• Search Menu
  • Browse content in Arts and Humanities
  • Browse content in Archaeology
  • Anglo-Saxon and Medieval Archaeology
  • Archaeological Methodology and Techniques
  • Archaeology by Region
  • Archaeology of Religion
  • Archaeology of Trade and Exchange
  • Biblical Archaeology
  • Contemporary and Public Archaeology
  • Environmental Archaeology
  • Historical Archaeology
  • History and Theory of Archaeology
  • Industrial Archaeology
  • Landscape Archaeology
  • Mortuary Archaeology
  • Prehistoric Archaeology
  • Underwater Archaeology
  • Zooarchaeology
  • Browse content in Architecture
  • Architectural Structure and Design
  • History of Architecture
  • Residential and Domestic Buildings
  • Theory of Architecture
  • Browse content in Art
  • Art Subjects and Themes
  • History of Art
  • Industrial and Commercial Art
  • Theory of Art
  • Biographical Studies
  • Byzantine Studies
  • Browse content in Classical Studies
  • Classical History
  • Classical Philosophy
  • Classical Mythology
  • Classical Literature
  • Classical Reception
  • Classical Art and Architecture
  • Classical Oratory and Rhetoric
  • Greek and Roman Papyrology
  • Greek and Roman Epigraphy
  • Greek and Roman Law
  • Greek and Roman Archaeology
  • Late Antiquity
  • Religion in the Ancient World
  • Digital Humanities
  • Browse content in History
  • Colonialism and Imperialism
  • Diplomatic History
  • Environmental History
  • Genealogy, Heraldry, Names, and Honours
  • Genocide and Ethnic Cleansing
  • Historical Geography
  • History by Period
  • History of Agriculture
  • History of Education
  • History of Gender and Sexuality
  • Industrial History
  • Intellectual History
  • International History
  • Labour History
  • Legal and Constitutional History
  • Local and Family History
  • Maritime History
  • Military History
  • National Liberation and Post-Colonialism
  • Oral History
  • Political History
  • Public History
  • Regional and National History
  • Revolutions and Rebellions
  • Slavery and Abolition of Slavery
  • Social and Cultural History
  • Theory, Methods, and Historiography
  • Urban History
  • World History
  • Browse content in Language Teaching and Learning
  • Language Learning (Specific Skills)
  • Language Teaching Theory and Methods
  • Browse content in Linguistics
  • Applied Linguistics
  • Cognitive Linguistics
  • Computational Linguistics
  • Forensic Linguistics
  • Grammar, Syntax and Morphology
  • Historical and Diachronic Linguistics
  • History of English
  • Language Evolution
  • Language Reference
  • Language Acquisition
  • Language Variation
  • Language Families
  • Lexicography
  • Linguistic Anthropology
  • Linguistic Theories
  • Linguistic Typology
  • Phonetics and Phonology
  • Psycholinguistics
  • Sociolinguistics
  • Translation and Interpretation
  • Writing Systems
  • Browse content in Literature
  • Bibliography
  • Children's Literature Studies
  • Literary Studies (Romanticism)
  • Literary Studies (American)
  • Literary Studies (Asian)
  • Literary Studies (European)
  • Literary Studies (Eco-criticism)
  • Literary Studies (Modernism)
  • Literary Studies - World
  • Literary Studies (1500 to 1800)
  • Literary Studies (19th Century)
  • Literary Studies (20th Century onwards)
  • Literary Studies (African American Literature)
  • Literary Studies (British and Irish)
  • Literary Studies (Early and Medieval)
  • Literary Studies (Fiction, Novelists, and Prose Writers)
  • Literary Studies (Gender Studies)
  • Literary Studies (Graphic Novels)
  • Literary Studies (History of the Book)
  • Literary Studies (Plays and Playwrights)
  • Literary Studies (Poetry and Poets)
  • Literary Studies (Postcolonial Literature)
  • Literary Studies (Queer Studies)
  • Literary Studies (Science Fiction)
  • Literary Studies (Travel Literature)
  • Literary Studies (War Literature)
  • Literary Studies (Women's Writing)
  • Literary Theory and Cultural Studies
  • Mythology and Folklore
  • Shakespeare Studies and Criticism
  • Browse content in Media Studies
  • Browse content in Music
  • Applied Music
  • Dance and Music
  • Ethics in Music
  • Ethnomusicology
  • Gender and Sexuality in Music
  • Medicine and Music
  • Music Cultures
  • Music and Media
  • Music and Religion
  • Music and Culture
  • Music Education and Pedagogy
  • Music Theory and Analysis
  • Musical Scores, Lyrics, and Libretti
  • Musical Structures, Styles, and Techniques
  • Musicology and Music History
  • Performance Practice and Studies
  • Race and Ethnicity in Music
  • Sound Studies
  • Browse content in Performing Arts
  • Browse content in Philosophy
  • Aesthetics and Philosophy of Art
  • Epistemology
  • Feminist Philosophy
  • History of Western Philosophy
  • Metaphysics
  • Moral Philosophy
  • Non-Western Philosophy
  • Philosophy of Language
  • Philosophy of Mind
  • Philosophy of Perception
  • Philosophy of Science
  • Philosophy of Action
  • Philosophy of Law
  • Philosophy of Religion
  • Philosophy of Mathematics and Logic
  • Practical Ethics
  • Social and Political Philosophy
  • Browse content in Religion
  • Biblical Studies
  • Christianity
  • East Asian Religions
  • History of Religion
  • Judaism and Jewish Studies
  • Qumran Studies
  • Religion and Education
  • Religion and Health
  • Religion and Politics
  • Religion and Science
  • Religion and Law
  • Religion and Art, Literature, and Music
  • Religious Studies
  • Browse content in Society and Culture
  • Cookery, Food, and Drink
  • Cultural Studies
  • Customs and Traditions
  • Ethical Issues and Debates
  • Hobbies, Games, Arts and Crafts
  • Lifestyle, Home, and Garden
  • Natural world, Country Life, and Pets
  • Popular Beliefs and Controversial Knowledge
  • Sports and Outdoor Recreation
  • Technology and Society
  • Travel and Holiday
  • Visual Culture
  • Browse content in Law
  • Arbitration
  • Browse content in Company and Commercial Law
  • Commercial Law
  • Company Law
  • Browse content in Comparative Law
  • Systems of Law
  • Competition Law
  • Browse content in Constitutional and Administrative Law
  • Government Powers
  • Judicial Review
  • Local Government Law
  • Military and Defence Law
  • Parliamentary and Legislative Practice
  • Construction Law
  • Contract Law
  • Browse content in Criminal Law
  • Criminal Procedure
  • Criminal Evidence Law
  • Sentencing and Punishment
  • Employment and Labour Law
  • Environment and Energy Law
  • Browse content in Financial Law
  • Banking Law
  • Insolvency Law
  • History of Law
  • Human Rights and Immigration
  • Intellectual Property Law
  • Browse content in International Law
  • Private International Law and Conflict of Laws
  • Public International Law
  • IT and Communications Law
  • Jurisprudence and Philosophy of Law
  • Law and Politics
  • Law and Society
  • Browse content in Legal System and Practice
  • Courts and Procedure
  • Legal Skills and Practice
  • Primary Sources of Law
  • Regulation of Legal Profession
  • Medical and Healthcare Law
  • Browse content in Policing
  • Criminal Investigation and Detection
  • Police and Security Services
  • Police Procedure and Law
  • Police Regional Planning
  • Browse content in Property Law
  • Personal Property Law
  • Study and Revision
  • Terrorism and National Security Law
  • Browse content in Trusts Law
  • Wills and Probate or Succession
  • Browse content in Medicine and Health
  • Browse content in Allied Health Professions
  • Arts Therapies
  • Clinical Science
  • Dietetics and Nutrition
  • Occupational Therapy
  • Operating Department Practice
  • Physiotherapy
  • Radiography
  • Speech and Language Therapy
  • Browse content in Anaesthetics
  • General Anaesthesia
  • Neuroanaesthesia
  • Clinical Neuroscience
  • Browse content in Clinical Medicine
  • Acute Medicine
  • Cardiovascular Medicine
  • Clinical Genetics
  • Clinical Pharmacology and Therapeutics
  • Dermatology
  • Endocrinology and Diabetes
  • Gastroenterology
  • Genito-urinary Medicine
  • Geriatric Medicine
  • Infectious Diseases
  • Medical Toxicology
  • Medical Oncology
  • Pain Medicine
  • Palliative Medicine
  • Rehabilitation Medicine
  • Respiratory Medicine and Pulmonology
  • Rheumatology
  • Sleep Medicine
  • Sports and Exercise Medicine
  • Community Medical Services
  • Critical Care
  • Emergency Medicine
  • Forensic Medicine
  • Haematology
  • History of Medicine
  • Browse content in Medical Skills
  • Clinical Skills
  • Communication Skills
  • Nursing Skills
  • Surgical Skills
  • Browse content in Medical Dentistry
  • Oral and Maxillofacial Surgery
  • Paediatric Dentistry
  • Restorative Dentistry and Orthodontics
  • Surgical Dentistry
  • Medical Ethics
  • Medical Statistics and Methodology
  • Browse content in Neurology
  • Clinical Neurophysiology
  • Neuropathology
  • Nursing Studies
  • Browse content in Obstetrics and Gynaecology
  • Gynaecology
  • Occupational Medicine
  • Ophthalmology
  • Otolaryngology (ENT)
  • Browse content in Paediatrics
  • Neonatology
  • Browse content in Pathology
  • Chemical Pathology
  • Clinical Cytogenetics and Molecular Genetics
  • Histopathology
  • Medical Microbiology and Virology
  • Patient Education and Information
  • Browse content in Pharmacology
  • Psychopharmacology
  • Browse content in Popular Health
  • Caring for Others
  • Complementary and Alternative Medicine
  • Self-help and Personal Development
  • Browse content in Preclinical Medicine
  • Cell Biology
  • Molecular Biology and Genetics
  • Reproduction, Growth and Development
  • Primary Care
  • Professional Development in Medicine
  • Browse content in Psychiatry
  • Addiction Medicine
  • Child and Adolescent Psychiatry
  • Forensic Psychiatry
  • Learning Disabilities
  • Old Age Psychiatry
  • Psychotherapy
  • Browse content in Public Health and Epidemiology
  • Epidemiology
  • Public Health
  • Browse content in Radiology
  • Clinical Radiology
  • Interventional Radiology
  • Nuclear Medicine
  • Radiation Oncology
  • Reproductive Medicine
  • Browse content in Surgery
  • Cardiothoracic Surgery
  • Gastro-intestinal and Colorectal Surgery
  • General Surgery
  • Neurosurgery
  • Paediatric Surgery
  • Peri-operative Care
  • Plastic and Reconstructive Surgery
  • Surgical Oncology
  • Transplant Surgery
  • Trauma and Orthopaedic Surgery
  • Vascular Surgery
  • Browse content in Science and Mathematics
  • Browse content in Biological Sciences
  • Aquatic Biology
  • Biochemistry
  • Bioinformatics and Computational Biology
  • Developmental Biology
  • Ecology and Conservation
  • Evolutionary Biology
  • Genetics and Genomics
  • Microbiology
  • Molecular and Cell Biology
  • Natural History
  • Plant Sciences and Forestry
  • Research Methods in Life Sciences
  • Structural Biology
  • Systems Biology
  • Zoology and Animal Sciences
  • Browse content in Chemistry
  • Analytical Chemistry
  • Computational Chemistry
  • Crystallography
  • Environmental Chemistry
  • Industrial Chemistry
  • Inorganic Chemistry
  • Materials Chemistry
  • Medicinal Chemistry
  • Mineralogy and Gems
  • Organic Chemistry
  • Physical Chemistry
  • Polymer Chemistry
  • Study and Communication Skills in Chemistry
  • Theoretical Chemistry
  • Browse content in Computer Science
  • Artificial Intelligence
  • Computer Architecture and Logic Design
  • Game Studies
  • Human-Computer Interaction
  • Mathematical Theory of Computation
  • Programming Languages
  • Software Engineering
  • Systems Analysis and Design
  • Virtual Reality
  • Browse content in Computing
  • Business Applications
  • Computer Security
  • Computer Games
  • Computer Networking and Communications
  • Digital Lifestyle
  • Graphical and Digital Media Applications
  • Operating Systems
  • Browse content in Earth Sciences and Geography
  • Atmospheric Sciences
  • Environmental Geography
  • Geology and the Lithosphere
  • Maps and Map-making
  • Meteorology and Climatology
  • Oceanography and Hydrology
  • Palaeontology
  • Physical Geography and Topography
  • Regional Geography
  • Soil Science
  • Urban Geography
  • Browse content in Engineering and Technology
  • Agriculture and Farming
  • Biological Engineering
  • Civil Engineering, Surveying, and Building
  • Electronics and Communications Engineering
  • Energy Technology
  • Engineering (General)
  • Environmental Science, Engineering, and Technology
  • History of Engineering and Technology
  • Mechanical Engineering and Materials
  • Technology of Industrial Chemistry
  • Transport Technology and Trades
  • Browse content in Environmental Science
  • Applied Ecology (Environmental Science)
  • Conservation of the Environment (Environmental Science)
  • Environmental Sustainability
  • Environmentalist Thought and Ideology (Environmental Science)
  • Management of Land and Natural Resources (Environmental Science)
  • Natural Disasters (Environmental Science)
  • Nuclear Issues (Environmental Science)
  • Pollution and Threats to the Environment (Environmental Science)
  • Social Impact of Environmental Issues (Environmental Science)
  • History of Science and Technology
  • Browse content in Materials Science
  • Ceramics and Glasses
  • Composite Materials
  • Metals, Alloying, and Corrosion
  • Nanotechnology
  • Browse content in Mathematics
  • Applied Mathematics
  • Biomathematics and Statistics
  • History of Mathematics
  • Mathematical Education
  • Mathematical Finance
  • Mathematical Analysis
  • Numerical and Computational Mathematics
  • Probability and Statistics
  • Pure Mathematics
  • Browse content in Neuroscience
  • Cognition and Behavioural Neuroscience
  • Development of the Nervous System
  • Disorders of the Nervous System
  • History of Neuroscience
  • Invertebrate Neurobiology
  • Molecular and Cellular Systems
  • Neuroendocrinology and Autonomic Nervous System
  • Neuroscientific Techniques
  • Sensory and Motor Systems
  • Browse content in Physics
  • Astronomy and Astrophysics
  • Atomic, Molecular, and Optical Physics
  • Biological and Medical Physics
  • Classical Mechanics
  • Computational Physics
  • Condensed Matter Physics
  • Electromagnetism, Optics, and Acoustics
  • History of Physics
  • Mathematical and Statistical Physics
  • Measurement Science
  • Nuclear Physics
  • Particles and Fields
  • Plasma Physics
  • Quantum Physics
  • Relativity and Gravitation
  • Semiconductor and Mesoscopic Physics
  • Browse content in Psychology
  • Affective Sciences
  • Clinical Psychology
  • Cognitive Psychology
  • Cognitive Neuroscience
  • Criminal and Forensic Psychology
  • Developmental Psychology
  • Educational Psychology
  • Evolutionary Psychology
  • Health Psychology
  • History and Systems in Psychology
  • Music Psychology
  • Neuropsychology
  • Organizational Psychology
  • Psychological Assessment and Testing
  • Psychology of Human-Technology Interaction
  • Psychology Professional Development and Training
  • Research Methods in Psychology
  • Social Psychology
  • Browse content in Social Sciences
  • Browse content in Anthropology
  • Anthropology of Religion
  • Human Evolution
  • Medical Anthropology
  • Physical Anthropology
  • Regional Anthropology
  • Social and Cultural Anthropology
  • Theory and Practice of Anthropology
  • Browse content in Business and Management
  • Business Ethics
  • Business Strategy
  • Business History
  • Business and Technology
  • Business and Government
  • Business and the Environment
  • Comparative Management
  • Corporate Governance
  • Corporate Social Responsibility
  • Entrepreneurship
  • Health Management
  • Human Resource Management
  • Industrial and Employment Relations
  • Industry Studies
  • Information and Communication Technologies
  • International Business
  • Knowledge Management
  • Management and Management Techniques
  • Operations Management
  • Organizational Theory and Behaviour
  • Pensions and Pension Management
  • Public and Nonprofit Management
  • Strategic Management
  • Supply Chain Management
  • Browse content in Criminology and Criminal Justice
  • Criminal Justice
  • Criminology
  • Forms of Crime
  • International and Comparative Criminology
  • Youth Violence and Juvenile Justice
  • Development Studies
  • Browse content in Economics
  • Agricultural, Environmental, and Natural Resource Economics
  • Asian Economics
  • Behavioural Finance
  • Behavioural Economics and Neuroeconomics
  • Econometrics and Mathematical Economics
  • Economic History
  • Economic Systems
  • Economic Methodology
  • Economic Development and Growth
  • Financial Markets
  • Financial Institutions and Services
  • General Economics and Teaching
  • Health, Education, and Welfare
  • History of Economic Thought
  • International Economics
  • Labour and Demographic Economics
  • Law and Economics
  • Macroeconomics and Monetary Economics
  • Microeconomics
  • Public Economics
  • Urban, Rural, and Regional Economics
  • Welfare Economics
  • Browse content in Education
  • Adult Education and Continuous Learning
  • Care and Counselling of Students
  • Early Childhood and Elementary Education
  • Educational Equipment and Technology
  • Educational Strategies and Policy
  • Higher and Further Education
  • Organization and Management of Education
  • Philosophy and Theory of Education
  • Schools Studies
  • Secondary Education
  • Teaching of a Specific Subject
  • Teaching of Specific Groups and Special Educational Needs
  • Teaching Skills and Techniques
  • Browse content in Environment
  • Applied Ecology (Social Science)
  • Climate Change
  • Conservation of the Environment (Social Science)
  • Environmentalist Thought and Ideology (Social Science)
  • Social Impact of Environmental Issues (Social Science)
  • Browse content in Human Geography
  • Cultural Geography
  • Economic Geography
  • Political Geography
  • Browse content in Interdisciplinary Studies
  • Communication Studies
  • Museums, Libraries, and Information Sciences
  • Browse content in Politics
  • African Politics
  • Asian Politics
  • Chinese Politics
  • Comparative Politics
  • Conflict Politics
  • Elections and Electoral Studies
  • Environmental Politics
  • European Union
  • Foreign Policy
  • Gender and Politics
  • Human Rights and Politics
  • Indian Politics
  • International Relations
  • International Organization (Politics)
  • International Political Economy
  • Irish Politics
  • Latin American Politics
  • Middle Eastern Politics
  • Political Behaviour
  • Political Economy
  • Political Institutions
  • Political Methodology
  • Political Communication
  • Political Philosophy
  • Political Sociology
  • Political Theory
  • Politics and Law
  • Public Policy
  • Public Administration
  • Quantitative Political Methodology
  • Regional Political Studies
  • Russian Politics
  • Security Studies
  • State and Local Government
  • UK Politics
  • US Politics
  • Browse content in Regional and Area Studies
  • African Studies
  • Asian Studies
  • East Asian Studies
  • Japanese Studies
  • Latin American Studies
  • Middle Eastern Studies
  • Native American Studies
  • Scottish Studies
  • Browse content in Research and Information
  • Research Methods
  • Browse content in Social Work
  • Addictions and Substance Misuse
  • Adoption and Fostering
  • Care of the Elderly
  • Child and Adolescent Social Work
  • Couple and Family Social Work
  • Developmental and Physical Disabilities Social Work
  • Direct Practice and Clinical Social Work
  • Emergency Services
  • Human Behaviour and the Social Environment
  • International and Global Issues in Social Work
  • Mental and Behavioural Health
  • Social Justice and Human Rights
  • Social Policy and Advocacy
  • Social Work and Crime and Justice
  • Social Work Macro Practice
  • Social Work Practice Settings
  • Social Work Research and Evidence-based Practice
  • Welfare and Benefit Systems
  • Browse content in Sociology
  • Childhood Studies
  • Community Development
  • Comparative and Historical Sociology
  • Economic Sociology
  • Gender and Sexuality
  • Gerontology and Ageing
  • Health, Illness, and Medicine
  • Marriage and the Family
  • Migration Studies
  • Occupations, Professions, and Work
  • Organizations
  • Population and Demography
  • Race and Ethnicity
  • Social Theory
  • Social Movements and Social Change
  • Social Research and Statistics
  • Social Stratification, Inequality, and Mobility
  • Sociology of Religion
  • Sociology of Education
  • Sport and Leisure
  • Urban and Rural Studies
  • Browse content in Warfare and Defence
  • Defence Strategy, Planning, and Research
  • Land Forces and Warfare
  • Military Administration
  • Military Life and Institutions
  • Naval Forces and Warfare
  • Other Warfare and Defence Issues
  • Peace Studies and Conflict Resolution
  • Weapons and Equipment

