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Vol 8-2..Munawar Iqbal..Islamic and conventional Banking in the nineties

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Islamic Economic Studies Vol.8, No.2, April 2001 ISLAMIC AND CONVENTIONAL BANKING IN THE NINETIES: A COMPARATIVE STUDY* MUNAWAR IQBAL** There is a serious lack of empirical studies on Islamic banking. This paper attempts to fill that gap to some extent. Using data for the 1990-98 period, several hypotheses and common perceptions about the practice of Islamic banking have been tested. The performance of Islamic banks has been evaluated using both trend and ratio analyses. For this purpose, some
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  Islamic Economic Studies Vol.8, No.2, April 2001 ISLAMIC AND CONVENTIONAL BANKING IN THE NINETIES: ACOMPARATIVE STUDY *   MUNAWAR IQBAL **   There is a serious lack of empirical studies on Islamic banking. This paper attempts to fill that gap to some extent. Using data for the 1990-98 period, severalhypotheses and common perceptions about the practice of Islamic banking havebeen tested. The performance of Islamic banks has been evaluated using both trend and ratio analyses. For this purpose, some objective “benchmarks” for variousratios have been developed for the first time. The performance of Islamic banks hasalso been compared with a ‘control group’ of conventional banks. It has been found that in general Islamic banks have done fairly well during the period under study. 1.   INTRODUCTION It has been quarter of a century since the first Islamic bank was established.During this period, the Islamic banking industry has witnessed a gradual andsustained expansion. In this respect, two distinct approaches have been followed.Firstly, Islamic banks and financial institutions were established in several parts of the World, including some non-Muslim countries, on private initiatives. Thenumber of such banks and financial institutions is now more than one hundred.Secondly, attempts were initiated to convert the whole financial system to Islamicprinciples in some Muslim countries. These include Pakistan, Iran and Sudan.These experiments have also been in operation for 15-20 years. It is high time thatboth of these initiatives are assessed and evaluated. This study attempts to analyzethe experience of the first group of banks. However, it must be pointed out thatmost of the conclusions apply to the second group of institutions also. In this studya number of hypotheses have been tested and a number of common perceptions evaluated against actual facts. Several of these have been found to bemisconceived. It is hoped that this study will start an objective discussion aboutthese to arrive at the truth. * An earlier version of this paper was presented at the Fourth International Conference on IslamicEconomics and Banking held at Loughborough University, UK, August 13-15,2000. Substantialrevisions have been made. ** Chief, Islamic Banking and Finance Division, Islamic Research and Training Institute, IslamicDevelopment Bank, Jeddah, Saudi Arabia.  Munawar Iqbal: Islamic and Conventional Banking: A Comparative Study 2 2.   DATA AND METHODOLOGY While several good theoretical studies on Islamic banking are available 1 , thereis a serious shortage of empirical studies. This study attempts to partially fill thatgap. Needless to say, that there is need and scope for several studies of this kind.The most important reason for the lack of empirical studies on Islamic bankingis the lack of a long and consistent time series for the Islamic banks. There are somany variations in practices of reporting financial statements that construction of aconsistent time series is a project in itself. For this study, a sample of twelveIslamic banks was chosen. These banks together account for more than 75 percentof total capital as well as total assets of private Islamic banks and thus form avery large sample from a statistical point of view. Therefore, we can safely assumethat the results derived from this sample are representative of the Islamic bankingindustry . The study covers the 1990-98 period. Data for a number of importantvariables were compiled from the annual reports of these banks. 