Worldwide comparison of financial efficiency of Islamic banks and conventional banks
Date of this Version
This paper reports policy-relevant findings from a major study on the financial performance of conventional and Islamic banks across the world to assess if the latter has performed as best as the former. This inquiry is timely and important to validate if ethical banking after 45 years of experience based on the twin-principles of risk-share-profit-share lending is at least as good as pre-fixed-interest-based banking. Using a world-wide matched sample of both bank types, tests on three sets of financial performance ratios reveal Islamic bank performance match those of conventional banks. If any, return to shareholders is a mere 2 percent higher in Islamic banks. This similarity is found to hold when controlled for size, age and region. Thus, it appears that the new form of bank lending has not led to any inferior performance to that of conventional practice. This helps to validate the relevance of Islamic banking as an alternative lending institution for those clients wanting ethics in lending. Islamic banking is no less welfare promoting.