The Oxford Handbook of Banking (3rd edn)

  • < Previous chapter
  • Next chapter >

The Oxford Handbook of Banking (3rd edn)

12 Islamic banking: A Review of the Empirical Literature and Future Research Directions

Narjess Boubakri is the Bank of Sharjah Chair in Banking and Finance, Professor of Finance and Head of the Finance Department at the School of Business Administration of the American University of Sharjah. Her research interests include, among other things, privatization, corporate governance, political economy of reforms, institutional economics, and the impact of institutional infrastructure on corporations. Her papers have been published in the Journal of Finance, the Journal of Financial Economics, the Journal of International Business Studies, the Journal of Accounting Research, and the Journal of Financial and Quantitative Analysis, among others. She acts as Associate Editor for the Journal of Corporate Finance, as Editor in Chief for Finance Research Letters, co-editor for the Quarterly Review of Economics and Finance, and is on the editorial boards of Emerging Markets Review and the Journal of International Financial Markets Institutions and Money.

Ruiyuan Ryan Chen is an Assistant Professor of Finance at the West Virginia University. His current research focuses on state ownership, corporate governance, and corporate cash holdings. His research has been published in Emerging Markets Review, the Journal of Corporate Finance, and the Journal of Financial and Quantitative Analysis.

Omrane Guedhami is the C. Russell Hill Professor of Economics and Professor of International Finance at the Moore School of Business at the University of South Carolina. His current research focuses on corporate governance, privatization, corporate social responsibility, and formal and informal institutions and their effects on corporate policies and firm performance. His research has been published in the Journal of Financial Economics, the Journal of Accounting Research, the Journal of Accounting and Economics, the Journal of Financial and Quantitative Analysis, the Journal of International Business Studies, and Management Science, and the Review of Finance, among others. He is a member of the editorial boards of major journals, such as Contemporary Accounting Research and the Journal of International Business Studies, and is currently serving as a Section Editor at the Journal of Business Ethics and Associate Editor of the Journal of Corporate Finance and the Journal of Financial Stability.

Xinming Li is an Associate Professor of Finance at the School of Finance at Nankai University and a consultant at the World Bank Group. He is also the holder of the Emerging Scholars Award by the Federal Reserve and the Conference of State Bank Supervisors. His research areas include a variety of topics related to banking and financial institutions, corporate finance, and international finance.

  • Published: 06 November 2019
  • Cite Icon Cite
  • Permissions Icon Permissions

The last two decades have witnessed a tremendous global growth in Islamic finance and banking, mainly prompted by the global financial crisis. This growth has been accompanied by an increasing interest among researchers, policymakers, managers of financial institutions, and the public about the functionalities of the Islamic banking system and how it differs from conventional banking. Against this backdrop, we start this chapter with an overview and assessment of the practice of Islamic banking around the world. Then, we discuss its primary characteristics, including its underlying principles and common financial products. Next, we review the key findings in the empirical literature on the differences between Islamic and conventional banking at the micro and macro levels. We conclude with a discussion of avenues for future research.

12.1 Introduction

The last two decades have witnessed dramatic global growth in Islamic finance and banking. Since the founding of the first Islamic bank in 1975, Islamic financial assets in the banking, capital markets, and insurance sectors have reached over $2 trillion (IFSB, 2018 ), 1 and more than 350 Islamic banks now operate worldwide.

The term “Islamic banking” refers generally to banking operations conducted under Sharia law, which mandates banking transactions be subject to three sets of constraints. First, payments or receipts of interest ( Riba ), whether nominal or real, are prohibited. In this sense, Islamic banking is basically an interest-free model. Thus, because money cannot reward money, Islamic transactions must be backed by tangible assets. Second, Gharar and Maysar , speculation and excessive risk-taking or betting, respectively, are prohibited. In practice, this means, for example, that Islamic banks cannot trade derivative products. 2 Third, Islamic banks are prohibited from financing activities that are illegal under Islamic law, or that are viewed as having a negative impact on society, such as those involving alcohol or gambling.

In this chapter, we provide an overview and assessment of the practice of Islamic banking around the world. Section 12.2 provides a brief review of the growth of Islamic banking. In section 12.3 , we discuss its primary characteristics, including its underlying principles and common financial products. In sections 12.4 and 12.5 , we review key findings in the empirical literature on the differences between Islamic and conventional banking at the micro and macro levels. We conclude in section 12.6 with avenues for future research.

12.2 Growth of Islamic Banking around the World

Modern Islamic banking dates to the 1970s. The first international Islamic bank, the Islamic Development Bank (IDB), was founded in 1975 by members of the Organisation of Islamic Cooperation. IDB’s aim was to cater to the Muslim population’s needs while fostering economic and social development in accordance with the principles of Sharia law, a set of Islamic principles derived from the Koran.

The first modern (private) Islamic bank, Dubai Islamic Bank, was also established in 1975. Although privately owned and operated, it relied on a committee of religious Sharia advisors to conduct its operations. Next, the Kuwait Finance House was established in 1977. Unlike Dubai Islamic Bank, Kuwait Finance House was majority owned by government ministries. Two additional Islamic banks were founded by governments in 1977, Faisal Islamic Bank of Sudan and Faisal Islamic Bank of Egypt. 3

During the 1980s, reforms in Iran and Sudan removed all interest-based operations from the banking sector, resulting in the first fully Islamic national banking systems (Wealth Monitor, 2016 ; Hassan and Aliyu, 2018 ). Islamic banks were also introduced in other countries with large Muslim populations, such as Malaysia, Bangladesh, Mauritania, and Saudi Arabia (Imam and Kpodar, 2016 ).

The 1990s witnessed a greater acceleration in the establishment of Islamic banks “after the applications of Islamic finance functions were acknowledged by the International Monetary Fund (IMF) and the World Bank [in] the early 1990s (Iqbal and Molyneux, 2005 )” (Alandejani, Kutan, and Samargandi, 2017 ). The pace quickened again after the global financial crisis (GFC), 4 because it cast doubts on the proper functioning of conventional banking, which, in turn, created interest in alternative models such as Islamic banking (Beck, Demirgüç-Kunt, and Merrouche, 2013 ; Hassan and Aliyu, 2018 ).

Zaher and Hassan ( 2001 ) argue that the liberalization of capital markets, the global integration of financial markets, structural macroeconomic reforms, and the introduction of innovative Islamic products also contributed to the growth of Islamic banking. The substantial rise in consumer demand for Sharia -compliant contracts has led multinational banks such as Chase Bank, Citibank, ABN Amro, and HSBC to establish Islamic finance branches while conducting separate conventional banking operations.

In 1991, to support this growth, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was created to set accounting, auditing, and Sharia standards for Islamic financial institutions. In 2002, the AAOIFI was complemented by the Islamic Financial Services Board (IFSB), which sets prudential standards and regulates the industry, and the International Islamic Financial Market (IIFM), which focuses on developing a robust, transparent, and efficient Islamic financial market. 5

As we note in the Introduction, today there are more than 350 Islamic banks worldwide, operating in countries as diverse as Switzerland, the US, France, Germany, Thailand, Singapore, India, China, and Australia. In January 2018, Islamic banking was also present in South America, where a conventional bank in Suriname was recently converted to a Sharia -compliant Islamic bank (IFSB, 2018 ). Despite the wide reach of Islamic banking, however, industry assets are highly concentrated in a small number of countries. In particular, the oil-exporting Gulf Cooperation Council (GCC) countries, Malaysia, and Iran together account for more than 80 percent of the industry’s assets (Islamic Finance Outlook, 2018 ). 6

At a country level, as shown by Figure 12.1 , Iran has the largest share of the Islamic banking market with 34.4 percent of global Islamic banking assets, followed by Saudi Arabia (20.4 percent), United Arab Emirates (9.3 percent), Malaysia (9.1 percent), Kuwait (6 percent), and Qatar (6 percent) (IFSB, 2018 ). Within countries, the share of Islamic banking has been growing as well. For example, Islamic banking now accounts for 61.8 percent of the domestic market in Brunei, followed by Saudi Arabia at 51.5 percent of the domestic market (IFSB, 2018 ).

Shares of Global Islamic Banking Assets (1H2017).

Looking at different sectors of the Islamic banking industry, the IFSI Stability Report (IFSB, 2018 ) shows that assets and financing each grew at a compounded rate of 8.8 percent between 2013 and 2017, while deposits grew at a compounded rate of 9.4 percent over the same period. In countries with a smaller Islamic base, these growth rates have been even more notable. Oman, for example, saw increases in Islamic banking assets, financing, and deposits of more than 30 percent each in 2Q2017. In the United Arab Emirates, both Islamic banking assets and financing grew by 7.4 percent, exceeding the average asset growth of 4.9 percent for conventional banks over the 2Q2016-2Q2017 period.

To provide further evidence on the worldwide growth of Islamic banking, we turn to Bankscope, 7 which contains detailed information about Islamic banking over the 1999–2014 period, and is widely viewed as an excellent source of information on Islamic finance. Figure 12.2 plots the number of Islamic banks between 1999 and 2014. As can be seen, the number reporting to Bankscope increased from thirty-six in 1999 to 104 in 2014, with a peak of 116 in 2011.

Figure 12.3 plots the total assets of Islamic banks. The figure shows that total assets increased dramatically, from around $18 billion in 1999 to $262 billion in 2014, with the level more than doubling after the GFC. In Figure 12.4 , we note that Islamic banks account for a small share of total bank assets globally—less than 3 percent of total banking sector assets in 2014—but, in Figure 12.5 , we see the share has been increasing. For example, in the twenty-eight countries with at least one Islamic bank over the 1999–2014 period, the proportion of Islamic bank assets increased from less than 1 percent in 1999 to a peak of more than 3 percent in 2013. Figure 12.5 shows that, in a large number of countries, and mainly in GCC countries, Islamic banks account for a significant share of assets in the domestic market. Note that the entire banking systems of Iran and Sudan are Islamic, while in Brunei they account for more than 57 percent, followed by Saudi Arabia (51.1 percent), and Kuwait (39 percent).

Number of Islamic Banks Reporting to Bankscope.

Islamic Banks’ Total Assets (million $).

Share of Islamic Banks’ Assets in Total Banking Sector Assets (%).

Share of Islamic Banks’ Assets in Total Banking Sector by Country (1H2016).

Looking ahead, Islamic banking is expected to continue growing. Imam and Kpodar ( 2013 ) show that factors contributing to the development of Islamic banking in a given country include the size of the Muslim population, income per capita, the level of interest rates, whether the country is a net exporter of oil, the size of trade with the Middle East, the level of economic stability, and proximity to Malaysia and Bahrain (two Islamic financial centers). However, while important for conventional banking, they find that the quality of a country’s institutional environment does not matter for the diffusion of Islamic banking. 8 As Figure 12.6 shows, the Muslim population is projected to increase from 1.3 billion in 2010 to over 1.6 billion in 2030. Because people in countries where the majority of residents identify as Muslim tend to have at least some familiarity with Islamic banking (PricewaterhouseCoopers, 2014 ), growth in the world’s Muslim population alone supports an increase in Islamic banking over time. The fact that Islamic banks are regarded as following an ethically and socially responsible business model and are perceived to show higher resilience during times of economic distress are likely to further contribute to the growth.

World Islamic Population 1990, 2010, and 2030 (millions).

12.3 Characteristics of Islamic Banking

12.3.1 islamic banking: underlying principles.

Islamic banks follow the religious principles of equity, participation, and ownership as embedded in Sharia law. Accordingly, as we discuss above, Islamic banks cannot charge predetermined interest rates ( Riba ), take excessive risk, speculate ( Gharar ), or bet ( Maysar ), and they are prohibited from trading in asset classes associated with illegal activity or negative social outcomes, such as alcohol, drugs, and weapons. As Zaher and Hassan ( 2001 , p. 158) put it, “exploitative contracts based on Riba (interest or usury) or unfair contracts that involve risk or speculation” are prohibited.

To elaborate, Riba —an important feature of conventional banking—corresponds to the “fixing in advance of a positive return on a loan as a reward for waiting to be repaid” (Zaher and Hassan, 2001 , p. 156). The prohibition of Riba , which is an increase in money not connected to a tangible real economic increase, is consistent with the principle of equity. Thus, the weaker contracting party in a financial transaction is protected from an increase in wealth that is not related to a productive activity (Hussain, Shahmoradi, and Turk, 2015 ). Moreover, the prohibition of Riba is consistent with the principle of participation, which ensures both borrower and lender share in the risk of a project (Zaher and Hassan, 2001 ). The prohibition of Gharar , or excessive risk-taking, is similarly in line with the equity principle, as it decreases information asymmetry and contract ambiguity. Instead, Islamic banks rely on the idea of risk sharing on both the liability and asset side. They also follow the idea “that all transactions have to be backed by a real economic transaction that involves a tangible asset” (Beck, Demirgüç-Kunt, and Merrouche, 2013 , p. 433), which is in line with the participation and ownership principles. For example, profit-and-loss sharing involve providing financing to anyone with a productive business venture idea. The borrower and the lender work closely together and share the risk of the venture, which is selected based on its projected returns. The return earned on capital is thus associated with productive activity, is backed by an asset (i.e., the requirement of asset ownership before a return can be earned), and is determined only ex post by the asset’s performance and not the passage of time (Hussain, Shahmoradi, and Turk, 2015 , p. 6). This idea of “zero risk entails zero return,” where risk relates “primarily to the real-sector uncertainties, not the risk of borrower delinquency” (Ariff, 2014 , p. 734), is a key feature of Islamic banking. Under this framework, Zaher and Hassan ( 2001 ) argue that depositors in Islamic banks can be viewed as “shareholders,” because they earn dividends when the bank makes a profit and lose money when the bank records a loss.

