Comparison Analysis Between Islamic And Conventional Banking Finance Essay

With the on-going fiscal crisis presenting assorted hazards to the banking establishments around the universe, there is a call for particular issues on its supervising and hazard direction. Islamic fiscal establishments, nevertheless, has claimed to turn out resiliency to the crisis. Islamic fiscal merchandises has grown in demand and good sought after in the Middle-East, North Africa and South East Asia every bit good as a deriving popularity in Europe and the United States. Therefore, it is clip to cast visible radiations on this banking system and a comparing between Islamic and conventional banking system is highlighted. This paper examines the public presentations and efficiencies of about 90 Muslim Bankss and conventional Bankss during the planetary fiscal crisis by looking at the impact of the crisis on its fiscal, profitableness, proficient and cost efficiency and how they are able to extenuate the crisis is found in this survey. ( EDIT: to construe the consequences subsequently and sum it up here )

Recognition

Table OF CONTENTS

1. Introduction

1.1 Brief Introduction

Islamic banking refers to ‘financial establishment or banking system whose purposes, rules and patterns must obey with the Islamic law, Shariah and must avoid the involvement in any of its patterns ( Ahmed, 2004 ) . Hence, Islamic Bankss do non have any involvement on loans and pay involvement to its depositors. The cardinal construct in Islamic banking and finance is achieved chiefly through the sharing of hazard. Stakeholders are supposed to portion net incomes and losingss, and bear downing of involvement which is known as Riba is prohibited. Gharar, puting in contractual understanding that is unsure is besides prohibited.

Islamic banking is one of the emerging Fieldss in the planetary fiscal market, turning at a really fast gait all around the universe. It has existed on the universe scene for about three decennaries ago and most of the rules applied by the Islamic banking system were accepted around the Earth. Presently, there are more than 300 Muslim fiscal establishments exists from 75 states ( El-Qorchi, 2005 ) . The 2010 study of fiscal establishments rehearsing Islamic finance reveals that total banking assets rose by 8.85 % from $ 822bn in 2009 to $ 895bn in 2010 ( The banker, 2010 ) . Entire assets of Muslim Bankss worldwide are estimated at approximately 300 billion dollars with an one-year growing rate of more than 15 % over the last decennary ( Chong and Liu, 2009 )

Muslim Bankss are most popular in the Middle East and in South East Asiatic states where Bahrain and Malaysia acts as a major hub for its regional Islamic Financial Institutions. have the highest figure of Islamic Bankss. Over the past few old ages, Islamic Bankss have besides gained its popularity in states such as United Kingdom, Europe and in the United States. China has begun to run a test to offer Islamic merchandises by running a test at Bank of Ningxia early this twelvemonth.

One of the ground of the progressively growing of Islamic Bankss is chiefly due to the higher demand of Islamic merchandises and the addition in competitory Islamic merchandises which attracts both Muslims and non-Muslims investors. The planetary fiscal crisis has made a batch of investors lost assurance in the banking system. Some major participants in the banking industry such as HSBC and Citibank have begun to open its Islamic Windowss by offering Islamic merchandises.

The planetary fiscal crisis has affected most of the fiscal system around the universe and some governmental bureaus point up the demand for assorted signifiers of hazard direction. Based from CNNmoney.com ( Clifford, 2008 ) , there are a entire figure of 22 Bankss from the United States which are forced to shut down as a consequence from the fiscal crisis. From recent intelligence articles, It was claimed that Islamic Bankss have non been much affected by the crisis. This may be due to ‘the nature of the Islamic banking where it does non cover in debt trading and distances itself from market guess that takes topographic point in European and American Bankss ‘ ( Al-Hamzani, 2008 ) .

Another article besides claims that alternatively of the other manner around, the Islamic banking had risen due to the fiscal crisis. As the demand of Islamic banking rises, France had become one of the states to promote Islamic banking by following the Shariah jurisprudence in order to avoid the harm cause from the mortgage crisis. Gallic Finance Minister Christine Lagarde has promised to do accommodations to the regulative and legal armory to enable Paris to go a major market place in Islamic finance ( Vandore, 2008 ) whereas Hong Kong is besides trusting to claim for the topographic point to go the part ‘s hub of Islamic commercialism activity in Asia ( Richardson, 2008 ) .

