Conventional and Islamic banks’ performance An Analysis of During and post-economic Crisis

Abstract

The current study looks at the factors that affected conventional and Islamic banks' profitability between 2007 and 2013. This period is further classified into two periods, i.e.2007-2009 and 2010-2013, the tenure during and the tenure after the financial crisis. Descriptive research design and logical reasoning are employed in this study to analyze fourteen conventional and Five Islamic banks. We used Return on Assets to measure the profitability, whereas two macro-economic variables, i.e. Inflation and GDP (gross domestic product), and three industry-specific constructs, i.e. Size, Leverage and Liquidity as independent constructs. According to panel regression results, the profitability of both banking sectors during both tenures was unaffected by macroeconomic factors. In the case of financial or variables that are specific to an industry, both types of banking sectors had a negative impact on profitability under pre-economic crisis tenure. However, the profitability of traditional banks is considerably enhanced by liquidity. The scale of both banking sectors greatly boosts profitability while the financial crisis is ongoing. Conventional banks’ leverage had a significant negative and liquidity had a significant positive impact on profitability during the financial crunch. In the years following the crisis, once again Islamic banks increased in profitability despite being inefficient, providing them with a tax shelter, with an increase in leverage significantly. On the other hand, conventional banks had the inverse impact of leverage on their profitability but they managed their liquidity much better than the previous two tenures and generated more profit. The outcomes will be useful for the banking institutions to develop their strategies consequently.