The principles above are at the core of the differences between Islamic and conventional banking systems, as summarized by Errico and Farahbaksh ( 1998 ) and illustrated in Table 12.1 .

12.3.2 Islamic Banking: Financial Products

Islamic scholars have developed several Sharia -compliant financial instruments that not only avoid the payment or receipt of interest at a predetermined rate (Čihák and Hesse, 2010 ), but also include risk sharing. These Islamic financial contracts fall into two asset categories: equity and debt. Table 12.2 summarizes the six basic Islamic finance instruments, which are discussed in more detail next.

On the equity side, Islamic banks offer Mudaraba (silent partnership) and Musharaka (joint partnership) contracts. A Mudaraba contract is structured as a profit-sharing and loss-bearing contract, whereby a principal (the bank or investor) provides funds to an agent (entrepreneur), who in turn provides effort and management expertise for the project. Under this contract, although the entrepreneur controls and runs the business, the bank that provides the capital can participate in the decision-making. In this case, losses are borne exclusively by the bank, while profits are shared at a pre-agreed percentage. This structure is comparable to conventional limited partnerships.

A Musharaka contract is an alternative profit-and-loss partnership arrangement. Under this type of agreement, two parties (the bank and the client) provide the capital needed to finance a project, so profits as well as losses are shared by both parties. Here, profits are shared based on a pre-agreed percentage, while losses are shared in proportion to each party’s equity participation. This type of contract comes closest to the principles of equity and participation that form the basis of Sharia law, since it involves risk sharing, asset ownership, and no interest. It is most suitable for financing long-term projects.

On the debt side, Islamic banks offer Murabaha, Ijara, Salam , and Istisna . A Murabaha contract is a cost-plus-profit transaction commonly used for consumer loans, trade finance, corporate credit, real estate, and project financing. Under this type of contract, the Islamic bank purchases goods on behalf of the customer and then resells them to the customer at a mark-up. This type of contract is essentially an asset-backed loan plus a deferred payment sale transaction. The contract terms cannot be altered during the life of the contract, even if the client defaults or is late making payments. The mark-up is determined based on LIBOR, the type of good being financed, the overall amount of the transaction, and the client’s credit history. Under this type of contract, the benefits and risks of asset ownership are transferred to the client along with ownership, but the bank shares in the project’s risk because it assumes liability if the goods it purchased were defective. In case of default, however, the ownership rights of the asset return to the bank.

Under an Ijara contract, the bank retains ownership of the goods, leasing them out for pre-agreed payments (to avoid speculation) over a pre-agreed period of time, just as in a conventional leasing contract. Because the bank owns the asset, it assumes responsibility for its maintenance and insurance. Ijara payments can be changed during the contract period, unlike Murabaha payments.

A Salam contract is a forward agreement whereby delivery occurs at a future date in exchange for spot payments. According to Hussain, Shahmoradi, and Turk ( 2015 , p. 9), “Such transactions were originally allowed to meet the financing needs of small farmers as they were unable to yield adequate returns until several periods after the initial investment.” To be Sharia -compliant, payment under these contracts must be made in full at the beginning of the contract period. This type of contract thus entails a spot obligation for the client and a future obligation for the bank.

Under the last type of debt contract, Istisna , both payment and delivery occur in the future. This type of contract is effectively a pre-delivery financing and leasing contract. It is used primarily to finance large-scale, long-term projects (Zaher and Hassan, 2001 ). Notably, Istisna is a three-party contract. The bank acts as an intermediary between the client, from which it receives payments, and the manufacturer, to which it makes installment payments, because it is the bank that commits to buying the assets. Of the various types of debt instruments in Islamic banking, the last two types, Salam and Istisna , are used least often.

In practice, several of these Sharia -compliant products do not appear to differ that much from conventional products. This is because of the “close alignment of the competitive rates paid by Islamic banks on investment deposits with deposit rates at conventional banks, as well as with the benchmarking of Islamic financing rates on the asset side of the balance sheet to the LIBOR” (Hussain, Shahmoradi, and Turk, 2015 , p. 12). 9 Moreover, in terms of their business models, Beck, Demirgüç-Kunt, and Merrouche ( 2013 ) and Čihák and Hesse ( 2010 ) find few significant differences in business orientation, asset quality, efficiency, or stability between Islamic and conventional banking. However, a closer look at the two sets of products reveals major differences in terms of asset ownership, 10 interest, equity, and risk sharing, as explained above. Moreover, there are differences in the degree of permissibility of some Sharia -compliant products from one country to another (Song and Oosthuizen, 2014 ). For example, Tawarruq , instruments used by Islamic banks to fulfill clients’ demands to extend personal loans, are permitted in the UAE but not in Iran.

The most recent Stability Report (IFSB, 2018 , p. 88) reports that household and personal financing constitute the main financing activities of Islamic banks (42 percent of total Islamic bank financing in 2017) (p. 94), followed by manufacturing and retail trade with 21 percent. In terms of contracts, Murabaha and Ijara dominate Islamic banking transactions, accounting for up to 7 percent. In comparison, profit-and-loss-sharing contracts represent only 5 percent of transactions with Islamic banks (Hassan and Aliyu, 2018 ). In Oman, where Islamic banking is growing at the fastest rate, Musharaka and Ijara account for 76.5 percent of total financing by Islamic banks, with these contracts used largely for real estate purchases and consumer financing (IFSB, 2018 ).

12.3.3 Islamic Banking versus Conventional Banking Balance Sheets

Van Greuning and Iqbal ( 2007 ) provide a detailed comparison of the balance sheets of a conventional bank (Table 12.3 ) and an Islamic bank (Table 12.4 ), highlighting differences in terms of risk. For a conventional bank, the liability side includes demand and savings deposits, term certificates, and capital. The asset side includes marketable securities, lending to consumers (individuals/households) and corporations, and trading accounts. According to van Greuning and Iqbal ( 2007 , chapter 2 , pp. 16–21), this structure (1) generates an asset-liability mismatch, because “the deposits create instantaneous pre-determined liabilities irrespective of the outcome of the usage of the funds on the asset side,” and (2) exposes the bank to maturity mismatch risk, reducing their incentives to fund long-term non-liquid projects because “medium- to long-term assets are financed by the stream of short-term liabilities.” Because they do not typically have access to traditional money markets, managing short-term liquidity positions in Islamic banks can be challenging.

In contrast, for an Islamic bank, the use (by entrepreneurs) and mobilization (by depositors) of funds intermediated by the bank are structured as profit-sharing contracts among depositors, the bank, and entrepreneurs. In other words, unlike conventional banking, Islamic banking is viewed as a “pass-through” financial intermediation arrangement, whereby profits and losses are passed to depositors and investors (van Greuning and Iqbal, 2007 ). More specifically, on the liability side of an Islamic bank’s balance sheet, we find demand deposits and (risk-free) investment accounts from customers. These investment accounts are linked to either the Islamic bank’s profits or to a specific investment account on the asset side of the bank’s balance sheet, and they share in the bank’s profits (depositors receive dividends) and losses. In comparison, savings and time deposits on the liability side of conventional banks earn interest on the spot, even if the funds are not deployed to productive use by the bank. In Islamic banks, demand deposits ( Amanah ) are entrusted to the bank. If these funds are used by the bank and generate returns, only then are they shared with depositors (Hassan and Aliyu, 2018 ).

On the asset side, we find Islamic financing and investing accounts. As shown in Table 12.4 , while non-profit-and-loss-sharing debt-based contracts such as Murabaha and Ijara dominate the asset side, the Mudarabah contract on the liability side is the basis of Islamic banking. Alzahrani and Megginson ( 2017 ) argue that risk sharing in Islamic banks allows for a better matching of assets and liabilities because investment accountholders on the liability side absorb any losses on the asset side. Indeed, because Islamic bank depositors’ returns are linked to the bank’s return on assets, the bank’s exposure to the asset–liability mismatch, typical in conventional banks, disappears. Furthermore, in line with the principle of risk sharing, an Islamic bank is exposed to the liability of the assets it purchases and sells to clients. This is not the case in conventional banks that finance an asset by extending a loan to the customer, regardless of the asset. Because an Islamic bank’s assets comprise real asset-based investments, “the lending capability of the [Islamic banking] sector is bound by the availability of real assets in the economy. Thus there is no leveraged credit creation” (van Greuning and Iqbal, 2007 , chapter 2 ). Finally, because interest is prohibited, Islamic banks cannot issue debt to finance assets, which also mitigates the creation of leverage. Because Islamic banks are unlevered, they are considered to be less risky during crises. Note further that conventional banks are allowed to trade in complex derivatives that appear on their balance sheets, while Islamic banks are prohibited from doing so (Hassan and Aliyu, 2018 , p. 28). These features of financial intermediation, together with better monitoring incentives of assets and borrowers in the risk-sharing partnership contracts that characterize Islamic banking, contribute to the stability of Islamic banking systems.

Doumpos, Hasan, and Pasiouras ( 2017 ) note that the differences between the balance sheets of Islamic banks and conventional banks have several operational implications. For example, while conventional banks are able to use both debt and equity to finance their asset portfolios, Islamic banks can only use equity financing and deposits, which limits their liquidity on the asset side. In addition, because Islamic banks engage in risk-sharing partnership contracts, they are not allowed to require collateral to reduce credit risk, as conventional banks do. This puts an additional burden on Islamic banks in terms of appraising and assessing which projects to finance. Beck, Demirgüç-Kunt, and Merrouche ( 2013 ) argue that such complexities in Islamic banking products, including legal and compliance risks, increase the overall operational risk of Islamic banks compared to conventional banks. However, the fact that they are restricted to certain asset classes, do not trade in risky securities such as derivatives, and do not engage in excessive risk-taking may also increase their relative stability compared to conventional banks.

12.4 Review of the Literature Comparing Islamic and Conventional Banks: Micro-Level Evidence

In this section, we review the literature on the financial characteristics of Islamic banks in comparison to conventional banks, their relative performance and efficiency, stability during crises, and other micro-level outcomes such as liquidity, corporate social responsibility, and transparency. 11 Appendix 12. A provides an overview of the studies.

12.4.1 Profitability and Efficiency

Despite being guided by such principles as justice, fairness, and concern for the general welfare of the people, Islamic banks are nevertheless also profit-seeking entities, just like conventional banks. Extensive research on the relative performance of Islamic and conventional banks has found mixed results thus far. Some authors find that Islamic banks are not distinguishable in practice from conventional banks (Siddiqi, 2006 ; Bourkhis and Nabi, 2013 ); others find that Islamic banks outperform their conventional bank counterparts in terms of profitability and efficiency. Baele, Farooq, and Ongena ( 2014 ), for example, find that loans from Islamic banks are less likely to be overdue or in default, suggesting that individual and systemic risk from loan defaults may be less likely to materialize for Islamic banks. Beck, Demirgüç-Kunt, and Merrouche ( 2013 ; Tables 12.5 and 12.6 ) show that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality, and are better capitalized. These findings broadly confirm prior literature (e.g., Olson and Zoubi, 2008 ; Turk-Ariss, 2010 ; Hasan and Dridi, 2011 ; Abedifar, Molyneux, and Tarazi, 2013 ). Some authors argue that it is because of their higher capitalization and asset quality that Islamic banks were able to outperform their conventional counterparts during the GFC (e.g., Bourkhis and Nabi, 2013 ).

Note : **significance at the 5% level; ***significance at the 1% level.

Note : *significance at the 10% level; **significance at the 5% level; ***significance at the 1% level.

Regarding the relative efficiency of Islamic versus conventional banks, the evidence is also inconclusive. An early study by Bader et al. ( 2008 ) found no significant differences in efficiency. And, according to Yahya, Muhammad, and Hadi ( 2012 ) and di Mauro et al. ( 2013 ), there was no efficiency gap between Islamic banks and conventional banks before the GFC. Instead, Srairi ( 2010 ) shows that Islamic banks are, on average, less cost- and profit-efficient than conventional banks. However, a more recent study by Doumpos, Hasan, and Pasiouras ( 2017 ) showed that Islamic banks outperformed conventional banks in the Middle East and North Africa (MENA) region, but underperformed in the GCC and Asian countries. The international comparison of Islamic and conventional banks in terms of cost and profit efficiency shows that Islamic banks in advanced economies “seem to be more efficient than those in other countries. This could be partly explained by well-established regulatory frameworks, more advanced human capital, and better risk management practices in these countries (Tahir and Haron, 2010 )” (Hussain, Shahmoradi, and Turk, 2015 , p. 17).

These mixed results in the literature have led to a debate over the appropriateness of using separate indicators of performance and efficiency. Bitar, Hassan, and Walker ( 2017 ), for example, argue that conventional bank accounting indicators used in the literature are relatively one-dimensional, and may lead to contradictory results. Some authors use them to assess risk, loan-loss reserves to gross loans, or the standard deviation of return on assets, while others may use the net interest margin or the z-score. The authors therefore propose using a principal component analysis that encompasses twenty indicators of bank financial strength. Using a sample of 8,615 banks (including 123 Islamic banks), they show that capital, volatility of returns, liquidity, and profitability capture most of the variance of the financial indicators of bank characteristics. They also show through Logit and Probit regressions that Islamic banks are more highly capitalized, more liquid, and more profitable, but have more volatile earnings relative to conventional banks in Europe and the US. They then focus on the sample of countries where dual banking systems exist, and find that Islamic banks and conventional banks are indistinguishable in terms of liquidity and volatility of earnings.

Doumpos, Hasan, and Pasiouras ( 2017 ) further emphasize the mixed results in the literature in their focus on the relative financial strength of Islamic and conventional banks. They build a multi-criteria index that aggregates various dimensions of bank capital strength, asset quality, earnings, liquidity, and management quality in controlling expenses. The authors argue that Islamic banks may have more financial strength, given their reliance on profit-and-loss sharing, which allows them to transfer risks from the asset to the liability side. However, they also counterargue that Islamic banks may have less financial strength, given their restrictions to certain asset classes, prohibition from using derivatives as hedging instruments, and the moral hazard issues embedded in Islamic contracts. Their results show that banks are substantially different when using individual financial ratios; however, they find no significant difference in overall financial strength between Islamic and conventional banks. When considering geographic location, Doumpos, Hasan, and Pasiouras ( 2017 ) observe that conventional banks perform better than Islamic banks or banks with Islamic branches in Asia and the GCC. The reverse is true in MENA. Control of corruption and government effectiveness are two institutional characteristics that affect financial strength.

Alandejani, Kutan, and Samargandi ( 2017 ) adopt a different approach, and focus on bank failure risk. To conduct their analysis, they focus on Islamic and conventional banks in GCC countries, and examine the explanatory power of bank-level and macro-level determinants using hazard and survival functions. They find that Islamic banks have a shorter survival time, and a higher incidence rate of failure, than conventional banks. They also show that the hazard rate of Islamic banks (conventional banks) increases (decreases) with higher net interest margin ratios, suggesting that Islamic banks and conventional banks obey different dynamics. The authors contend that the higher government ownership associated with conventional banks, which provides them with an implicit bailout guarantee in cases of distress, may explain why their failure rate is lower than that of Islamic banks.

12.4.2 Stability and Performance around the GFC

Several theoretical arguments suggest that Islamic banks should be more resilient to crises. First, the use of leveraged transactions, as well as complex securitization products and derivatives, in the conventional banking system have often been cited as the main cause of the GFC (Sorwar et al., 2016 ). Since excessive risk-taking (i.e., Gharar ) and trading in derivatives are strictly prohibited in Islamic banks (as discussed above), one would expect lower risk exposure for the latter than for conventional banks (Čihák and Hesse, 2010 ; Pappas et al., 2017 ). Second, short-selling is not permissible in Islamic banks. Third, Islamic banks “are able to pass through a negative shock from the asset side (e.g., a Musharaka loss) to the investment depositors (a Mudaraba arrangement),” resulting in less vulnerability to risk (Čihák and Hesse, 2010 , p. 98). In effect, the profit-and-loss-sharing banking instruments, and the asset-backed financing of Islamic banks’ operations linking financing to production, contribute to “curb excessive leverage” (Hussain, Shahmoradi, and Turk, 2015 ; Alzahrani and Megginson, 2017 ). Fourth, the enhanced monitoring of investment accountholders, who are also less likely to withdraw their funds because of their religious beliefs, suggest that Islamic banks are less vulnerable to downturns compared to their conventional bank counterparts. In addition, their superior asset quality and higher capitalization ratios provide Islamic banks with a buffer during downturns.

However, other arguments in the literature suggest the contrary. For example, Sorwar et al. ( 2016 ) suggest that the prohibition against using derivatives means Islamic banks cannot manage or hedge against risk effectively. In addition, Islamic banks cannot access the interbank market for liquidity because of its interest-bearing features. In this vein, Wiyono and Rahmayuni ( 2012 ) observe that, unlike conventional banks, Islamic banks are more exposed to liquidity risk. This is because they cannot benefit from central banks’ liquidity provisions during liquidity shortages because they are based on interest lending (Alqahtani, Mayes, and Brown, 2017 ). Moreover, the complexity of Islamic financial instruments, combined with their regulatory and compliance risk, increase their exposure to overall operating risk (Beck, Demirgüç-Kunt, and Merrouche, 2013 ). Finally, and as shown by Khan ( 2010 ), there is a high correlation between the profit-sharing ratios in Islamic banks’ instruments and standard interest rate proxies, such as LIBOR rates. This suggests that Islamic banks are as exposed to market risk as conventional banks (Sorwar et al., 2016 ). Beck, Demirgüç-Kunt, and Merrouche ( 2013 ) conduct a comparative analysis of Islamic banks and conventional banks during crises (Table 12.7 ). Using several indicators of asset quality and stability, they show that Islamic banks are more likely to be negatively affected during times of distress. They find evidence of higher capitalization during local crises, and a stronger negative trend in the capitalization of Islamic banks than in conventional banks. They observe no significant difference in z-score, profitability, or maturity mismatch. Islamic banks, however, have higher loan-deposit ratios, lower non-performing loans, and lower loan-loss provisions than conventional banks.