The recent fiscal crisis besides gives advantages for Muslim Bankss as it presents an chance for Muslim Bankss as they are less likely affected from the crisis compared to major international Bankss which may pull more investors. Muslim Bankss have been slightly ‘insulated from the current fiscal crisis because when comparing to their conventional opposite numbers, they do non borrow in inter bank markets, their financess coming alternatively from their ain sedimentations. They besides did non keep toxic collateralized debt duties because they are non allowed to keep involvement bearing securities ‘ ( Wilson, 2009 ) .

Even though it is widely claimed that the recent planetary crisis have no consequence to Islamic Bankss, a recent survey carried out by IMF ( International Monetary Funds ) found that during the initial phase of the fiscal crisis, Islamic Bankss fared better than Conventional Bankss in 2008. However, this was reversed in 2009 as the crisis hit the existent economic system. Despite lower profitableness during the planetary crisis period, Islamic Banks ‘ continued to hold higher growing in recognition and assets than conventional Bankss ( Hasan & A ; Dridi, 2010 )

The intent of this survey is to compare the differences between both groups of Bankss and their public presentations during the crisis. First, the paper provides descriptive comparing about Islamic and conventional Bankss features and their basicss. Second, it uses three different types of methodological analysiss to find the implicit in factors act uponing the public presentations of conventional Bankss and Muslim Bankss as this will cast visible radiations from the result of the consequences ; whether Islamic banking truly proves resiliency to the crisis as widely claimed. Third, this paper will besides reason the findings and restrictions understood from the consequences obtained from the survey conducted subsequently.

1.2 Conventional Banking Model vs. Islamic Banking Model

Conventional Bankss maps and operates based on to the full adult male made rules whereas Islamic Bankss maps and operates based on Shariah jurisprudence.

conventional banking is basically based on the debtor-creditor relationship between the depositors and the bank on one manus, and between the borrowers and the bank on the other. Interest is considered to be the monetary value of recognition, reflecting the chance cost of money.

In general, Muslim Bankss are governed and guided by Islamic Torahs ( Sharia ) . Muslim Bankss have several distinguishing characteristics. The first and most of import characteristic of

Muslim Bankss are the prohibition of involvement ( riba ) , irrespective of its signifier or beginning. The

Holy book of Islam ( the Qur’an ) prohibits both the reception and payment of involvement in all minutess. The principle is that the recognition system affecting involvement leads to an unjust distribution of income in society. Riba is non a payment for taking hazards, nor is it the wages for a constructive activity. However, without some sort of wages,

Muslim Bankss could non run. Although Muslim Bankss can non bear down fixed involvement in progress, they operate by take parting in the net income ensuing from the usage of bank financess.

The construct of involvement is replaced by net income and loss sharing, but a mark-up for delayed payments and trade-financing committees are allowed under the Islamic banking theoretical account.

Islamic banking refers to a banking system or banking activities that is consistent with the Shariah Law. The chief differentiation of Islamic banking is that it forbids the payment of involvement, called riba. They besides prohibit puting in activities where there is unanticipated hazard or fiscal hazard. In add-on, puting in concerns such as intoxicant, gaming, weaponries and other haraam related activities are deemed out.

Muslim Bankss performs the same intermediary map as conventional Bankss but does non received predetermines involvement from borrowers and does non pay predetermines involvement to the depositors ; the sum of net incomes is based on the net income sharing understandings with the depositors and besides with the borrowers. In add-on, there are fee-based banking services that are similar to the conventional Bankss every bit long as there is no predetermines involvement payment/receipt in the dealing. Thus, Islamic banking is considered as a different banking watercourse as it prohibits involvement and replaces with ( a ) net income portions and ( B ) the net income portion depends on the extent of the hazard engagement of the parties.