2 Attempts havebeen made to reconcile the data over the period as well as across the banks toconstruct a comparable series.For comparative purposes, another sample of twelve conventional banks waschosen. These banks were chosen from exactly the same countries from whereIslamic banks were chosen. An attempt was also made to choose banks roughly of the same size as the Islamic banks. The data for these banks has been compiledfrom various issues of the Bankers' Almanac. The names of banks included in thetwo samples are given in Table 1. 1 See for example, Ahmad, Ziauddin, et al. (ed) and Chapra, (1985). 2 There were a few gaps in the data, which were filled through forecasting techniques.  Munawar Iqbal: Islamic and Conventional Banking: A Comparative Study 3 Table 1Banks Included in the SampleNo. Islamic Banks Conventional Banks 1 Al Rajhi Banking & InvestmentCorporation, Saudi Arabia (Rajhi)   Riyad Bank, Saudi Arabia   2 Kuwait Finance House, Kuwait (KFH)   National Bank of KuwaitSAK, Kuwait   3 Al Baraka Islamic Investment. Bank,Bahrain (BKBN)   Arab Banking Corporation(BSC), Bahrain   4 Bahrain Islamic Bank, Bahrain (BIB)   Bank of Bahrain and KuwaitBSC, Bahrain   5 Faysal Islamic Bank, Bahrain (FIBB)   National Bank of BahrainBSC, Bahrain   6 Faisal Islamic Bank, Egypt (FIBE)   Egyptian Amerrican Bank,Egypt   7 Dubai Islamic Bank, UAE (DIB)   Mashreq Bank PSC, UAE   8 Jordan Islamic Bank, Jordan (JIB)   Bank of Jordan plc, Jordan   9 Qatar Islamic Bank, Qatar (QIB)   Qatar National Bank SAQ,Qatar   10 Islami Bank Bangladesh, Bangladesh(IBBG)   Arab Bangladesh Bank Ltd,Bangladesh   11 Bank Islam Malaysia Berhard, Malaysia(BIM)   The Pacific Bank Berhad,Malaysia   12 Al Barakah Turkish Finance House,Turkey (BKTFH)   Finansbank AS, Turkey   In the next two sections, the growth and performance of Islamic bankingindustry have been analyzed with the focus on inter-industry comparisons. Insection four the performance of Islamic banking industry has been evaluated vis-avis conventional banking industry. 3.   GROWTH OF ISLAMIC BANKING INDUSTRY (1990-98) Every now and then we read press reports about the rates of growth of Islamicbanking industry. Without supporting data, however, these are no more than speculations . Data on some key variables for the period 1990-98 are given inTable 2 and analyzed in the following paragraphs. The period has been divided intotwo sub-periods to see the trends over time while minimizing yearly variations.  Munawar Iqbal: Islamic and Conventional Banking: A Comparative Study 4 Table 2Annual Growth Rates for Some Key Variables Total Equity Total Deposits Total Investment Total Assets Total RevenueBank 1990-94 1994-98 1990-98 1990-94 1994-98 1990-98 1990-94 1994-98 1990-98 1990-94 1994-98 1990-98 1990-94 1994-98 1990-98 Rajhi 7.7 7.5 7.6 13.9 7.7 10.8 12.0 7.3 9.6 11.8 7.1 9.4 0.5 11.2 5.7 KFH 14.4 21.0 17.6 2.7 3.3 3.0 9.9 6.2 8.0 4.2 6.2 5.2 11.2 11.8 11.5 BKBN 0.2 3.1 1.6 -12.2 5.5 -3.8 -10.5 3.8 -3.6 -9.3 5.1 -2.3 14.9 23.3 19.0 BIB 17.5 2.4 9.7 5.8 4.6 5.2 7.1 4.5 5.8 6.7 4.5 5.6 -2.0 11.9 4.7 FIBB 16.3 5.4 10.7 5.2 4.3 4.7 4.3 4.8 22.6 31.4 -8.8 9.5 23.9 2.8 12.8 FIBE -15.2 12.2 -2.4 -2.4 5.6 1.6 4.5 9.3 6.8 -1.2 5.1 1.9 -13.8 17.1 0.4 DIB 8.0 34.1 20.3 17.0 6.9 11.8 12.2 9.7 11.0 13.8 9.2 11.5 14.4 8.6 11.5 JIB 32.2 6.4 18.6 22.0 5.2 13.3 21.2 6.5 13.6 21.9 5.1 13.2 17.8 0.6 8.9 QIB -1.3 11.9 5.1 6.2 4.1 5.1 10.4 3.6 7.0 11.7 4.1 7.8 2.9 12.5 7.6 IBBG 12.1 25.2 18.5 18.5 13.4 15.9 21.4 9.3 15.2 18.8 13.3 16.0 12.0 14.0 13.0 BIM 24.1 30.8 27.4 21.1 -2.4 8.7 21.7 1.3 11.0 21.5 3.3 12.0 19.9 7.6 13.6 BKTFH -12.1 35.4 9.1 20.1 9.8 14.8 14.8 12.0 13.4 10.0 10.7 10.4 49.9 -27.9 4.0 SimpleAverage8.7 16.3 12.0 9.8 5.7 7.6 10.7 6.5 10.0 11.8 5.4 8.4 12.6 7.8 9.4StandardDeviation14.0 12.4 8.6 10.7 3.8 6.0 9.1 3.1 6.3 11.0 5.4 5.1 15.9 12.7 5.2WeightedAverage7.9 12.6 10.2 8.8 5.7 7.2 11.3 6.9 9.1 9.3 6.4 7.8 11.2 3.7 7.3
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