Several authors have tried to disentangle these effects, and to examine the validity of these arguments around the GFC, which is considered an ideal setting given its exogeneity. The results to date remain mixed. In a seminal work focused on Islamic banks in the GCC, Olson and Zoubi ( 2008 ) observe a higher profitability of Islamic banks versus conventional banks based on profitability ratios, efficiency ratios, asset quality, and cash/liquidity ratios. Prior to the GFC, Islamic banks held more cash and had fewer loan-loss provisions. In a follow-up study, Olson and Zoubi ( 2016 ) explored the recovery period, and observed a convergence toward the mean for Islamic and conventional banks alike in terms of profitability (measured by return on assets (ROA) and return on equity (ROE)). They show that the speed of convergence was relatively slower for Islamic banks, although they also performed better prior to the crisis. Rosman, Wahab, and Zainol ( 2014 ) find that Islamic banks in Middle Eastern and Asian countries were able to maintain their technical efficiency during the GFC due to their capital buffers and higher profitability. Johnes, Izzeldin, and Pappas ( 2014 ) report lower efficiency for conventional banks in the GCC prior to the crisis (2006–8), and a slight decline in the level of Islamic banks’ revenue and profit efficiency during the GFC. They attribute these results to Islamic banks’ superior asset quality, confirming findings in Hasan and Dridi ( 2011 ) and Pappas et al. ( 2017 ). Alqahtani, Mayes, and Brown ( 2017 ) add to this evidence by examining the pre-crisis, crisis, and recovery periods. They show that, during the GFC, Islamic banks were more cost-efficient than conventional banks. After the crisis, however, Islamic banks underperformed conventional banks, and lost their cost-efficiency superiority. The authors interpret this evidence as follows: Islamic banks were less exposed to the GFC because, unlike conventional banks, they were constrained from trading in risky, highly leveraged asset classes. In the aftermath, when the shock spilled over from the financial to the economic sector, and given that Islamic banking is asset-backed, Islamic banks suffered more heavily from the repercussions of the GFC (p. 60).

Hasan and Dridi ( 2011 ) focus on the GCC countries, as well as on Jordan, Malaysia, and Turkey, to examine the effect of the GFC on the profitability, credit, and asset growth of Islamic versus conventional banks. Their results suggest that large Islamic banks were more profitable than conventional banks during the crisis, but small Islamic banks were not. Čihák and Hesse ( 2010 ) provide supporting evidence that there is a size effect in the relative stability between Islamic and conventional banks. However, their results show that small Islamic banks actually seem more stable than similarly sized conventional banks. Using default rates on loans, Baele, Farooq, and Ongena ( 2014 ) observe that the default rate on Islamic loans is less than half that on conventional bank loans. Farooq and Zaheer ( 2015 ) add supporting evidence from Pakistan, where Islamic banks had lower withdrawals, attracted more deposits, and disbursed more loans than conventional banks during the crisis. The higher liquidity buffers insulated Islamic banks from some of the most negative impacts.

Based on return dynamics, Fakhfekh et al. ( 2016 ) examine the volatility of Islamic and conventional banks during the crisis for banks in GCC countries over the 2006–13 period. They find that Islamic banks were more resilient than conventional banks, and exhibited lower return volatility. Sorwar et al. ( 2016 ) further re-examine the market risk profile of Islamic banks. Their univariate analysis shows that the market risk profile of Islamic banks is no different, on average, from that of conventional banks. However, when they use a VaR multivariate analysis, they find that Islamic banks exhibit lower market risk on average, and that the difference is more pronounced during the crisis period. In addition, they observe that Islamic banks exhibit lower leverage across different sub-periods around the GFC.

Overall, these studies suggest that the asset-based and risk-sharing nature of Islamic contracts limited their exposure to the crisis (Alzahrani and Megginson, 2017 ). Their higher capitalization and asset quality also contributed to their relative resilience (Hasan and Dridi, 2011 ; Bourkhis and Nabi, 2013 ). In addition, Islamic banks may have been less affected by the crisis because they do not hold or trade in conventional securitized assets.

Nevertheless, these positive facets of Islamic banking have been contested by several other authors. For example, Abedifar, Molyneux, and Tarazi ( 2013 ) compare the credit risk and stability (z-score) of Islamic and conventional banks (as well as of conventional banks with Islamic branches). They find no significant differences in insolvency risk or stability, and suggest this is because Islamic banks mostly apply non-profit-and-loss-sharing contracts, which are technically similar to conventional bank practices.

In the same vein, Pappas et al. ( 2017 ) conduct a comparative study of the risk of failure of Islamic and conventional banks using a sample of 421 banks from twenty countries between 1995 and 2010. Their findings suggest that conventional banks have a higher failure rate than Islamic banks. Alandejani, Kutan, and Samargandi ( 2017 ) complement this evidence by including the impact of the GFC. They examine the hazard and survival functions of Islamic and conventional banks over the 1995–2011 period for banks in GCC countries. They show that, during the crisis, Islamic banks had a higher rate of failure, and therefore shorter survival times, than conventional banks, contradicting Pappas et al. ( 2017 ).

Regarding resilience, the IFSI Stability Report 2018 (IFSB, 2018, p. 4) indicates that: “Global Islamic banking has sustained its resilience, and most of its stability indicators are in comfortable compliance with the minimum international regulatory requirements. However, global Islamic banking can no longer claim to be superior to conventional banking in all the stability dimensions. For example, Islamic banks clearly outperform European Union (EU) banks in terms of return on assets (ROA), return on equity (ROE) and cost-to-income, but the capitalisation of EU banks is now stronger than that of Islamic banks and the non-performing loans ratio of EU banks is better than the non-performing financing (NPF) ratio of Islamic banks.”

Thus, the impact of the GFC and the resilience of Islamic banks during economic downturns remains somewhat unclear. Evidence seems to vary with geographic region, bank size, and sample size. Further studies in this area could be enlightening, particularly by exploring the differential impact of Islamic and conventional banks during various banking crises across countries.

12.4.3 Sharia Supervisory Board Corporate Governance and Risk-Taking

Islamic banks have a particular governance structure that involves an additional layer of monitoring of their activities. The Sharia supervisory board (SSB) is the highest corporate governance authority in an Islamic bank (Dusuki, 2012 ). The Sharia board’s role is to advise Islamic banks and to supervise their operations and performance. Abdul Rahman and Bukair ( 2013 ) and Mallin, Farag, and Ow-Yong ( 2014 ) find that SSB size is positively related to a bank’s corporate responsibility disclosure index, suggesting that the larger the board, the stronger its effect on social commitment to society. The SSB’s characteristics are also associated with Islamic banks’ credit ratings (Grassa, 2016 ). In a recent study, Mollah et al. ( 2017 ) examine a sample of Islamic and conventional banks to assess whether their respective governance/organizational structures affect their risk-taking and performance. The authors find that Islamic banks take higher risks and achieve higher performance than conventional banks.

Interestingly, Hussain, Shahmoradi, and Turk ( 2015 ) note that Sharia board size can be costly to the bank, because it can create gridlock and divergence of opinions “among religious scholars regarding the Sharia compliance of specific financial arrangements.” This is particularly true for banks that expand beyond their borders. As mentioned earlier, Sharia compliance in one country does not necessarily apply in another. The AAOIFI and IFSB work toward setting standards and regulatory requirements for the global Islamic finance industry.

12.4.4 Transparency, Earnings Management, and Earnings Quality

Evidence in the literature to date on a link between religion and earnings quality is mixed. For example, McGuire, Omer, and Sharp ( 2011 ) and Dyreng, Mayew, and Williams ( 2012 ) conclude “that religion-influenced firms are less involved in aggressive financial reporting and have higher accrual quality, lower restatements of financial statements, lower risk of fraudulent accounting, and lower forecast errors” (p. 646). Meanwhile, Callen, Segal, and Ole-Kristian ( 2010 ) find no association between religion and earnings management.

The religious principles that govern Islamic banks’ transactions and activities may also serve to mitigate managers’ opportunistic behavior. The mechanisms of enhanced monitoring by investment accountholders in profit-and-loss-sharing contracts, for example, could lead to better earnings quality in Islamic banks. To the best of our knowledge, however, only Abdelsalam et al. ( 2016 ) directly address this issue.

Alsaadi, Ebrahim, and Jaafar ( 2017 ) focus on the relation between Sharia -compliant investments and the quality of financial reporting. They show that firms engaged in CSR activities are less likely to manipulate earnings, and that being included in a Sharia index does not play an important role in determining earnings quality. This latter result suggests there is no significant relation between Sharia compliance and earnings quality. In fact, the authors posit that this is due to managerial opportunism, because managers seem to “use an ethical practice as a label to create the perception of transparency, thereby avoiding scrutiny from stakeholders” (Alsaadi, Ebrahim, and Jaafar, 2017 , p. 170). This evidence goes against the expectation that Sharia compliance with religious norms and moral accountability constraints provides a moral obligation to maintain high quality and transparent standards in reporting financial information.

Abdelsalam et al. ( 2016 ) provide contrasting evidence by focusing on the earnings quality of listed banks in the MENA region. Over the 2008–13 period, their evidence suggests that Islamic banks are more conservative and less likely to manage earnings. Islamic banks are also more likely to employ a Big Four audit firm, suggesting higher quality of financial information. The authors conclude that Islamic banks “operate within a governance framework that enhances financial reporting quality” (p. 156). Abdelsalam et al. ( 2016 ) link this evidence to the extent of agency costs in Islamic banks compared to that in conventional banks. Because Islamic banks are subject to an extra monitoring layer by the SSB, which ensures compliance with moral values, and because of the overall moral accountability of the managers and board members, one would expect fewer agency problems and hence higher earnings quality. However, investment accountholders in Islamic banks tend to give more leeway to managers, potentially increasing agency problems, and hence managerial opportunistic behavior and lower earnings quality as well.

Clearly, there remains great potential in this area of research. Assessing the earnings quality of banks worldwide would be useful to exclude geographically determined results. One could also explore whether the quality of financial information reporting is comparable for Islamic banks across time, including during crises.

12.4.5 Corporate Social Responsibility

With its principles of equity and participation, Islamic banking is viewed as a type of ethical banking. As such, it is supposed to embed ethics and social responsibility in Islamic banks’ activities (Abdelsalam et al., 2016 ). The Islamic Finance Outlook ( 2018 , p. 4) outlines the “natural connection between Islamic finance principles, responsible finance, Sustainable Development Goals (SDGs), and impact investing. All aim to create a more equitable financial system that has a positive tangible impact on the economy and population.”

A recent study on corporate social responsibility (CSR) disclosures of Islamic banks provides interesting insights. Platonova et al. ( 2018 ) show that the CSR activities of Islamic banks in GCC countries are positively related to their long-term performance, confirming earlier evidence on the positive value-enhancing effect of CSR for non-financial firms. Mallin, Farag, and Ow-Yong ( 2014 ) show that Islamic banks with larger SSBs tend to have higher CSR disclosures, thus establishing a link between CSR and corporate governance. However, in a study on UAE banks, Nobanee and Ellili ( 2016 ) find no evidence of a relation between Islamic banks’ performance and CSR disclosure. Note there is a positive relation for conventional banks. Therefore, another future stream of research could focus on assessing the capabilities of Islamic banks to engage in CSR activities. One challenge, however, would be the availability of CSR data on Islamic banks in existing datasets, such as Thomson Reuters’ ASSET4. Field research to collect such data on Islamic banks, identifying all aspects of engagement toward the community, could assist in this endeavor.

12.4.6 Liquidity Creation

Banks provide two overlapping functions in the economy: (1) creating liquidity to provide the non-bank public with access to liquid funds, and (2) transforming risk to provide safer investments. Banks create liquidity “on the balance sheet” by transforming illiquid assets (e.g., small business loans) into liquid liabilities (e.g., transaction deposits), and “off the balance sheet” by providing loan commitments and other guarantees of liquid funds. To transform risk, banks issue riskless deposits to finance risky loans.

The literature on bank liquidity creation has grown extensively since Berger and Bouwman ( 2009 ) developed an appealing measure that captures total bank output.

Based on this measure, and building on the key differences between Islamic and conventional banks’ balance sheets, Berger et al. ( 2017 ) compare the effects on total liquidity creation and its various components, as well as on the financial stability implications of Islamic banking. The authors anticipate two conflicting effects of Islamic banking on liquidity creation. First, Islamic banks create more liquidity because they are generally better at absorbing risk, they are more highly capitalized, and they are less exposed to bank runs than conventional banks. Second, the reduced inclination of Islamic banks to undertake risk, combined with Sharia ’s limits on Islamic bank assets and off-balance-sheet activities, may cause Islamic banks to create less liquidity. In terms of the financial stability implications, Berger et al. ( 2017 ) also provide two conflicting predictions.

First, because Islamic banks may exhibit a greater capacity to withstand negative shocks that could contribute to financial instability, liquidity creation by Islamic banks may contribute less to financial instability than conventional banks. Second, Islamic bank liquidity creation may contribute more to national financial instability because of higher credit risk (e.g., Islamic banks typically do not require collateral from borrowers, exacerbating losses in the event of borrower default).

Using 2000–14 data on twenty-three countries and constructing liquidity creation following Berger and Bouwman ( 2009 ), Berger et al. ( 2017 ) find that Islamic banks create more liquidity per unit of assets than conventional banks after controlling for other bank and country characteristics. They also show that Islamic banks create more liquidity per unit of assets on the asset side of the balance sheet, and less on the off-balance-sheet side, than conventional banks (Table 12.8 ). The authors note that conventional bank liquidity creation contributes to financial instability, while that of Islamic banks has no significant impact. Focusing on banks in the GCC, Mohammad and Asutay ( 2015 ) similarly find that Islamic banks create more liquidity than other banks in a region. Overall, these findings point to the many favorable effects of Islamic banking.

Note : This table shows estimates from regressions analyzing the effect of Islamic banks on bank liquidity creation using ordinary least squares (OLS) analysis. The dependent variable in column (1) is LC (total)/GTA , which is total bank liquidity creation normalized by corresponding gross total assets. The dependent variable in column (2) is LC(asset)/GTA , which is asset components of bank liquidity creation normalized by corresponding gross total assets. The dependent variable in column (3) is LC(liability)/GTA , which is liability and equity components of bank liquidity creation normalized by corresponding gross total assets. The dependent variable in column (4) is LC(off)/GTA , which is off-balance-sheet components of bank liquidity creation normalized by corresponding gross total assets. The key explanatory variable is IB , an indicator that equals 1 if a bank is an Islamic bank. We include country controls such as Interest (lending interest rate), Inflation (country’s rate of inflation), Lerner (Lerner Index), and a broad set of bank-level controls such as Ln_Asset (natural logarithm of bank total assets), Capital (bank capital ratio). All controls are lagged one year, and all columns include year and country fixed effects. Standard errors are clustered at bank level.

***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

12.4.7 Stock Liquidity

Stock liquidity is an important determinant of financial market development and hence economic growth (Levine, 2005 ). Yet, to date, this remains an underexplored area in relation to Islamic banks. Some recent insights appear in Boubakri et al. ( 2019 ), who examine the comparative stock liquidity of Islamic banks and matching conventional banks in an international cross-country study. The preliminary findings show that Islamic banks have higher stock liquidity than conventional banks (Table 12.9 ). The liquidity effects are particularly important for small Islamic banks, and tend to persist during the GFC in countries with better market development and weaker regulations and supervision. These results suggest that faith-driven investors prefer Islamic banks’ stocks, and disregard what they consider to be “sin stocks” (i.e., some of those offered by conventional banks), which do not conform to their religious beliefs. These findings support the segmentation hypothesis by Merton ( 1987 ). During periods of uncertainty, faith-driven investors find refuge in norm-confirming investments (i.e., Islamic banks). Further investigation is warranted on the determinants of stock liquidity of Islamic banks, and the outcome of such liquidity on the cost of financing of both Islamic and conventional banks.

Note : This table shows regression results relating Islamic banks to stock liquidity. The sample comprises firm–year observations between 1992 and 2014. The dependent variable in Models 1–4 is Amihud illiquidity , which is the average stock return over trading volume. The dependent variable in Model 5 is the logarithm of bid–ask spread. We winsorize all financial variables at the 1% level in both tails of the distribution. t -statistics based on robust standard errors clustered at the firm level are in parentheses below each coefficient.

12.5 Review of the Literature Comparing Islamic and Conventional Banks: Macro-Level Evidence

In this section, we review the literature on the macro-impact of Islamic banking. We particularly examine the link between Islamic banking, on the one hand, and financial development and economic growth on the other. We also review the scarce literature on the impact of Islamic banking on financial inclusion and entrepreneurship, as well as on market competitiveness and power.