There are besides differences in footings of fiscal intermediation. While conventional intermediation is mostly debt based, and allows for hazard transportation, Islamic intermediation, by contrast is plus based, and centres on hazard sharing. One key difference between conventional Bankss and Muslim Bankss is that the latter ‘s theoretical account does non let puting in or financing the sort of instruments that have adversely affected their conventional rivals and triggered the planetary fiscal crisis. These include toxic assets, derived functions and conventional fiscal establishment securities ( Hasan & A ; Dridi, 2010 )

1.3 Problem Statement

Muslim Bankss operate under a different rule which is the Islamic Shariah Law. They are obliged to take active portion in the concern and sharing of net income and losingss since involvement based investing is non permitted in Islamic banking. Since Islamic banking did non bear down a fixed return, it may seems that Islamic Bankss faces more hazard and will hold more volatile to their return in assets as they have to have the plus before they sale or rent it to their clients and take on the market hazard which conventional Bankss do non take in funding. During the recent planetary fiscal crisis, a figure of surveies made by economic expert, research workers and analysts are that Islamic Bankss are susceptible to the crisis.

1.4 Thesis Structure

The paper will be presented and divided into 6 parts. Following from this debut, subdivision 2 will be the literature reappraisal on methodological analysiss used in both Islamic and conventional banking. Methodologies and informations used in subdivision 3 will reason the analysis and findings of the consequences in subdivision 4. Section 5 will be followed by decision and possible recommendation and eventually subdivision 6 will continue with the restrictions found in this survey.

2. LITERATURE REVIEW

2.1 Theory and Practise

Past surveies have covered extensively on hazard and factors lending to hazards of fiscal establishments in the conventional banking system ( Khan and Ahmed, 2001 ; Hassan, 1993, 1994 ; Berger and DeYoung, 1997 ; Angbazo et al. , 1998 ; Ahmad, 2003 ) . Despite its importance to accomplishing good hazard direction in Islamic banking, these factors have non been widely investigated and documented.

An Islamic bank is usually exposed to certain internal and external hazards. External hazards are caused by alterations in policies and ordinances ( regulative hazard ) or by factors that affect the rates of benchmarks, such as LIBOR. Another hazard relates to the fulfilment of duties by debitors of the Islamic Bankss, that is the recognition hazard. Muslim Bankss are more open to recognition hazard compared with conventional Bankss because Islamic Bankss tends to holds more assets because of the nature of its banking system.

Harmonizing to Hasan & A ; Dridi ( 2010 ) , Muslim Bankss contracts involve recognition and market hazards, and some particular issues of hazards in Islamic banking activities that differ from conventional banking. Interest-rate type of hazard is really limited, and fudging instruments are besides mostly unavailable. Therefore, pull offing liquidness is more ambitious in Islamic Bankss, given the limited capacity of many Islamic Bankss to pull net income sharing investing assets since the return on these histories is unsure and the substructure and tools for liquidness hazard direction by Islamic Bankss is still in its babyhood in many legal powers compared to conventional Bankss.

2.2 Methodologies used in banking system

2.2.1 Performance Approach

2.2.1.1 Fiscal Ratios

Tax return on Assets & A ; Return on Equity

Samad and Hassan ( 1999 ) have used the profitableness, liquidness, hazard and solvency ratios of Islamic Bankss in Malaysia and comparing them with a group of 8 conventional Bankss for the period 1984-1997. The findings suggest that that ROA and ROE does non demo any differences in public presentation. The liquidness hazard besides does non demo any betterment or impairment of both Bankss. The hazard and insolvency increased in Muslim Bankss but, when comparing with conventional Bankss, Muslim Bankss are still less hazardous and more solvent. The paper concluded that the ‘lack of cognition of bankers in choosing, measuring and pull offing profitable undertaking is the chief ground of the slow growing ‘ ( Samad and Hassan, 1999 ) .

Liquidity ratio

In add-on, Ahmad and Hassan ( 2007 ) explained the operational difference between Islamic Bankss and conventional Bankss in Bangladesh. The survey analyses the plus quality, capital ratios and operational ratios for seven old ages period from 1994 to 2001. On norm, it is found that Islamic Bankss performed better in most of the ratios and they outperformed conventional Bankss in capital adequateness and liquidness except for equity ratio which is in line with conventional Bankss. In avoiding the hazards that are related with Islamic bank when fdmarket and should hold similar policy with conventional Bankss. It is besides suggested that the Islamic Bankss have an independent banking authorization and provides legal support.

three. Capital Adequacy Ratio ( CAR )

Sijbring ( 2009 ) has used this ratio to analyze whether Islamic banking is riskier than conventional banking. He carries out a agency of an rating of 13 one-year studies of Muslim Bankss and focused chiefly on the first pillar from Basel II, viz. whether a CAR higher than eight per centum is necessary for Muslim Bankss in order to signal stableness. The rating resulted in favour of the affair. Another point is that he claimed that one could derive a higher return when lodging money at an Islamic bank alternatively of a conventional bank. This nevertheless needs a careful survey because different bank differs greatly and an in-depth research is necessary.

