Rewards in faith‐based vs conventional banking

Abstract

Purpose

The purpose of this paper is to analyze the performance of conventional and Islamic paradigms of banking through profitability. Profitability of conventional and Islamic banks is compared through four authentic methods of ratio through reliable statistical data from seven countries. The healthier bank spread in the Islamic way of banking is analyzed and compared with the conventional trend of banking.

Design/methodology/approach

Profitability of two‐streams of banking are analyzed through bank spread, bank margin to total assets, non‐interest‐based costs to total assets and relationship of bank‐spread and NPBT&Z of conventional and Islamic banks. Data from 87 banks belonged to seven countries were analyzed to obtain results, of which 35 were following Islamic principles‐based products and services. Countries are selected among those which are following binary‐banking systems simultaneously. Statistical data are gathered from audited‐annual reports of these sample banks.

Findings

Islamic banks are found to reflect marginal bank spread but bear higher operational (non‐bank margin) costs.

Research limitations/implications

Statistical data are gathered from audited annual accounts of banking companies. Foreign banks are excluded in this analysis due to non‐availability of published accounts for most of such banks at country level. Further NPLs of sample banks were not available in most of sample banks, which could provide actual statistical figures for earning assets of bank.

Originality/value

The paper will be helpful in analyzing the business approach of the global, growing trend of Islamic banking.

Citation

Muhammad Khan Ghauri, S. and Sabah Obaid Qambar, A. (2012), "Rewards in faith‐based vs conventional banking", Qualitative Research in Financial Markets, Vol. 4 No. 2/3, pp. 176-196. https://doi.org/10.1108/17554171211252510