12.5.1 Islamic Banks, Financial Development, and Economic Growth

The main functions of financial intermediaries are to mobilize savings and efficiently allocate funds. While doing so, financial intermediaries “mitigate the effects of information and transaction costs and improve the allocation of resources, thus influencing saving rates, investment decisions, technical innovation, and ultimately long-run growth rates” (Imam and Kpodar, 2016 , p. 389). The literature has confirmed how important well-functioning financial markets and institutions are to productive efficiency and economic growth (Levine, 2005 ; Beck, Demirgüç-Kunt, and Merrouche, 2013 ; Abedifar, Hasan, and Tarazi, 2016 ). The spread of Islamic banking as an alternative model to conventional financial intermediation thus raises the question of its impact on the development of the banking system, as well as on overall economic growth.

The following theoretical arguments, discussed at length in Imam and Kpodar ( 2016 , p. 389–91), suggest that Islamic banking is positively related to banking sector growth and economic growth in general. First, Islamic banking provides financing to individuals with no assets. Unlike conventional banks, which require guarantees and collateral to extend loans, Islamic banks are prohibited from engaging in those activities. Instead, the risk-sharing structure of Islamic contracts makes the borrower a partner of the bank. This is likely to encourage entrepreneurs to seek financing, even if they have no collateral or guarantee to offer. Second, Islamic banking mobilizes the savings of Muslims who do not want to use conventional banks, and channels them into the formal sector. Third, Islamic banking principles increase financial stability, because of their reliance on profit-and-loss-sharing and their asset-liability matching. Similarly, their higher capitalization and the prohibition against trading in derivatives are likely to enhance stability and performance during crises. Overall, Islamic banks cater to the needs of Muslim individuals and entrepreneurs, increasing their financial inclusion, alleviating poverty, increasing savings, and, ultimately, enhancing economic growth.

The literature provides us with ample empirical evidence to support these arguments. For example, Gheeraert ( 2014 ) uses a sample of twenty Muslim countries for the 2000–5 period, and shows that the introduction of Islamic banks contributed to the development of the entire banking system as measured by the amount of private credit or bank deposits scaled to GDP. Gheeraert ( 2014 ) argues that this positive effect suggests that a nascent Islamic banking industry does not crowd out conventional banking. In fact, the Islamic banking sector acts as a complement to conventional banking. The author identifies several channels by which Islamic banking can impact financial sector development (p. S5). First, by appealing to devout unbanked individuals through Sharia -compliant instruments, Islamic banking mobilizes more capital. Second, Islamic finance fosters financial innovation to attract more depositors, and increases participation in the banking system. It, therefore, creates incentives for other banks to innovate in order to increase their competitiveness. Third, the banking market structure can be affected by the creation of new Islamic banks or the transformation of existing conventional banks into Islamic banks.

Based on the premise that productivity growth plays a more important role than factor accumulation in explaining countries’ growth differences (Easterly and Levine, 2001 ; Caselli, 2005 ), Gheeraert and Weill ( 2015 ) employ a stochastic frontier approach to estimate country-level technical efficiency using a sample of Islamic banks from seventy countries over the 2000–5 period. They detect a non-linear relationship between the development of Islamic banking and macroeconomic efficiency, which means the benefits of expanding Islamic banking beyond a certain threshold will be detrimental to macroeconomic efficiency. The authors posit that this may be because Islamic banking is interest-free, which eliminates the monitoring and corporate governance role of financial intermediaries. Debt financing can play a disciplinary role through interest payment obligations, inducing managers to perform and improve productivity. However, “[t]his incentive scheme can be less efficient in the context of the profit-and-loss-sharing instruments that are proposed by Islamic banks because the replacement of interest-payment obligations by a share of profits reduces the threat of bankruptcy for managers” (Gheeraert and Weill, 2015 , p. 33).

In a more extensive approach, Abedifar, Hasan, and Tarazi ( 2016 ) focus on a sample of twenty-two Muslim countries with dual banking systems over the 1999–2011 period (i.e., where both Islamic and conventional institutions operate). They first examine whether the efficiency of conventional banks is impacted by the competition of Islamic banks, and then examine the overall impact on financial development, economic growth, and poverty. The authors show that the market share of medium-sized Islamic banks is positively associated with the efficiency of conventional banks, suggesting that the introduction of Islamic banking enhances healthy competition. In addition, Islamic bank market share is positively related to fund mobilization, credit allocation, economic growth, and poverty alleviation in countries with relatively greater proportions of Muslims in their populations, countries with higher uncertainty avoidance indices, and countries with lower GDP per capita. The results indicate that, in “more religiously diverse Muslim countries, the market share of conventional banks with Islamic window/branches is positively linked to the efficiency of purely conventional banks” (Abedifar, Hasan, and Tarazi, 2016 , p. 199).

Imam and Kpodar ( 2016 ) assess the relationship between Islamic banking development and economic growth for a sample of fifty-two countries over the 1990–2010 period. They also conclude that Islamic banking is positively associated with economic growth. The authors note that the main channels of transmission through which Islamic banking affects economic growth are capital accumulation and superior financial inclusion.

12.5.2 Islamic Banks, Financial Inclusion, Microfinance, and Entrepreneurship

Given their profit-and-loss-sharing contracts, one would expect Islamic banks to contribute to financial inclusion and to provide needed funds to the unbanked. In Turkey, Aysan, Disli, and Özturk ( 2018 ) observe that most activities of Islamic banks are associated with a greater tendency toward small to medium-sized enterprise (SME) financing than conventional banks. Evidence in Abedifar, Hasan, and Tarazi ( 2016 ) shows that, in Muslim countries, Islamic banks have contributed to reducing poverty and inequality despite their relatively small size compared to conventional banks. Their evidence also suggests that Islamic banks were able to mobilize the savings of Muslim individuals. However, because Islamic financial institutions are more risk-averse than conventional banks, this “might limit entrepreneurship by encouraging borrowers to select low-risk projects or to invest excessively in tangible assets. Furthermore, Islamic financiers may prefer to allocate funds to the real economy, because they are not authorized to allocate financial resources to speculative activities” (Abedifar, Hasan, and Tarazi, 2016 , p. 200). In turn, this can adversely affect entrepreneurship and innovation. Aggarwal and Yousef ( 2000 ) provided supporting evidence in a study conducted two decades ago. They find that Islamic banks’ financing is somewhat biased against agriculture and industry, and that long-term financing is rarely extended to entrepreneurs.

Another fruitful avenue of future research could be to assess the extent to which Islamic banks contribute to project financing. On a related note, a further area of investigation would be to explore how firms make financing choices. Why, and under which conditions, do entrepreneurs or firms choose Islamic bank financing over conventional bank financing in religiously diverse countries? Such an analysis in both Muslim and non-Muslim countries would certainly provide vital insights for regulators and bankers alike to better cater to the needs of borrowers, whether individuals or corporations.

12.5.3 Islamic Banks, Market Discipline, and Market Power

Aysan et al. ( 2017 ) empirically test the claim that “Islamic banks are subject to more market discipline.” To test this conjecture, that “Islamic bank depositors are indeed able to monitor and discipline their banks,” the authors use the natural setting of deposit insurance reform in Turkey in December 2005. 12 According to the market discipline theory, during periods of greater risk, depositors will either require higher returns on their deposits or withdraw their funds from the bank. The results suggest that Islamic bank depositors increased their sensitivity to bank risk after the reform, and hence increased market discipline in the Islamic banking sector.

Aysan et al.’s ( 2017 ) findings suggest that Islamic bank depositors indeed behaved differently than their conventional peers. In the pre-deposit insurance reform period, they find that depositors of conventional banks were sensitive to bank risk, while they did not observe this phenomenon for Islamic depositors. In the post-reform period, however, the authors note that Islamic bank depositors increased their sensitivity to bank-specific risks. Overall, they find that deposit insurance reform resulted in greater market discipline in the Turkish Islamic banking sector, most likely due to increased competition among Islamic banks.

In a study precisely dedicated to addressing the market power issue, Weill ( 2011 ), using a sample of Islamic and conventional banks in seventeen countries over the period 2000–7, observes that Islamic banks have lower levels of market power than conventional banks. This runs against his initial expectation that Islamic banks should have more market power since they benefit from “a captive client base,” with a more inelastic demand driven by religious principles. Weill ( 2011 ) defines market power as “the ability of a firm to influence the price of products and is therefore directly linked to competition since greater competition reduces market power” (p. 292). It is measured by the Lerner index. A comparison of the market power of Islamic and conventional banks is a fundamental issue, because greater bank competition decreases the cost of credit to investors, leading to higher borrowing costs to finance investments. This, in turn, has implications for economic development (Petersen and Rajan, 1995 ; Jayaratne and Strahan, 1996 ; Cetorelli and Gambera, 2001 ) and financial development (Levine, 2005 ).

12.6 Conclusion and Directions for Future Research

To conclude, we first survey recent empirical literature on the micro and macro impact of Islamic banking. We then outline further instructive research directions.

The Sharia principles of profit-and-loss sharing, and the prohibitions on paying and receiving interest and taking excessive risk (e.g., investing in derivatives products) help buffer Islamic banks during financial crises. However, Islamic banks suffer from certain structural weaknesses that can affect their performance, although these weaknesses should resolve organically as the industry matures. For example, the fact that Islamic banks are not permitted to trade complex financial products leaves them with few hedging and diversification opportunities, which increases operating risk. In addition, as Weill ( 2011 ) shows, Islamic banks have lower market power than conventional banks, cannot benefit from liquidity provisions from central banks, and are generally smaller than conventional banks, which puts them somewhat at a disadvantage. As the industry develops, innovative Sharia -compliant products should emerge to help Islamic banks better manage liquidity. Since we focus on Islamic banking in this chapter, we do not discuss early developments along these lines, such as Islamic bonds (or Sukuks ), nor do we cover Islamic funds or insurance.

The Islamic finance and banking sector faces momentous opportunities thanks to a fast-growing Muslim population (which points to increasing demand for Islamic banking services), increased awareness of Islamic banking as an alternative banking model, and the internationalization of Islamic banks in Western countries. The fact that Islamic banking financial intermediation is based on profit sharing rather than lending, and thus helps stabilize financial markets, is drawing increased interest from non-Muslim communities. Nevertheless, major efforts remain to be made to standardize Islamic banking instruments across countries, develop a unified regulatory environment, and further increase awareness of Islamic banks’ activities and instruments.

In its most recent report (Islamic Finance Outlook, 2018 ), S&P notes that the lack of standardization in Sharia boards across banks and countries has been a major hindrance to greater global integration of Islamic finance. SSBs typically issue recommendations based on their own interpretation of Sharia law. A host of other issues regarding regulation also need to be tackled. A recent multi-country report (IMF, 2017 ) identifies persistent differences in the extent to which different countries adapt their prudential, consumer protection, liquidity management, safety nets, and resolution frameworks to the specificities of Islamic banking and the standards issued by IFSB and AAOIFI. The report highlights some weaknesses in Islamic banking licensing policies, whereby the approval process is “conditioned upon proof of ex-ante and ex-post robust Shari’ah governance framework and internal controls tailored to address risks specific to [Islamic bank] operations” (p. 10). The report notes the lack, or partial adoption, of IFSB applicable prudential standards across countries, which undermines comparability of solvency risks.

The academic side has lagged as well. At the micro level, more work is needed on corporate governance mechanisms in Islamic banking, and the extent to which they complement other internal and external governance mechanisms. In addition, questions related to identifying and measuring the specific risks associated with Islamic banking remain to be explored. The cost of debt financing under Islamic banking is also worth investigating empirically, in light of the fact that Islamic bank financing is often argued to be costlier than conventional bank financing.

Moreover, while the literature as reviewed here has been expanding rapidly since the onset of the GFC, the implications of Islamic banking for country-level financial stability remain unclear. One interesting avenue could be to explore the differential effects of banking crises on Islamic versus conventional banks. Given the link between financial system stability and economic growth, this question is very timely. Our survey also identifies a lack of evidence on the corporate social responsibility of Islamic banks. Since Islamic banking is often referred to as ethical banking, and its underlying model is based on principles of social justice, participation, and fairness, this lack is surprising. We thus call for more research on the social implications of Islamic banking.

Intensive research efforts could also be undertaken at the macro level, which, compared to the micro evidence surveyed here, remains understudied. While most macro studies focus on the beneficial effect of Islamic banking on economic growth and the real economy, the evidence is far from conclusive. Similarly, we lack an understanding of how Islamic banking affects financial market development. For example, what are the liquidity implications of Islamic banks, and how do conventional banks compare in terms of stock liquidity?

How Islamic banking is conducted in practice also raises a number of questions. For example, why are Islamic debt instruments more prevalent than equity instruments? What factors drive firms’ choice between Islamic and conventional bank financing? And what is the optimal regulatory framework in dual banking systems, where both Islamic and conventional banks co-exist? An assessment of the practice and implications of Islamic banking in developed countries represents an interesting direction for future research.

Given the growth prospects for Islamic finance, we expect the literature to continue to expand, extending to other aspects of Islamic finance such as Islamic bonds ( Sukuk ), Islamic insurance ( Takaful ), and asset-pricing of Islamic finance instruments. These and other important questions will need to be addressed as Islamic banking and finance instruments spread across the globe. For this to happen, however, a significant hurdle in terms of data compilation needs to be overcome. More interest by major academic journals in the field should encourage researchers to dive into this relatively unexplored area of investigation.

Appendix 12. A: Summary of Islamic Bank Literature

Abdelsalam, O. , Dimitropoulos, P. , Elnahass, M. , and Leventis, S. ( 2016 ). “ Earnings Management Behaviors under Different Monitoring Mechanisms: The Case of Islamic and Conventional Banks, ” Journal of Economic Behavior & Organization , 132, 155–73.

Google Scholar

Abdul Rahman, A. and Bukair, A. A. ( 2013 ). “The Influence of the Shariah Supervision Board on Corporate Social Responsibility Disclosure by Islamic Banks of Gulf Co-operation Council Countries,” Asian Journal of Business and Accounting , 6, 65–104.

Abedifar, P. , Ebrahim, M. S. , Molyneux, P. , and Tarazi, A. ( 2015 ). “ Islamic Banking and Finance: Recent Empirical Literature and Directions for Future Research, ” Journal of Economic Surveys , 29, 637–70.

Abedifar, P. , Hasan, I. , and Tarazi, A. ( 2016 ). “ Finance–Growth Nexus and Dual Banking Systems: Relative Importance of Islamic Banks, ” Journal of Economic Behavior and Organization , 132, 198–215.

Abedifar, P. , Molyneux, P. , and Tarazi, A. ( 2013 ). “ Risk in Islamic Banking, ” Review of Finance , 17, 2035–96.

Aggarwal, R. K. and Yousef, T. ( 2000 ). “ Islamic Banks and Investment Financing, ” Journal of Money, Credit and Banking , 32, 93–120.

Alandejani, A. , Kutan, A. , and Samargandi, N. ( 2017 ). “ Do Islamic Banks Fail More Than Conventional Banks? ” Journal of International Financial Markets, Institutions and Money , 50, 135–55.

Alqahtani, F. , Mayes, D. G. , and Brown, K. ( 2017 ). “ Islamic Bank Efficiency Compared to Conventional Banks During the Global Crisis in the GCC Region, ” Journal of International Financial Markets, Institutions and Money , 51, 58–74.

Alsaadi, A. , Ebrahim, M. S. , and Jaafar, A. ( 2017 ). “ Corporate Social Responsibility, Shariah-Compliance, and Earnings Quality, ” Journal of Financial Services Research , 51(2), 169–94.

Alzahrani, M. and Megginson, W. L. (2017). “Finance as Worship: A Survey of Islamic Finance Research,” Working Paper, available at: http://dx.doi.org/10.2139/ssrn.2967619 .

Ariff, M. ( 2014 ). “ Whither Islamic Banking? ” World Economy , 37(6), 733–46.

Aysan, A. F. , Disli, M. , Duygun, M. , and Özturk, H. ( 2017 ). “ Islamic Banks, Deposit Insurance Reform and Market Discipline: Evidence from a Natural Framework, ” Journal of Financial Services Research , 51(2), 257–82.

Aysan, A. F. , Disli, M. , and Özturk, H. ( 2018 ). “ Bank Lending Channel in a Dual Banking System: Why are Islamic Banks so Responsive? ” World Economy , 41(3), 674–98.

Bader, M. K. I. , Shamsher, M. , Ariff, M. , and Hassan, T. ( 2008 ). “ Cost, Revenue, and Profit Efficiency of Islamic versus Conventional Banks: International Evidence Using Data Envelopment Analysis, ” Islamic Economic Studies , 15, 23–76.

Baele, L. , Farooq, M. , and Ongena, S. ( 2014 ). “ Of Religion and Redemption: Evidence From Default on Islamic Loans, ” Journal of Banking & Finance , 44, 141–59.

Beck, T. , Demirgüç-Kunt, A. , and Merrouche, O. ( 2013 ). “ Islamic vs. Conventional Banking: Business Model, Efficiency and Stability, ” Journal of Banking and Finance , 37, 433–47.