2.2.1.2 Arrested development Analysis

Cihak and Hesse ( 2008 ) have used arrested development analysis to compare whether Muslim Bankss are more stable than conventional Bankss that covered 20 states over the period 1993 to 2004. From the observation of 520 in 77 Muslim Bankss and 3,248 observations in 397 conventional Bankss, the overall consequence suggests that Islamic Bankss are more stable than commercial Bankss. When comparing between bank sizes, smaller Muslim Bankss are the most financially strongest Bankss followed by big commercial Bankss, little commercial Bankss and big Islamic Bankss. As the little Bankss tend to be financially stronger than big Islamic Bankss, the consequence reflects the challenges of recognition hazard direction in big Islamic Bankss. The consequence besides indicates that ‘the market portion of Muslim Bankss does non hold a important impact on the fiscal strength of other Bankss ‘ .

Another analysis carried out by Salman and Amanat ( 2008 ) shows a strong relationship between ROE of both Islamic and conventional Bankss. It besides shows that both Islamic Bankss and conventional Bankss are profitable and the hazard direction processs in Islamic Bankss are equal to extenuate their mostly equity-based investings and give their clients adequate returns which are comparable with conventional Bankss. The paper concludes that equity-based concern of Islamic Bankss presenting a somewhat more hazard than conventional Bankss is good mitigated by Muslim Bankss through their effectual and equal distinct hazard direction processs.

2.2.2 Risk Management Approach

2.2.2.1 Risk weighted assets

Hazard weighted assets is a step of the sum of a Bankss assets, adjusted for hazard. The nature of a bank ‘s concern means it is usual for about all of a bank ‘s assets will dwell of loans to clients. Comparing the sum of capital a bank has with the sum of its assets gives a step of how able the bank is to absorb losingss. If its capital is 10 % of its assets, so it can lose 10 % of its assets without going bankrupt.

A survey conducted by Ahmad & A ; Ahmad ( 2004 ) utilizing RWA shows that the support cost of Islamic banking is really much smaller than the conventional Bankss because of the absence of involvement disbursal. The consequence of the survey shows that Islamic Bankss, on norm had mobilized 81 per centum of its sedimentations to give out funding to clients. This ratio is lower compared to conventional Bankss, which had extended loans whose sum was 1.013 times more than its sedimentations. It suggested that a high chance of liquidness hazard in the event of high default rate in conventional Bankss.

2.2.2.2 Vector auto-regression ( VAR ) method.

This internal theoretical account is an appropriate method to mensurate the extra capital charge required efficaciously for the displaced commercial hazard. Several empirical surveies analyse the consequence of alterations in conventional sedimentation involvement rated on the rates of return and the volume of sedimentations in Muslim Bankss in several states where Muslim Bankss operate with conventional 1s ( Chong & A ; Liu, 2009 ; Rahmatina & A ; Salina, 2006 ; Sundarajan, 2005 ) . Most of these surveies reveal a negative relationship between the two variables.

Kassim and Majid ( 2008 ) conducted survey on the impact of the fiscal dazes on Islamic Bankss in Malaysia during two separate fiscal crises, The Asiatic fiscal crisis 1997 and The Global fiscal crisis 2007. The consequences indicate that both the Islamic and conventional banking systems are vulnerable to fiscal dazes. This is contrary to the popular belief that the Islamic fiscal system is sheltered from the fiscal dazes due to its interest-free nature. The consequences indicate that both the Islamic and conventional banking systems are

vulnerable to i¬?nancial dazes. This is contrary to the popular belief that the Islamic i¬?nancial system is sheltered from the i¬?nancial dazes due to its interest-free nature.

