The paper 'The Performance Of Islamic Banks and That of the Conventional Banks' is a great example of a Finance and Accounting Research Paper. The stability of the banking sector in a country to a larger extent affects the growth and stability of its economy. Banks facilitate funds and act as intermediaries for deficit and surplus units sparking economic development. The Islamic system of banking has emerged as a feasible alternative to the conventional banking system. The first bank that follows Sharia law was introduced in Egypt in 1963 and since then it has increased to more than 600 banks in 75 countries globally (Al-Mazari, 2014; Rashwan, 2012).
Young (2012) noted that the assets of Islamic banks in the commercial banking system had grown by 19 percent to $1.3 trillion. In a past study by Hassan and Dridi (2010) and Khamis and Senhadji (2010), Conventional banks (CBS) and Islamic banks (IBs) found that Islamic banks in the economic recession of 2008 were efficient and compliant to speculation and negative profitability. To restore investor confidence, Jusufovic (2009), notes that it was important to stabilize the financial system.
Moreover, Sayed and Hayes (2012) agreed that it was essential to conduct a continuous assessment of the banking operations to protect against poor or risk management that threatens a country’ s financial system. A CAMEL model was proposed by the Basel Committee on Banking Supervision to assess financial management hence ranking the banks based on performance. This study compares the performance of Islamic banks with conventional banks in terms of performance indicators, effectiveness and efficiency, and other indicators derived from the Balance sheet and Income statements.
The study is important in highlighting the competitive position of Islamic banks compared with conventional banks in terms of liquidity and earnings quality, management quality, asset quality, and capital adequacy. 2.0 Literature review Islam comprises three broad concepts; Aqidah (faith and belief), Sharia (practical actions by Muslims), and Akhlag (attitudes, work ethics, and behavior). The inception of Islamic banking is based on Riba or interest (Geelani, 2005) and Gharar or uncertainty and speculation (Kahf & Khan, 2007). According to Kettel (2011), Islamic banks promote, between fund providers, risk-sharing, and proper use of entrepreneur funds.
Moreover, Al-Janabi (2012) asserted that money in Islam is only meant as a medium of exchange and any value of money should be asset-based. The instruments of Islamic banking comprises leasing (Ijarah), forward sales (Salam), cost-plus (Marhaba), sale of non-existent assets (Istina’ a), a system of insurance (Takaful) and profit-sharing principle (Mudarabah). However, Islamic banks also face challenges such as the absence of standardized regulatory frameworks, an unsatisfactory record for innovation, risk management challenges, and deficient human resources and Sharia experts (Khamis and Senhadji, 2010; Siddiqi, 2012; and Khalid and Amjad, 2012).
The comparison in performance and efficiency between conventional and Islamic banks is evaluated throughout the world and specifically the gulf countries. Srairi (2009) used a stochastic frontier analysis of 71 commercial banks to evaluate the profit and cost efficiency of the Gulf Cooperation Council (GCC) countries from the year 1999 to 2007. The author found from although computed results on the efficiency of banks in Gulf countries were more convincing to the world, conventional banks were more efficient than Islamic banks. This implies that Islamic banking is not merely a copy of conventional banking but differs based on the boundaries of Islamic Law such as interest, avoidance of economic activities, the introduction of an Islamic tax, and the production of goods and services prohibited by Islam.
This meant that despite the Islamic banking system running their operation on interest-free principles, they are also victims of interest rates.
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