Berger, A. N. and Bouwman, C. H. S. ( 2009 ). “ Bank Liquidity Creation, ” Review of Financial Studies , 22, 3779–837.

Berger, A. N. , Boubakri, N. , Guedhami, O. , and Li, X. (2017). “Liquidity Creation and Financial Stability Implications of Islamic Banking: Evidence From A Multinational Study,” available at: http://cim.kfupm.edu.sa/ibf2017/papers/1_2.pdf .

Bitar, M. , Hassan, M. K. , and Walker, T. ( 2017 ). “ Political Systems and the Financial Soundness of Islamic Banks, ” Journal of Financial Stability , 31, 18–44.

Boubakri, N. , Chen, R. R. , El Ghoul, S. , and Guedhami, O. (2019). “State Ownership, Liquidity and Valuation: Evidence From Privatization,” Emerging Markets Review, 39, 210–224.

Bourkhis, K. and Nabi, M. S. ( 2013 ). “ Islamic and Conventional Banks’ Soundness During the 2007–2008 Financial Crisis, ” Review of Financial Economics , 22, 68–77.

Callen, J. L. , Segal, D. , and Ole-Kristian, H. ( 2010 ). “ The Pricing of Conservative Accounting and the Measurement of Conservatism at the Firm-Year Level, ” Review of Accounting Studies , 15, 145–78.

Caselli, F. ( 2005 ). “Accounting for Cross-Country Income Differences,” in P. Aghion and S. Durlauf (eds.), Handbook of Economic Growth (Amsterdam: North-Holland/Elsevier), 679–742.

Google Preview

Cetorelli, N. and Gambera, M. ( 2001 ). “ Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data, ” Journal of Finance , 56, 617–48.

Čihák, M. and Hesse, H. ( 2010 ). “ Islamic Banks and Financial Stability: An Empirical Analysis, ” Journal of Financial Services Research , 38, 95–113.

Di Mauro, F. , Caristi, P. , Couderc, S. , Di Maria, A. , Ho, L. , Kaur Grewal, B. , Masciantonio, S. , Ongena, S. , and Zaheer, S. ( 2013 ). “ Islamic Finance in Europe, ” ECB Occasional Paper No. 146, available at: https://ssrn.com/abstract=2251204 .

Doumpos, M. , Hasan, I. , and Pasiouras, F. ( 2017 ). “ Bank Overall Financial Strength: Islamic versus Conventional Banks, ” Economic Modelling , 64, 513–23.

Dusuki, A. W. ( 2012 ). Islamic Financial System: Principles & Operations (Kuala Lumpur: International Shari’ah Research Academy for Islamic Finance (ISRA)).

Dyreng, S. , Mayew, W. J. , and Williams, C. D. ( 2012 ). “ Religious Social Norms and Corporate Financial Reporting, ” Journal of Business Finance & Accounting , 39, 845–75.

Easterly, W. and Levine, R. ( 2001 ). “ It’s not Factor Accumulation: Stylized Facts and Growth Models, ” World Bank Economic Review , 15(2), 177–219.

Ernst & Young (2015). “World Islamic Banking Competitiveness Report 2014–2015,” available at: https://www.ey.com/Publication/vwLUAssets/EY-world-islamic-banking-competitiveness-report-2014-15/$FILE/EY-world-islamic-banking-competitiveness-report-2014-15.pdf .

Errico, L. and Farahbaksh, M. (1998). “Islamic Banking: Issues in Prudential Regulations and Supervision,” IMF Working Paper, available at: https://ssrn.com/abstract=882267 .

Fakhfekh, M. , Hachicha, N. , Jawadi, F. , Selmi, N. , and Cheffou, A. I. ( 2016 ). “ Measuring Volatility Persistence for Conventional and Islamic Banks: An FI-EGARCH Approach, ” Emerging Markets Review , 27(6), 84–99.

Farooq, M. and Zaheer, S. ( 2015 ). “ Are Islamic Banks More Resilient During Financial Panics? ” Pacific Economic Review , 20, 101–24.

Gheeraert, L. ( 2014 ). “ Does Islamic Finance Spur Banking Sector Development? ” Journal of Economic Behavior and Organization , 103, S4–S20.

Gheeraert, L. and Weill, L. ( 2015 ). “ Does Islamic Banking Development Favor Macroeconomic Efficiency? Evidence on the Islamic Finance–Growth Nexus, ” Economic Modelling , 47, 32–9.

Grassa, R. ( 2016 ). “ Corporate Governance and Credit Rating in Islamic Banks: Does Shariah Governance Matter? ” Journal of Management and Governance , 20(4), 875–906.

Hasan, M. and Dridi, J. ( 2011 ). “ The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study, ” Journal of International Commerce, Economics and Policy , 2, 163–200.

Hassan, K. and Aliyu, S. ( 2018 ). “ A Contemporary Survey of Islamic Banking Literature, ” Journal of Financial Stability , 34, 12–43.

Hussain, M. , Shahmoradi, A. , and Turk, R. (2015). “An Overview of Islamic Finance,” IMF Working Paper No. WP/15/120, available at: https://www.imf.org/external/pubs/ft/wp/2015/wp15120.pdf .

Imam, P. and Kpodar, K. ( 2013 ). “ Islamic Banking: How Has It Expanded? ” Emerging Markets Finance and Trade , 49(6), 112–37.

Imam, P. and Kpodar, K. ( 2016 ). “ Islamic Banking: Good For Growth? ” Economic Modelling , 59, 387–401.

International Monetary Fund ( 2017 ). “ Multi-Country Report: Ensuring Financial Stability In Countries With Islamic Banking, Case Studies, ” IMF Country Report No. 17/145, available at: https://www.imf.org/en/Publications/CR/Issues/2017/06/20/Multi-Country-Report-Ensuring-Financial-Stability-in-Countries-with-Islamic-Banking-Case-44969 .

Iqbal, M. and Molyneux, P. ( 2005 ). “Thirty Years of Islamic Banking: History, Performance and Prospects, ” Prospects , 19, 190, available at: http://dx.doi.org/10.1057/9780230503229 .

Islamic Finance Outlook (2018). S&P Global Rating, available at: https://www.spratings.com/documents/20184/4521646/Islamic+Finance+2018+Digital-1.pdf/cf025a76-0a23-46d6-9528-cecde80e84c8 .

Islamic Financial Services Board (IFSB) (2018). “Islamic Financial Services Industry Stability Report,” available at: https://www.ifsb.org/ .

Jayaratne, J. and Strahan, P. E. ( 1996 ). “ The Finance-Growth Nexus: Evidence from Bank Branch Deregulation, ” Quarterly Journal of Economics , 113(3), 639–70.

Johnes, J. , Izzeldin, M. , and Pappas, V. ( 2014 ). “ A Comparison of Performance of Islamic and Conventional Banks 2004–2009, ” Journal of Economic Behavior & Organization , 103, S93–S107.

Khan, F. ( 2010 ). “ How Islamic is Islamic Banking? ” Journal of Economic Behavior & Organization , 76, 805–20.

Levine, R. ( 2005 ). “ Finance and Growth: Theory and Evidence, ” Handbook of Economic Growth , 1, 865–934.

Mallin, C. , Farag, H. , and Ow-Yong, K. ( 2014 ). “ Corporate Social Responsibility and Financial Performance in Islamic Banks, ” Journal of Economic Behavior & Organization , 103, S21–S38.

McGuire, S. T. , Omer, T. C. , and Sharp, N. Y. ( 2011 ). “ The Impact of Religion on Financial Reporting Irregularities, ” Accounting Review , 87(2), 645–73.

Merton, R. C. ( 1987 ). “ A Simple Model of Capital Market Equilibrium with Incomplete Information, ” Journal of Finance , 42(3), 483–510.

Mohammad, S. and Asutay, M. ( 2015 ). “ Measuring Liquidity Creation and its Determinants in the Banking Sector: A Comparative Analysis Between Islamic, Conventional and Hybrid Banks in the Case of the GCC Region, ” Working Paper.

Mollah, S. , Hassan, M. K. , Al Farooque, O. , and Mobarek, A. ( 2017 ). “ The Governance, Risk-Taking and Performance of Islamic Banks, ” Journal of Financial Services Research , 51(2), 195–219.

Narayan, P. K. and Phan, D. H. B. (2017). “ A Survey of Islamic Banking and Finance Literature: Issues, Challenges and Future Directions, ” Pacific-Basin Finance Journal , 53(February), 484–96.

Nobanee, H. and Ellili, N. ( 2016 ). “ Corporate Sustainability Disclosure in Annual Reports: Evidence from UAE Banks: Islamic versus Conventional, ” Renewable & Sustainable Energy Reviews , 55, 1336–41.

Olson, D. and Zoubi, T. A. ( 2008 ). “ Using Accounting Ratios to Distinguish Between Islamic and Conventional Banks in the GCC Region, ” International Journal of Accounting , 43, 45–65.

Olson, D. and Zoubi, T. ( 2016 ). “ Convergence in Bank Performance for Commercial and Islamic Banks During and After the Global Financial Crisis, ” Quarterly Review of Economics & Finance , 65, 71–87.

Pappas, V. , Ongena, S. , Izzeldin, M. , and Fuertes, A. M. ( 2017 ). “ A Survival Analysis of Islamic and Conventional Banks, ” Journal of Financial Services Research , 51(2), 221–56.

Petersen, W. and Rajan, R. ( 1995 ). “ The Effect of Credit Market Competition on Lending Relationships, ” Quarterly Journal of Economics , 110, 407–43.

Platonova, E. , Asutay, M. , Dixon, R. , and Mohammad, S. ( 2018 ). “ The Impact of Corporate Social Responsibility Disclosure on Financial Performance: Evidence from the GCC Islamic Banking Sector, ” Journal of Business Ethics , 151(2), 451–71.

PricewaterhouseCoopers (2014). Information available at: https://www.pwc.com/m1/en/publications/middle_east_islamic_finance_survey.pdf .

Rosman, R. , Wahab, N. A. , and Zainol, Z. ( 2014 ). “ Efficiency of Islamic Banks During the Financial Crisis: An Analysis of Middle Eastern and Asian Countries, ” Pacific-Basin Finance Journal , 28, 76–90.

Siddiqi, M. N. ( 2006 ). “ Islamic Banking and Finance in Theory and Practice: A Survey of State of the Art, ” Islamic Economic Studies , 13, 1–48.

Song, I. and Oosthuizen, C. ( 2014 ). “ Islamic Banking Regulation and Supervision: Survey Results and Challenges, ” IMF Working Paper No. 14/220, available at: http://dx.doi.org/10.5089/9781498380928.001 .

Sorwar, G. , Pappas, V. , Pereira, J. , and Nurullah, M. ( 2016 ). “ To Debt or Not To Debt: Are Islamic Banks Less Risky Than Conventional Banks? ” Journal of Economic Behavior & Organization , 132, 113–26.

Srairi, S. ( 2010 ). “ Cost and Profit Efficiency of Conventional and Islamic Banks, ” Journal of Productivity Analysis , 34, 45–62.

Tahir, I. M. and Haron, S. ( 2010 ). “ Cost and Profit Efficiency of Islamic Banks: International Evidence Using the Stochastic Frontier Approach, ” Banks and Bank Systems , 5(4), 78–83.

Turk-Ariss, R. ( 2010 ). “ Competitive Conditions in Islamic and Conventional Banking: A Global Perspective, ” Review of Financial Economics , 19, 101–8.

van Greuning, H. and Iqbal, Z. ( 2007 ). “ Risk Analysis for Islamic Banks, ” The World Bank, available at: http://dx.doi.org/10.1596/978-0-8213-7141-1 .

Wealth Monitor (2016). “History of Islamic Finance,” available at: https://wealth-monitor.com/features/markets-rewind/history-of-islamic-finance/ .

Weill, L. ( 2011 ). “ Do Islamic Banks Have Greater Market Power? ” Comparative Economic Studies , 53(2), 291–306.

Wiyono, S. and Rahmayuni, S. ( 2012 ). “ The Effect of Credit Risk to Islamic Bank Profitability with Islamic Income and Profit Sharing Ratio as Moderating Variable, ” GSTF Business Review , (GBR) 2, 45–50.

Yahya, M. H. , Muhammad, J. , and Hadi, A. R. A. ( 2012 ). “ A Comparative Study on the Level of Efficiency Between Islamic and Conventional Banking Systems in Malaysia, ” International Journal of Islamic and Middle Eastern Finance and Management , 5, 48–62.

Zaher, T. and Hassan, K. ( 2001 ). “ A Comparative Literature Survey of Islamic Finance and Banking, ” Financial Markets, Institutions and Instruments , 10(4), 155–99.

Islamic banking accounts for the largest share of total assets (76 percent), followed by Islamic capital markets (23 percent), and Islamic insurance (1.3 percent) (IFSB, 2018 ).

Imam and Kpodar ( 2016 , p. 387) define speculation “as increasing one’s wealth by chance rather than productive effort.” Gharar refers to “doubtful or uncertain contracts, such as undertaking a business venture without sufficient information or taking excessive risk,” while Maysar refers to “unnecessary uncertainties not part of everyday life, such as going to a casino.”

The first Islamic bank, Mit Ghamr, was established as a cooperative organization in Egypt in 1964, and was based on profit sharing and interest avoidance (Siddiqi, 2006 ). See https://wealth-monitor.com/features/markets-rewind/history-of-islamic-finance/ .

From the onset of the GFC in 2008 through 2013, the Islamic finance industry grew at a 17.5 percent average annual rate (Ernst & Young, 2015 ; Hussain, Shahmoradi, and Turk, 2015 ).

The IIFM was created by the Islamic Development Bank (Saudi Arabia), Autoriti Monetari Brunei Darussalam, Bank Indonesia, Bank Negara Malaysia, the Central Bank of Bahrain, and the Central Bank of Sudan. See http://www.iifm.net/about_iifm/corporate-profile .

See https://www.spratings.com/documents/20184/4521646/Islamic+Finance+2018+Digital-1.pdf/cf025a76-0a23-46d6-9528-cecde80e84c8 .

Bureau van Dijk’s Bankscope database provides comprehensive coverage of banks around the world, and accounts for at least 85 percent of all banking assets in each country. Although its coverage of small banks might be incomplete, including Islamic banks, the data is valuable for the purpose of illustrating the growth of Islamic banks.

According to the authors, “Because Islamic banking is guided by Shariah law, it is largely immune to poorly functioning institutions—from the judiciary to the bureaucracy—because there is little resort to them; disputes are instead settled within Islamic jurisprudence” (Imam and Kpodar, 2013 , p. 131).

For a discussion of why Islamic banks use interest rates as benchmarks, see https://islamicmarkets.com/articles/the-benchmark-why-do-islamic-banks-use-interest-rate-benchmarks .

Salam and Istisna are the only debt-based financing instruments that do not require physical asset ownership for sale (Hussain, Shahmoradi, and Turk, 2015 ).

For two excellent reviews of Islamic banking and finance, see Abedifar et al. ( 2015 ), which covers studies between 1999 and 2014, and Hassan and Aliyu ( 2018 ), which covers studies between 1983 and 2017. Other recent survey papers include Alzahrani and Megginson ( 2017 ) and Narayan and Phan (2019).

In motivating their setting, the authors note that “Turkey was the first country in the world that had adopted a dual deposit insurance framework in 2001, in which the Islamic deposit insurance scheme operated alongside its conventional counterpart. Unlike the conventional scheme, which was administered by the government, the Islamic scheme was organized and managed by Islamic banks. However, in December 2005, the dual deposit insurance framework was revised and the Islamic scheme was absorbed by the conventional scheme” (p. 259).

  • About Oxford Academic
  • Publish journals with us
  • University press partners
  • What we publish
  • New features  
  • Open access
  • Institutional account management
  • Rights and permissions
  • Get help with access
  • Accessibility
  • Advertising
  • Media enquiries
  • Oxford University Press
  • Oxford Languages
  • University of Oxford

Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide

  • Copyright © 2024 Oxford University Press
  • Cookie settings
  • Cookie policy
  • Privacy policy
  • Legal notice

This Feature Is Available To Subscribers Only

Sign In or Create an Account

This PDF is available to Subscribers Only

For full access to this pdf, sign in to an existing account, or purchase an annual subscription.

  • Open access
  • Published: 14 November 2019

An investigation into factors that determine the growth rate in the Islamic banking and finance

  • Huma Nawaz   ORCID: orcid.org/0000-0002-6234-3848 1 , 2  

Future Business Journal volume  5 , Article number:  1 ( 2019 ) Cite this article

10k Accesses

4 Citations

Metrics details

The purpose of this study is to determine the impact of products and services of Islamic finance in Pakistan. This study has involved an empirical analysis of the environmental factors of growth and its impact on the growth of Islamic Financial Institutions. To investigate the factors of growth, a structural equation model develops that incorporates the main determinants of growth of banking assets and equity funds. The growth in the Islamic equity funds and banking assets has been identified as definite antecedents of growth in the Islamic financial system. The empirical investigation by the structural model using Pakistani dataset revealed that four out of ten hypotheses were significant including two direct paths as antecedents of annual growth. This study provides empirical support for the influence of some development factors to control the barriers of growth in the Islamic finance industry. This paper allows the identification of the major development factors of Islamic financial system that takes into account the importance of operational strategy and environment for the growth of Islamic equity funds and banking assets.