In another separate survey by Zainol and Kassim ( 2010 ) on the analyzing the possible rate of return of Islamic Bankss and involvement rate hazard in the conventional Bankss, the survey shows that both Islamic Bankss ‘ rate of return and conventional Bankss ‘ involvement rate are cointegrated and have a long-term equilibrium. The consequences further proved that the Islamic Bankss are exposed to the rate of return hazard. When the conventional Bankss involvement rate additions, the Islamic bank depositors will reassign their financess from the Islamic Bankss to the conventional Bankss.

2.2.3 Parametric and Non-Parametric Frontier Approach

Efficiency has been used in legion surveies to measure the profitableness degree, greater sum of financess intermediated, better monetary values and services quality for consumers and greater safety and soundness if some of the efficiency nest eggs are applied towards bettering capital buffers that absorb hazard.

The usage of both parametric and non parametric frontier is much better in mensurating efficiency compared to ratio analysis and arrested development analysis. This is due to that both frontier methods ‘take into history the interaction between a figure of inputs and end products and they treat them at the same time ‘ Ozkan-Gunay and Tektas ( 2006 ) . Frontier analysis benchmarks the comparative public presentation of Decision Making Unit ( DMU ) where DMU can either be Bankss within the fiscal sector or subdivisions within a house. The frontier analysis has different advantages compared to other methods. One of the advantages is that ‘the frontier analysis provides an overall aim in finding the efficiency value and ranking of Decision Making Unit of measurements ( DMUs ) and It besides helps in placing the country of inputs that are overused and the country of end products that are under production ‘ Ozkan-Gunay and Tektas ( 2006 ) . The differences between parametric and non parametric attack is that ‘the parametric attack engages in the specification and econometric appraisal of a statistical or parametric map, while the non parametric methods offer a additive boundary by enfolding the experimental information points ‘ ( Yudistira, 2004 ) . The surveies of both of the methods on Muslim Bankss are shown below.

To mensurate the cost efficiency of Bankss, one should compare ascertained cost- and output-factor combinations with optimum combinations determed by the available engineering ( efficient frontier )

2.2.3.1 Stochastic Frontier Method ( SFA )

In a survey by Ahmad Mokhtar et Al ( 2006 ) , they use parametric attack called Stochastic Frontier Methods in analysing the proficient and cost efficiency between Bankss from 1997-2003. The findings show that the efficiency degree of Islamic banking is still lower than conventional Bankss. It besides reveals that fully fledged Islamic Bankss are more efficient than Islamic Windowss, while Islamic Windowss of foreign Bankss tend to be more efficient than those of domestic Bankss.

Abdul-Majid et Al ( 2008 ) use the parametric attack in finding the impact of Malayan Islamic Banks on public presentation over the period 1996-2002. The survey investigates the efficiency, economic systems of graduated table and productiveness of Islamic Bankss in comparing with conventional Bankss utilizing end product distance map and generalized Malmquist productiveness index. Overall, the Malayan Bankss have experience inefficiency over the period of an mean 2.37 per centum per twelvemonth, with a lessening in return to graduated table and a diminution in proficient graduated table. Their research besides shows that merged Bankss have non contributed a positive bank public presentation due to higher input use and lower productiveness alteration. And eventually from the fiscal crisis in 1998 have besides lead to a negative impact on the end product public presentation due to the increasing volume of non-performing loans based from the crisis.

Another survey by Mohamad et Al ( 2009 ) besides used SFA in mensurating and comparing the cost and net income efficiency of 37 conventional Bankss and 43 Muslim Banks in 21 Administration of Islamic Conference ( OIC ) states for a period 1990-2005. But the survey differs from the above where this survey measures bank efficiency based on the bank size, age and part. Results show ‘that from overall sample, there are no important difference between cost and net income efficiency of both conventional and Islamic bank irrespective of size, age and location of Bankss ‘ . But for Islamic Bankss, overall the Middle E and Turkey Islamic Bankss have the highest cost efficiency while African Islamic Bankss have the lowest and for net income efficiency, large conventional Bankss have the highest net income compared to little and African conventional Bankss.

