Risk and profitability of islamic banks: a religious deception or an alternative solution?

Naama Trad, Mohamed Ali Trabelsi and Jean-François Goux

MPRA Paper from University Library of Munich, Germany

Abstract: The aim of this paper is to examine whether Islamic finance could be an alternative to the traditional financial system and could guarantee stability in times of crisis. To this end, 78 Islamic banks in 12 countries have been studied over the 2004 to 2013 period. A series of bank-specific and other country-specific indicators are combined to explain the soundness of Islamic banking in terms of profitability as measured by ROA and ROE, and risk divided into credit risk measured by IMLGL and EQL, and insolvency risk measured by Z-SCORE. The aim is to estimate five regressions using dynamic panel data econometrics (GMM system). The results indicate that bank size and capital are the main factors responsible for increasing profitability and stability of Islamic banks and reducing their credit risk. However, the ratios forming the variable liquidity and asset quality often lead to inconclusive results. It is also found that macroeconomic variables, except inflation, are able to improve Islamic banks’ stability. This is not the case for credit risk where the ratio is still unfavorable. The conclusion is that there are no major differences between IBs and CBs in terms of their profitability and risk features.

Keywords: Islamic Banks; Credit Strength; Risk and Profitability; GMM system (search for similar items in EconPapers)
JEL-codes: G01 G21 G24 G31 (search for similar items in EconPapers)
Date: 2015, Revised 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: RISK AND PROFI TABILITY OF ISLAMIC BANKS: A RELIGIOUS DECEPTION OR AN ALTERNATIVE SOLUTION? (2017)
Working Paper: Risk and profitability of Islamic banks: A religious deception or an alternative solution? (2017)
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