Introduction

The first, experimental, local Islamic bank was established in the late 1950s in a rural area of Pakistan which charged no interest on its lending [ 53 ]. However, since then the Islamic financial development has been slow and poorly developed as the result of a strong foothold in the conventional financial system. The developmental measures still could not bring them to the extent of competing strongly with an interest-based system. In fact, the Islamic finance market is often referred to as a “niche market”.

A country needs to maintain a positive direct relationship with the financial organization for financial growth. However, some inadequate financial policies and decisions based on conventional interest system were incapable of functioning both effectively and ethically within the society, consequently resulting in a weak financial system with meager outcomes.

Population, time interval, return, and economic parameter, i.e., Gross domestic product (GDP) growth rate are an important consideration for development of Islamic banking and equity fund industry. Many Islamic banking and finance studies [ 1 , 2 , 11 , 27 , 65 ] explored factors of growth. However, existing literature on Islamic finance investigated only one class of Islamic financial system, among many instruments, i.e., Islamic equity funds, Islamic finance assets, Islamic equity capital, Islamic capital market instruments, Islamic loan funds, Islamic bank deposits and financial returns of participating Islamic banks.

Moreover, the vast literature on Islamic banking and finance on factors of growth is rooted in the developed countries, leaving the impact of major emerging markets almost unexamined. These gaps in the study are not acknowledged, therefore, an extension of research in comparison to growth components of sample size could be extended for determination of important development tools.

Background of theory and hypothesis development

In an Islamic financial system framework, all the principles, laws, and process follow a commitment to Allah and His last prophet Muhammad (PBUH). Moral soundness applied for acceptance of financial transactions, contract, or instruments [ 39 ]. Methodology for theory building in Islamic economics based on economic statements of the Quran, Hadith, and Sunnah lead to method that unfolds a mechanism to arrive at the real and undeniable meanings for development of the Islamic economic system [ 38 ].

Recent literature is drawing theoretical aspects of Islamic banking and finance for depositors, regulators, owners, managers, and borrower of the Islamic financial system. However, theoretical aspect of this study is based on socioeconomic theory.

Islamic economic theory and traditional economic theory are two different approaches. Both theories have different perspectives. “The principle of contractual fairness could counterbalance the principle of permissibility with the objective of attaining social justice or equity between the parties” [ 8 ].

The theoretical framework builds upon the basis of external and internal variables that effect on an Islamic financial system, with many variables including, banking as the endogenous variable and four constructs of the exogenous variable, i.e., return, population, time interval, and Gross domestic product (GDP) growth rate. The conceptual framework for the hypothesis is depicted in Fig.  1 .

figure 1

Conceptual model

Prohibition of Riba (interest) is a core component of the Islamic economic theory. For financial matters, gains through fair trade are legitimized in the canon but are offset by the prohibitions of Riba (interest/usury), maysir (gambling) and gharar (excessive risk or uncertainty) [ 63 ].

The macroeconomic variable, inflation rate (INF), has a negative and statistically significant impact on the ROE for both domestic and foreign banks. Therefore, high INF is associated with low ROE of banks.

There are many reasons for the study based on the determinants of growth of the Islamic financial system. According to the socioeconomic theory, income and well-being of the people are components of social economy perspectives [ 18 ]. The demand for social justice and economic opportunity lead to the developmental growth of Islamic economic and financial ideas [ 30 ].

Normally, Islamic banking is less risky due to profit and loss sharing features of their banking services. On the other hand, conventional banking systems are exposed to more risk due to certain economic turmoil, i.e., by an increase in inflation.

The variables of underlying study, i.e., return (income), population, time interval, and Gross domestic product (GDP) have been extended for country dataset.

The impact of performance of Islamic equity funds and Islamic banking assets is also an interesting issue to examine as the basis of the country instead of traditional investments, the banking system, and socially responsible investment funds (SRI) or ethical equity funds. Several researchers such as Azhar Rosly and Afandi Abu Bakar [ 7 ], Akhtar et al. [ 3 ], Siddiqui [ 60 ], Moin [ 43 ], Sadeghi [ 54 ], and Subramaniam et al. [ 61 ] have individually investigated this issue and it was to be put into effect in different regions of the world.

The profit is the difference between the revenue and cost while investment is an investment of project and cost is general cost and cost of fund. In general, Islamic profit and loss sharing have no interest cost and cost of fund. However, a higher return is an important prerequisite for above average profitability of financial system [ 50 ].

To determine how banking systems view increased participation with regard to the growth of Islamic financial system, Keith G. Carr-Lee, B.A. surveyed and compared Islamic banking sectors to those without such sectors. The researcher analyzed data from over 26 Organization of Islamic Cooperation (OIC) states of majority in Muslim populations. The researcher found the growth of an existing Islamic banking sector is directly related to countries that already possess Islamic financial system and have a positive effect on the rate of growth of financial depth [ 19 ].

Nainggolan [ 46 ] found that younger fund performed better than older funds, researcher concluded that there is a positive relationship between fund size and performance [ 46 ].

Perception and awareness in Islamic countries observed as an important aspect of Islamic finance growth. However, in spite of the similarity in GDP rate of Islamic and non-Islamic countries, Islamic banking sector showed a key development indicator with an increase in its product awareness [ 57 ].

The aim of this research is to investigate factors of growth in Islamic financial system in Pakistan and to determine how these factors are related to the development of Islamic financial products and services—i.e., the degree to which Islamic banking assets and Islamic equity funds act as an important factor in the Islamic financial industry growth. More significantly, this paper is answering the research question, i.e., “What are the development factors of growth of Islamic financial system and how do they influence the Islamic financial system?” While the following hypothesis has been developed for this study based on the literature and conceptual framework described in Fig.  1 and next section, respectively.

There is a significant relationship between the volatility of Islamic banking assets and return ( R ).

Population ( P ) has a direct effect on Islamic banking assets.

Time interval ( T ) has a direct effect on Islamic banking assets.

GDP (GDP) has a direct effect on Islamic banking assets.

There is a significant relationship between the volatility of NAV of Islamic equity funds and Return (R).

Population ( P ) has a direct effect on NAV of Islamic equity funds.

Time interval ( T ) has a direct effect on NAV of Islamic equity funds.

GDP (D) has a direct effect on NAV of Islamic equity funds.

NAV of Islamic equity funds has a direct effect on the growth of Islamic financial system.

Islamic banking assets have a direct effect on the growth of Islamic financial system.

According to Rani and Sikka [ 52 ], time series data have a significant size and can be organized into three groups, i.e., work directly with raw data in frequency or time domain, indirectly with the features either extracted from the model of raw data [ 52 ]. Two types of data either primary or secondary were gathered from experimental studies. This study is using time series data as a technique based on secondary data. Meanwhile, Bryman and Bell [ 16 ] stated that secondary data refer to the data, such as theoretical papers, and comparative research reports, and the grey literature is collected by other research scholars and institutions [ 16 ]. The secondary data were collected by reports of national and international institutions, research and articles based on operational efficiency.

To provide a solution to a research problem, traditional quantitative data were collected from each institutional respective entity. Due to limited resources, the author relied more on secondary data. To create the authenticity of this data, data have been extracted from Government monetary and international regulatory institutions of Pakistan. To create a deeper understanding of growth factors regarding Islamic financial institution in Pakistan, it has been necessary to take and observe speeches of institutional respective executives for a deeper understanding of growth factors. The perceived value of Internet surfing and its impact on reading practices and research has been approved by a number of studies [ 41 ].

The desired sample size for the complex structural model should be 200 or more [ 29 ]. Hence, dataset for this study have more than 200 observations. The sound judgment of data is an important component of research worth. Examination of data not only required to proceed data analysis but it also provides critical insight into data characteristics [ 26 ]. First, replacement of missing values with zero is the authentic solution for valid time series [ 9 ]. Missing data were replaced with zero due to the nonexistence of a respondent’s operational activity during the sample period (2005–2015). Second, data pattern was identified for multivariate data items. Descriptive statistics including mean, standard deviation variance and skewness was conducted. Likewise, to reduce the skewness of data and to make the data pattern interpretable, log transformation (log10) was performed [ 49 ].

The research objective implied the importance of research design and research method. Hence, diverse types of relevant research tools and instruments, necessary for analysis of data were collected for the accomplishment of this study objective.

The research of this study is conducted for evaluation of factors in relation to Islamic banking and finance. According to Creswell et al. [ 20 ] quantitative approach is best to identify factors that influence an outcome of an underlying problem, the utility of an intervention or identifying the best predictors of consequential outcomes [ 20 ]. Since the return, time interval, Muslim population, and GDP are difficult to measure by qualitative means, a quantitative approach would be more suitable to accomplish, the aim of this research.

A time series data of 11 years’ (2005–2015) growth factors including time interval, GDP, income (return) and population, specific for this study was selected to analyze their impact on the development of Islamic finance in Pakistan. This study, therefore, uses time series as a technique based on the primary as well as secondary data. The randomly selected respondents who participated in this work are:

Meezan Bank Limited (MBL)

Dubai Islamic Bank Pakistan Limited (DIB)

Al Baraka Bank (Pakistan) Limited

Bank Islamic Pakistan Limited

Burj Bank Limited

Equity funds

Meezan equity fund

JS Islamic fund

Al Ameen Shari‘ah Stock Fund

Alfalah GHP Islamic Stock Fund

Atlas Islamic Stock Fund

PIML Islamic Equity Fund

MCB Pakistan Islamic Stock Fund

Al Meezan Mutual Fund

HBL Islamic Stock Fund

ABL Islamic Stock Fund

The statistical process for calculation and analysis in Appendix was based on the following equations:

where GP is the growth of Islamic financial system in Pakistan and IB(PK) and E (PK) is Islamic banks product and services (asset and equity fund NAV) development of Pakistan.

Independent variables are:

R (PK) = return

P (PK) = population

T (PK) = time interval

GDP(PK) = GDP

Mediating variables are:

IB(PK) = banking assets of Islamic banking of Pakistan

E (PK) = NAV/unit of Islamic equity fund of Pakistan

Dependent variable is:

G (PK) = growth of Islamic financial system of Pakistan

Assessment of normality (descriptive statistics)

Table  1 (descriptive statistics of Pakistani dataset) shows the descriptive summary of the variables of this underlying study. It reflects mean, standard deviation, variance, skewness, and kurtosis of each variable, i.e., total banking assets, NAV and four factors of growth on selected Islamic banks of Pakistan. The mean ( M ) is the average level of the variable data series. The variance is the variance of the time series around the mean.

Descriptive statistics suggest that the impact of variation in return ( M  = 7.61, SD = .387) is more than the variations in GDP growth ( M  = .532, SD = .34). Precisely, data of Pakistan indicated that population ( M  = 8.23, SD = .02) and return ( M  = 7.61, SD = .387) have a higher impact compared to other independent factors underlying this study. The growth of equity fund is associated with the growth of Islamic financial system ( M  = 18.67, SD = .66) to a great extent. While a positive relationship exists between equity ( M  = 2.84, SD = .21) and growth of Islamic financial system ( M  = 18.67, SD = .66), however, lesser than banking assets ( M  = 8.56, SD = .28). A measure of variance shows that higher dispersion from data central tendency for a time interval (.101) and return (.150), respectively.

The coefficient of skewness reflects the direction. Hence, the (+) sign direction for positively skewed data and (0) sign reveals that the data are stable.

Validity of constructs

The sound judgment of quantitative research depends on the validity and reliability tests of an underline study. The authenticity and trustworthiness as an important component of a research evaluation are essential for selection of measurement techniques. Recognizing that all approaches to research have inherited limitations, however, biases inherent in any research lead to a decrease in the reliability and validity of result findings [ 35 ]. Therefore, reliability and validity of this study are provided with specifications of statistical tests.

The research objective implied the importance of research design and research method. Hence, diverse types of relevant research tools necessary for analysis of data. This was collected for research and significantly to the attainment of this study objective. The regression model has been a useful method for the analysis due to this study data property.

The Cronbach’s alpha was used to investigate the reliability of the variables. Table  2 shows the reliability coefficients of the data collected for each variable of Pakistani data sample. Moreover, results shows ranges from low to moderate coefficients level, i.e., .200 to .620 for Cronbach’s alpha of underlying items, i.e., population, return, GDP, assets and equity results are at an acceptable level (> .6). However, the overall value of Cronbach’s alpha is .604, greater than .6, which indicates an adequate level of acceptable internal consistency for this study sample.

Validity test

Before applying SEM, a factor analysis is necessary for the first stage of data analysis to summarize information of variables [ 26 , 66 ]. The validity test for all underlying items of Pakistani study sample is done using factor analysis as the basis. To condense the underlying variables of this study sample, principal component analysis was performed by undergoing Kaiser–Meyer–Olkin (KMO) and Bartlett’s test of sphericity to test its adaptability.

The results (Table  3 ) showed that the KMO measure of sampling adequacy = .536, which indicates that the reasoned analysis is reasonable [ 64 ]. Hair et al. [ 26 ] regards KMO = .5 as suitable for factor analysis [ 26 ]. As for Bartlett’s test of sphericity, the results in terms of Chi square distribution χ 2  = 69.51 ( df  = 21, Sig. = .000) indicate that correlational matrix of study sample has common factors. Moreover, some scope for reducing the dimension exists for this sample dataset. After utilizing principal component analysis, the information in the third column of Table  3 , indicates that all variable has a communality or variance of 1. Factor 1 has an eigenvalue of 3.464, which accounts for 49.491% of the total variance. While 26.671% of the total variance will be explained by the second factor. Moreover, 17.378% of the total variance will be explained by the third factor. Thus, only 3 components have an eigenvalue of 1 or greater and have a lot of variation and influence on Pcs.

Bivariate correlation

Bivariate correlation between the two variables provides basic ground for relationship measurement. Table  4 depicts the correlation matrix between dependent and independent variables of this study. There is a strong evidence of a close correlation between growth and growth factors [including time interval ( T ) and population ( M )] specific for this research.

The findings from Table  4 suggests that growth ( r  = .905, p  = .000) is significantly correlated with time results ( r  = 905, p  = .000) and population results ( r  = .888, p  = .000). Therefore, a significant relationship exists between growth and time.

These are the indicators that variation in internal and external indicators can bring the significant part in the development of Islamic financial system.

Moreover, some of these correlations results could be examined and interpret more rigorously by structural equation model.

  • Structural equation model

After exploring the data reliability and validity scores, next phase is to explain the dimensionality of the constructs. The measurement model for Pakistani dataset is presented in Appendix : Fig.  3 . Structural equation modeling is a combination of exploratory factor analysis (EFR) and multiple regressions [ 62 ]. However, SEM is best for confirmatory factor analysis (CFA) [ 56 ]. In this part, model measurement with the AMOS software being done to estimate and assess the constructed model of this study. First, a model for dataset was specified.

Using the PLS diagram, all the parameter estimates were measured for the underlying dataset ( Appendix ). Major phases of confirmatory factor analysis used for this model are: specification, identification, estimation, assessment and re-specification within model specification by mediating variables.

For the structural equation modeling, 7 observed variables (time, return, population GDP, banking assets, NAV of equity and growth of Islamic financial system) were used. While variables, i.e., time, return, population and GDP were exogenous variables. Endogenous variables in this study were banking assets, NAV of equity and growth with 3 error terms.

Statistically, the fit indices were proposed for different motivations. According to Hooper et al. [ 31 ], reader and reviewer get burden in the presence of a large number of research output, so researchers should be limited to few important model fit indices [ 31 ].

In most literature, goodness-of-fit index (GFI), Bentler’s comparative fit index (CFI) and root mean square error of approximation (RMSEA) were used to estimate and evaluate the fit statistics indices for a data [ 32 ]. The fit indices of structural equation modeling reported for this study are depicted in Table  5 .

The correlation relationship structure between error terms and independent variables of the analysis was suggested for a good model fit. First, model was specified with 10 variables. Ten variables were included for SEM model. The square variables (time, return, population, GDP, banking assets, equity, and growth) represent the observed variables and the circles ( e 1, e 2, and e 3) explain the error terms. The number of exogenous variables was 7 while many endogenous variables were 3. The input data have 297 observations while to interpret data precisely, 37 missing values were replaced with zero value. To test and interpret the structural model fit for data, the path diagram, with standardized regression coefficients, was developed. Figure  2 illustrates the model specified for good model fit.

figure 2

Specified model

The correlation of error terms is a feasible solution for the model fit [ 5 , 25 , 31 ]. Therefore, error term correlation of e 1 and e 2 was specified for the model.

The model of dataset was identified with df of 6.

No. of observations − no. of parameters = degree of freedom

Degrees of freedom

(28 − 24) = 4

The threshold for indices and correlation of data was suggested by AMOS. Variables including, GDP and return, time and population and residuals of variables e 1 and e 2 were correlated.

To test and interpret the structural model fit for data, the path diagram, including 24 parameters with standardized regression coefficients was developed.

The resulted significant path of the coefficient is with:

Return and asset (.003)

GDP and growth (.05)

Time and growth (.02)

Return and equity (.02)

Assets and growth (.000*)

Equity and growth (.002)

While all the variables were significant at a level of .001* and .05, respectively.