2.2.3.2 Data Envelopment Analysis ( DEA )

The DEA method has been used by Batchelor and Wadud ( 2004 ) in look intoing the proficient and scale efficiency of Islamic Bankss in Malaysia during the clip where all the local Bankss undergo alterations in competition from globalization from 1997-2002. For the six twelvemonth period, consequences indicate that pure Islamic Bankss are under performed due to their sub-optimal graduated table of operation compared to the Islamic Bank Scheme ( IBS ) in Malaysia. It besides shows that proficient efficiency tonss are bettering more for commercial Bankss runing IBS than Full Islamic Bankss. And for single Bankss, the mean proficient efficiency tonss shows that larger Bankss are less inefficient compared to smaller Bankss.

There is besides another survey on Islamic Bankss in Malaysia by Sufian ( 2007 ) based which uses DEA to analyze the efficiency between foreign and domestic Islamic Bankss using a panel of 58 Muslim Bankss during the period 2001 to 2004. He calculated three DEA efficiency steps viz. proficient efficiency, pure proficient efficiency and scale efficiency. He found that the efficiency in Islamic Bankss declined in the 2002 but so rose back in 2003 and 2004. He besides found that the domestic Islamic Bankss are more efficient compared to foreign Muslim Bankss. The consequences have besides found that the inefficiency of Islamic Bankss in Malaysia is the consequences from graduated table where Islamic Bankss in Malaysia have been runing at the incorrect graduated table of operations. The consequence besides shows that more efficient Bankss are related to bank profitableness.

Danesh ( 2007 ) have besides conducted a survey utilizing DEA in comparing the efficiency between 12 Islamic Bankss and 38 conventional Bankss in the Gulf Cooperation Council ( GCC ) from the period 2000 to 2006. The survey besides examines the 2nd phase arrested development theoretical account attack. Based from the consequences of the DEA efficiency tonss, there are no differences between Islamic Bankss and conventional Bankss. The arrested development analysis besides implies that the efficiency of Islamic Bankss in the GCC markets is apathetic. Overall from the 7 twelvemonth period, it is found that Muslim Bankss have the highest pure proficient efficiency mark of 92.5 % in 2006. The consequences besides found that size and fiscal capital are extremely conducive to banking efficiency where the regional consequence of Saudi Arabia is negatively related to efficiency.

2.2.3.3 Combination of Methods

Other than concentrating on one method, some surveies have besides combined two or more methodological analysis in mensurating the efficiency and public presentation of Islamic Bankss.

Hassan ( 2005 ) has employed both parametric ( cost and net income frontier attack ) and non parametric techniques ( DEA ) in the survey of the Islamic bank efficiency around the universe for the period over 1995 to 2001 period. ‘The surveies used five DEA efficiency steps which are cost, allocative, proficient, pure proficient and scale efficiency tonss and used together with accounting ratios in finding the bank ‘s public presentation. On norm, the consequences shows that the Islamic Bankss are less efficient compared with conventional Bankss. The consequences besides shows that all of the five DEA efficiency steps are extremely correlated with ROA and ROE which indicates that all of these efficiencies can be used together with accounting ratios in finding the Islamic bank ‘s public presentation ‘ ( Hassan, 2005 ) .

The survey on the public presentation of Islamic Bankss have besides been conducted by Brown ( 2003 ) by uniting both DEA methodological analysis ( Cost efficiency ) and ratio analysis from the period 1998 to 2001 from the sum of 19 states around the universe. The consequences of the survey shows that Iran, Brunei and Yemen are the most efficient states and Indonesia and Sudan are the least efficient states. The efficiency of the states selected is so compared with concentration ratios. It is found that the concentration of Islamic Bankss largely increases in states which have big figure of Muslim populations such as in Yemen from 9.4 % in 1998 to 19.2 % in 2001 where Brunei and Iran shows changeless concentration of above 40 % for 4 old ages. The survey besides shows that even though there are a little Muslim population in Bahamas, the Islamic Bank in Bahamas which acts as offshore banking installations has a considerable size ( USD 1bn ) . The states are besides analysed utilizing descriptive statistics for four separate old ages. Iran, Kuwait and Saudi Arabia have the largest markets based on assets size. Saudi Arabia besides has the highest degree of equity. The profitableness step varies each twelvemonth for certain states where the most liquid banking market is Bahamas and the least liquid banking is Tunisia and Kuwait. Finally the survey concludes that there are no important correlativities between standard ratio cost efficiency measuring and cost to income with cost efficiency tonss.

