting up and implementation of regulations should be different for each type of banking systems
to improve their financial performance, compliance standing,
and risk assessment. The banking practices and products that
comply with Shari’ah principles give an outlook on bank
transparency and benefits, even though the CBs are more
cost-efficient than the IBs, but the Islamic banking principles
and instruments are more efficient toward the social
responsibility and the risk effects. As the effect of Liquid
Assets was found negative and strongly significant for CBs,
we may conclude that liquidity is an essential tool to
improve their performance and reduce potential losses. For
individual banks and financial companies, risk assessment
policies should be considered and tailored with the bank’s
business models, size, products, and services. For individual
clients and small businesses, this study offers an outlook of
the banking products and an in-depth comparative analysis
of CBs and IBs performance based on their bank-specific
characteristics, capital adequacy, and risk-taking; it also
depends on clients’ expectations of the short- or long-term
investments, financing, or profit-making a well as the option
to avoid risk.
References
Addawe, S. (2012). What are the impacts of the global financial crisis
on Islamic banking system and how Islamic bank spared from the
crisis? Master’s thesis, Aalto University, School of Economics,
Department of Accounting.
Alharbi, A. (2015). Development of the Islamic banking system.
Journal of Islamic Banking and Finance, 3(1).
84
F. Mrad and M. Mateev
postcrisis period but negative in the precrisis and crisis
period. Similar to Table 9, the effect of capital adequacy
measures on cost efficiency is found to be strongly significant and positive in the postcrisis period and the full sample
period but less pronounced in the precrisis and crisis period.
The effect on a bank’s profitability as measured
by EARTA before, during, and after the crisis is reported
in Table 11. The effect of bank-level characteristics,
risk-taking, and ownership structure seems to be weak during the precrisis period and the full sample period. However,
we find more evidence for a significant effect on profitability
during the postcrisis period (Deposit/Assets, Income Diversity, and Non-Interest Income are all strongly significant).
Finally, the effect on a bank’s profitability as measured by
EARGL is presented in Table 12. Bank specific characteristics such as Loan/Assets ratio, Income Diversity, and
Non-Interest Income are the only bank characteristics that
strongly influence bank profitability during the precrisis and
crisis period. Capital adequacy ratios and risk measures seem
to have no effect on bank profitability in all analyzed
periods.
In conclusion, we find that bank level and other effects
are more pronounced in the postcrisis period, suggesting
some improvements after the global financial crisis, which
also saw the implementation of the Basel II framework.
These improvements indicate that the positive effect of
Basel II implementation and other developments is more
significant on bank cost efficiency than bank profitability.
6 Conclusion and Recommendations
Banking systems in the MENA region are vital and significantly contribute to the economy as a monetary strategy
instrument for governments to facilitate the development
plans and economic growth in these countries. On the other
hand, banking systems can be affected by the global economic crises and the political, economic, and social development of the countries in the region. The consequences of
the recent financial crises are still ongoing, and the banking
systems are not fully recovered. This study analyzes the
difference in the performance of CBs and IBs in the UAE,
throughout 2005–2015. We find that the profitability of the
UAE banks is not significantly different between CBs and
IBs; however, IBs profitability is more responsive to the
risk-taking as measured by distance to default Log(Z). Bank
specific characteristics have a strong impact on a bank’s
profitability only in the group of CBs. We observe a significant influence of capital adequacy measures on the
profitability of CBs, but this effect is insignificant for IBs.
The crisis seems to have a limited impact on bank profitability of both types of banks.
Additionally, we find that the effect of bank-level characteristics and capital adequacy measures on a bank’s cost
efficiency is significant in both groups of banks; yet, this
effect seems to be more pronounced in the sample of CBs.
However, we observe a significant difference in the effect of
risk-taking on cost efficiency between CBs and IBs; whereas
the lower risk is associated with an improvement in cost
efficiency in the group of CBs; this effect is insignificant for
IBs. The effect of the crisis on cost efficiency, when measured by CIR, is found to be significant in both samples of
UAE banks, but insignificant for CBs when measured by
NIM. Finally, we provide evidence that the effect of ownership structure is not significantly different between the two
banking systems. We find limited evidence that Foreign
ownership has a significant effect on both cost efficiency and
profitability of CBs but is insignificant for IBs.
As a result of our analysis, we may recommend that the
banking system in the MENA region should increase its
ability to adopt applicable reforms aligned with the regulatory rules. Since IBs and CBs are governed by different rules
and principles and can be affected differently by global
financial crises, then setting up and implementation of regulations should be different for each type of banking systems
to improve their financial performance, compliance standing,
and risk assessment. The banking practices and products that
comply with Shari’ah principles give an outlook on bank
transparency and benefits, even though the CBs are more
cost-efficient than the IBs, but the Islamic banking principles
and instruments are more efficient toward the social
responsibility and the risk effects. As the effect of Liquid
Assets was found negative and strongly significant for CBs,
we may conclude that liquidity is an essential tool to
improve their performance and reduce potential losses. For
individual banks and financial companies, risk assessment
policies should be considered and tailored with the bank’s
business models, size, products, and services. For individual
clients and small businesses, this study offers an outlook of
the banking products and an in-depth comparative analysis
of CBs and IBs performance based on their bank-specific
characteristics, capital adequacy, and risk-taking; it also
depends on clients’ expectations of the short- or long-term
investments, financing, or profit-making a well as the option
to avoid risk.
References
Addawe, S. (2012). What are the impacts of the global financial crisis
on Islamic banking system and how Islamic bank spared from the
crisis? Master’s thesis, Aalto University, School of Economics,
Department of Accounting.
Alharbi, A. (2015). Development of the Islamic banking system.
Journal of Islamic Banking and Finance, 3(1).
84
F. Mrad and M. Mateev