Similar survey utilizing DEA and ratio analysis has besides been conducted by Brown and Skully ( 2003 ) which examines cross state survey in a sum of 35 Muslim Bankss. The survey concluded that larger bank size and profitableness have a positive impact to be efficiency where the Persian Bankss, which is the largest and profitableness Bankss are more cost efficient compared with Sudanese Bankss which offers agricultural fundss have the least cost efficiency. The survey besides found that Islamic Bankss in the Middle East part are the most cost efficient Bankss.

From the literature above, there is a figure of surveies conducted utilizing both of the frontier methods. But based from the surveies, there is still no understanding of which frontier methods to utilize or which frontier methods between DEA and SFA is the best. It is accepted that ‘parametric attacks impose a peculiar functional signifier that assume the form of the frontier which normally specify a local analysis, such as translog but provides hapless estimates for banking informations that are non near the average graduated table and production mix ‘ ( McAllister and McManus 1993 ) . But when compared with DEA, the non-parametric surveies use less construction on frontier. Therefore when comparing with the other methods that were used in the literature, ‘DEA has going the taking method for efficiency rating, in footings of both the figure of published research documents and the sum of existent universe applications ‘ ( Golany 1988 ) . DEA besides ‘analyzes sensitiveness to the end product variables and depicts consistence between the theoretical account proposals and supervisory agent determinations. Thus the DEA theoretical account can be a tool to observe and better the beginnings of inefficiency by bank direction and supervisory agents ‘ ( Ozkan-Gunay and Tektas, 2006 ) .

2.3 Fiscal Crisis

A few surveies has been done in measuring the bank public presentation on Islamic Bankss and conventional Bankss utilizing fiscal ratios, Parametric and non-parametric attack

( infix some LR of those crisis articles )

3 METHODOLOGY/DATA

The methodological analysis used in this survey is traveling to be conducted in three ways. These methods prove sufficient to analyze the public presentations of both groups during the planetary fiscal crisis.

3.1 Fiscal ratios attack

3.1.1 Return on Assetss

3.1.2 Return on Equity

3.2 Arrested development analysis

Arrested development analysis will be applied to analysed the recognition hazard underlying the profitableness, recognition and growing assets of the Bankss.

3.3 Stochastic Frontier Method ( SFA )

Stochastic Frontier Method ( SFA ) will be conducted to mensurate the proficient cost and net income efficiencies of both groups of Bankss ; to demo whether Muslim Bankss are more efficient than conventional Bankss.

Cost

Efficiency

Translog

Grand Frontier

Half-Normal

STOCHASTIC

Frontier

Approach

Model

Concept of Efficiency

Frontier Construction

Functional Forms

Distributional Premises

Technical

Efficiency

3.3.1 Advantages of SFA

Conventional Bankss would bask the advantages over Muslim Bankss being holding a long history and experience, accepting involvement which is the majour beginning of bank grosss, do non portion loss with clients and inquire for guranteed collaterals in most minutess, enjoy immense capotals and much more developed engineerings and can come in Islamic banking market.

3.3.2 Restrictions to SFA

3.4 Datas

The Income statement and the balance sheet of both Islamic and Conventional Bankss are obtained from Zhongnan University of Economics and Law digital library Bankscope and single fiscal statements or one-year studies for the period 2006 – 2009, roll uping a scope of around 90 Bankss of both Islamic Bankss and Conventional Bankss across nine states – Brunei, Bahrain, Indonesia, Jordan, Malaysia, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates. These states host the most Muslim Bankss ( more than 80 per centum of the industry ) and have a big conventional banking sector. Iran, Sudan and Pakistan is excluded in the information aggregation. Iran and Sudan has a big Islamic banking sector nevertheless they are excluded because they do non hold conventional banking system and Pakistan is excluded because conventional Bankss are operated alongside Islamic banking and at the beginning of July 1985, all conventional Bankss became interest-free.