To report the hypothesized path, a model of Pakistani group was fulfilling the model fit requirement. The Chi square value of 2.025 and probability level above .05 specify a better model. Almost all the fit indices crossed the minimum cap of good fit indices. The (CMIN/DF) with a score of .506, GFI of .949, and RMSEA of .000 are acceptable as depicted in Table  6 .

Predictors and mediators of Islamic finance in Pakistan

The research objective is posted to identify the causal relationship between internal and external variables to growth variable. Results of the final model for Pakistan indicate that both direct paths and two of the eight original indirect paths are significant.

The indirect effects of the GDP and time on growth are not significant at the .05 level (.106 and .391, respectively). These findings implied that these independent variables have no indirect effects on growth variable. However, the effect of population variable on growth variable is significant at the .05 level ( p  = .022) indicating a significant indirect effect on growth. The imbalance indirect effects of the return were found for the variable of growth. This may be due to less power than expected to detect a true indirect effect between the variables [ 42 ].

Full mediation was achieved for return and population. As the relationship between return and population was significant during the direct effect of both of these variables. The relationship was significant with growth variable by a value of .05 and .00, respectively, but after mediation relationship was not significant with a p value of .823 and .201, respectively. Partial mediation was achieved for only variable of GDP as before mediation ( p  = .008) and after mediation ( p  = .05) the relationship was significant, however, the magnitude of beta coefficient was low after mediation ( β  = .140) as compared to before mediation ( β  = .240).

The statistical process to reveal relation [ 51 ], among variable of this study is determined by a number of steps ( Appendix ).

Before the mediation

After the mediation.

The SEM findings in Table  7 are presented for dataset based on standardized estimated path coefficient β value with C.R. and p value. The significance of estimated path between independent and dependent variable was decided at a significance level of ≤ .05 to decide the significance level of the path coefficient between variables of study [ 17 ].

Banking assets and return

The coefficients for the SEM path between financial assets and return (estimated standardized β coefficient = − .65, with p  = .003) in final model provide strong significant support for H 1 .

This implied that the volatility of Islamic financial institutions return has a direct effect on the growth of financial assets of Islamic financial institutions. Thus, higher is the profitability of financial institutions, the lower the growth of assets (− .65) of financial assets. This may have implied that efficiency of return is not only the only factor of asset development. However, specific geographical or territorial factors influence the asset.

These results strengthen the conceptual theories of the literature. It is consistent with the findings of [ 40 , 58 ]. These results also validate that regardless of religious factors as stressed in Islamic finance literature, the efficiency of macroeconomic factors is also important to boost the growth of Islamic financial system. This also implied that bigger share of the overall industry likewise implies more strength to the bank of controlling the costs and benefits it offers to keep customers [ 28 ].

Moreover, this finding also elaborates that institutional effort for measures of increase profitability can strengthen the size of the institution as well. Thus, these results empirically proved the relationship of return and asset to influence the outward operations of the institutions.

Banking assets and population

The coefficients for the SEM path between financial assets and population (estimated standardized β coefficient .48), with non-significant value p  = .76, did not support the hypothesis H 2.

Muslim population ( P ) has a direct effect on Islamic banking assets.

The result of final model for the relationship between asset and population is not according to expectations. This implied that the percentage of Muslims in a particular geographical area has no impact on increasing the size of Islamic financial institutions.

The research study strengthens the conceptual theories of the literature related to the relationship between assets and population. These findings are consistent with [ 22 ], that analyzes the effect of religion on Islamic Finance. The study observed that Muslims belittled Islamic banks in view of the religious variable, as well as more due to the profits, got from investments. These results also validate that regardless of religious factors, the efficiency of other factors of growth are important to boost the growth of Islamic financial system.

However, these findings are inconsistent with the finding of [ 4 ], who considered to religious factor as an important factor to attract Muslim investors and increase the institutional size.

Banking assets and time interval

The beta coefficients for the SEM path between variables of financial assets and time interval (estimated standardized β coefficient − .15), with non-significant value p  = .924, did not support the hypothesis H 3.

The result of final model for the relationship between asset and time interval is quite unique. This implied that the matter of time on Islamic institutions has no impact on increasing and decreasing the size of assets of Islamic financial institutions.

The research study strengthens the already studied conceptual theories of the literature related to the relationship between assets and time interval that considered management expertise and other variables as an important factor to increase the share of Islamic finance in the financial system. These empirical research findings also impact the confidence of investors. So far, this study signifies the invaluable relationship of time and asset. The sample characteristics and complexity of SEM model to measure the variables may be a cause of such findings [ 55 ].

These results also validate that instead of time factors, efficiency and effectiveness of other factors of growth are important to boost the growth of Islamic financial system.

However, these findings are inconsistent with the finding of [ 21 ], who considered to the passage of time as a meaningful variable to get deep insight into determinants of growth of financial indicators and increase the institutional size. Moreover, SEM model specifies the direct significant relationship between time and growth with a significance value of p  = .02. This finding rejects the mediating role of products and services to strengthen the relationship between time and growth of IF.

Banking assets and GDP rate

Gross domestic product (GDP) and economic development are usually related to defining financial premises. A huge amount of literature discussed the relationship between an increase in the percentage of bank deposits to GDP [ 10 , 24 , 47 , 48 , 59 ]. Moreover, SEM model specifies the direct significant relationship between GDP and growth with a significance value of p  = .000.

However, the hypothesized relationship between asset and GDP (estimated standardized β coefficient .39), of this study is not significant at a level of .05. The findings of SEM model did not support the H 4 . This finding rejects the mediating role of products and services to strengthen the relationship between GDP and growth of IF.

GDP (D) has a direct effect on Islamic banking assets.

The result of final model for the relationship between asset and GDP is also quite unique. This implied that the external environment factor, GDP, has no impact on increasing and decreasing the size of assets of Islamic financial institutions.

The research study did not strengthen the already studied conceptual theories of the literature related to the relationship between assets and GDP. The study implied that economic indicators have a no influence on investors’ confidence and development of assets.

These results also validate that instead of GDP, efficiency and effectiveness of other factors of growth need to be evaluated to study their impact on assets of IFIs. Moreover, SEM model specifies the direct significant relationship between GDP and growth with a significance value of p  = .05. This finding rejects the mediating role of products and services to strengthen the relationship between time and growth of IF.

Islamic equity fund and return

The coefficients for the SEM path between IEF and return (estimated standardized β coefficient .50, with p  = .02) in final model provide strong significant support for H 5 .

There is a significant relationship between the volatility of NAV of Islamic equity funds and return ( R ).

This implied that the volatility of Islamic financial institutions return has a direct effect on the growth of IEF sector. Thus, higher is the profitability of Islamic financial institutions, the greater the value of IEF. One percent increase in return leads to .50% increase in the value of IEF. This may have implied that efficiency of return is an important factor of IEF development.

These results strengthen the previous conceptual theories of the literature built by many authors. Many authors including [ 37 , 46 ] concluded positive results towards the performance of Islamic equity fund [ 37 , 45 ]. These results also validate that regardless of external factors, the efficiency of internal factors are also important to boost the growth of financial assets. This also implied that bigger size of the overall industry likewise implies more strength to the specific sector of an industry. However, these finding opposed to Bashir and Nawang [ 10 ] that contend the negative performance of IEF.

This finding also elaborates that industrial effort for measures of increase profitability can strengthen the size of the institution as well. These results empirically proved the relationship of return and IEF to influence the outward operations of the institutions. Moreover, these finding shows the confidence of Islamic finance investors towards IEF.

Islamic equity fund and population

The coefficients for the SEM path between IEF and population (estimated standardized β coefficient − .57), with non-significant value p  = .735, did not support the hypothesis H 6 .

The result of final model for the relationship between IEF and population is not according to expectations. Again, this implied that the percentage of Muslims in a particular geographical area has no impact on increasing the size of IEF. This inferred the importance of creating awareness about Islamic products and services to people of Pakistan [ 48 ].

The research study strengthens the conceptual theories of the literature related to the relationship between IEF and population. Again, these findings are consistent with Erol and El-Bdour [ 22 ], that analyzes the effect of religion on investment in Islamic products and services [ 22 ].

However, these findings are inconsistent with the finding [ 6 ], the researcher contends that the growing population of Muslims in a world is considered an important force behind establishment and growth of Islamic finance products and services [ 6 , 33 ].

These results also validate that regardless of religious belief factors, the efficiency of other factors of growth are important to boost the growth of Islamic products and services in Pakistan.

Islamic equity fund and time interval

The beta coefficients for the SEM path between variables of IEF and time interval (estimated standardized β coefficient 1), with non-significant value p  = .533, did not support the hypothesis H 3 .

The result of a modified model for the relationship between IEF and time interval is not according to expectations. This implied that the matter of time on Islamic institutions have no impact on increasing and decreasing the size of investment of IEF.

These findings are inconsistent with the finding of Elfakhani et al. [ 21 ], who considered to the passage of time as a meaningful variable to get deep insight into determinants of growth of financial products and services [ 21 ]. Moreover, SEM model specifies the direct significant relationship between time and growth with a significance value of p  = .02. This finding rejects the mediating role of IEF to strengthen the relationship between time and growth of IFIs.

These empirical research findings also revealed the confidence of investors. Research finding indicates that investors have no confidence on IEF. So far, this study signifies the invaluable relationship of time and IEF. These results also validate that instead of time factors, efficiency and effectiveness of other factors might have an impact on the growth of Islamic equity funds.

However, results of bivariate correlation implied a significant relationship between IEF and return with a p value of .04. While the beta coefficient of .620 presented a positive relationship between the variables, i.e., increase in return lead to increase in investments in IEF. These results also validate that instead of time factors, efficiency and effectiveness of other factors of might have an impact on the growth of Islamic equity funds.

Islamic equity fund and GDP rate

As depicted in Table  7 , the hypothesized relationship between IEF and GDP (estimated standardized β coefficient = − .28) of this study is not significant at a level of .05 with a p value of .22. The findings of SEM model did not support the H 8 .

The result of final model for the relationship between IEF and GDP is unexpected. This implied that the external environment factor, GDP, have no impact on increasing and decreasing the size of investment in Islamic equity fund.

The research study did not strengthen the already studied conceptual theories of the literature including Nguena [ 49 ] that is related to the relationship between Islamic products and GDP [ 49 ]. The study implied that GDP, an economic indicator of growth, has a no influence on investors’ confidence and development of IEF. Moreover, SEM model specifies the direct significant relationship between GDP and growth with a significance value of p  = .05. This finding rejects the mediating role of IEF to strengthen the relationship between time and growth of IF.

However, this research finding is consistent with Johnson [ 36 ] that refused the impact of GDP on the growth of Islamic financial products and services [ 36 , 37 ].

These results also validate that instead of GDP, efficiency and effectiveness of other macroeconomic factors of growth need to be evaluated to study their impact on the growth of Islamic financial system.

Islamic equity fund and growth of Islamic finance

The coefficients for the SEM path between financial assets and growth variable of IF (estimated standardized β coefficient .453, with p  = .002) in final model provide strong significant support for H 9 .

This implied that the increase in investment in IEF has a direct effect on the growth of Islamic financial institutions. Thus, higher is the confidence of investors on IEF, the greater the growth of equity fund of Islamic financial institutions. One percent increase in IEF leads to .453 percent increase in IF. This further implied that variable of IEF of this study conferred that variable of growth in IEF is an important factor of overall IF development.

These results strengthen the conceptual theories of the previous literature. It is consistent with the findings of [ 34 , 37 ]. These results also validate the impact of institutional products and services to the profitability of the overall industry. This also implied that bigger level of investment of IEF has a positive impact on the overall industry and likewise implies more strength to the Islamic financial institutions.

These results empirically proved the relationship of growth of IEF and IF to influence the outward operations of the institutions.

Banking assets and growth of Islamic finance

The coefficients for the SEM path between financial assets and growth variable of IF (estimated standardized β coefficient = .59, with p  = .000) in final model provide strong significant support for H 10 .

This implied that the increase in the volume of financial assets has a direct effect on the growth of Islamic financial institutions. Thus, higher are the assets of financial institutions, the greater the growth of assets of financial assets. One percent increase in assets leads to .59 percent increase in IF. This further implied that variable of an asset of this study conferred that assets are an important factor of overall IF development.

These results strengthen the conceptual theories of the previous literature. It is consistent with the research findings of studies including [ 12 , 45 ]. These results also validate the impact of an internal factor of growth to the growth of financial institutions profitability. This also implied that bigger volume of the assets has a positive impact on overall industry likewise implies more strength to the Islamic financial institutions. This result empirically proved the relationship of growth of asset and IF to influence the outward operations of the institutions.

Many contemporary study’s findings suggest ‘Islamic Finance’ as an effective means to build an inclusive financial system for economic growth. Today, Islamic financial assets grow at 15–20% a year in most core markets of all over the world and 3.3% of global banking assets. The study of development factors has become progressively emerged in last few decades with the introduction of Islamic financial economics globally. This has boosted perception and awareness among depositors and investors to include ethical preferences in their savings and business motives.

This study confirmed the mediating role of banking assets and IEFs in strengthening the relationship between return and growth of IF system. The results of the SEM final model indicated that the H 1 , H 5 , H 9 , and H 10 are supported, H 1 is accepted, i.e., there is a significant relationship that influences profitability measuring return with the dependent variable of financial assets. For H 5 , there is a significantly close relationship between variables of the dataset that influence IEF investment with an independent variable which is the return of financial institutions with significance at level 5%. Overall, 4 paths in the final model were found to be significant. However, the study is failed to support the significant impact of a return to the asset, population to assets, time to assets, GDP to assets, population to equity, time to equity and GDP to equity.

This study provides a useful knowledge of the factors that might have an impact and contribution to the successful adoption of an Islamic financial system in organizations. However, the scope of this study is limited to the financial system of Pakistan. The discussion can be expanding by comparing the growth of different countries with roughly the same variables. Small sample size prevents from performing rigid analysis on the sample frame. It is required to use more advanced application of statistics, such as Monte Carlo simulation, or probability simulation for more useful findings. Another limitation of this research was a low reliability (< .6) of some variables. These results might lead to a large number of explanations. Probably, such a relatively low-reliability results (< .6) is because of the respondent’s different background more specifically sample characteristics that differentiate one variable to another one.

Implications

This study will help to extend the dimensions of debate in a sector of Islamic banking and finance at different levels. First, according to author knowledge, this is an explicit study in relation to the analysis of environmental factors of Pakistan in a sector of Islamic finance. As this study not only investigated the impact of development factors on a general level but also opened a way for future research in a specific direction.

Due to time constraints and difficulties to specify an approach to performance measurement, previous author studies were restricted to analyze the detailed information on traditional statistical models. This paper explains the impact of environmental factors and nature of work on the efficiency of Islamic financial industry. This study explores the new approach relating to the identification of performance of Islamic industry framework in the context of Pakistan. The institutional performance in relation to the direct impact of macroeconomic variables is being studied. Indeed, many authors worked on this issue [ 13 , 14 , 15 , 44 ]. However, like other studies, these studies did not explore the impact of mediating role of Islamic products and services on Islamic finance. This research used a time series data for 11 years that covered Islamic banks and Islamic investment institutions including internal and external environmental development factors of growth.

Second, Islamic products and services are developed on the basis of Shari’ah compline principles. The examination of development factors influencing the Islamic financial institutions provides an insight to learn about difficulties arising from specific environmental factors.

Third, the relationship between internal and external development factors with the performance of Islamic finance provides the strength to current Islamic agency principle contracts significance. The findings of paper generated greater awareness among organizations of Pakistan on the importance of strengthening the current Islamic financial system as a vehicle for organizational effectiveness.

The empirical findings of this research conferred the impact of significant development factors to strengthen the relationships and control the barriers to Islamic finance industry growth. Managers and regulators of IF industry should take a timely action to enhance the efficiency of existing services of financial institutions [ 47 , 48 ].

This study shows that the industrial products and services getting momentum and at a level to give strong support to Islamic financial system. However, certain internal factor, i.e., the level of profitability, has a significant position to influence the Islamic finance industry. This signifies the strong role of profitability to develop the Islamic finance industry in Pakistan. Pakistani financial institutions shall conceive a better strategy of products introduced to get a return performance.

The size and quantity of Islamic products are crucial for the growth of IF. The policies and strategies should be implemented to develop the confidence of stakeholders. The managers should have focused on research and development to fulfill the market requirements. This can help to attract new investors and keep the confidence of potential investors. The management should increase the outreach of Islamic products and services to the new and potential customer. The big financial institution with a big pan of operations must implement strategies to innovate new products.

The policies should be developed to encourage investors to invest in IEFs. The implication for practician in the Islamic financial system is that development of financial services is achieved when there is an improvement in fulfilling market needs and wants. An IEF and financial assets were significantly correlated with the annual growth of IFS in a dataset. This shows that innovative, market requirement is still regarded as an important factor.

Availability of data and materials

The datasets used and/or analyzed during the current study are available from the corresponding author on reasonable request.

Abbreviations

Islamic bank

Islamic equity finance

Islamic finance

Islamic financial institution

Islamic financial institutions

structural equation modeling

Abdullah RFS, Rahman ARA (2007) Factors influencing knowledge of Islamic banking services: the case of Malaysian bank managers. Rev Islam Econ 11:31

Google Scholar  

Adebola SS, Yusoff WSW, Dahalan J (2011) The impact of macroeconomic variables on Islamic banks financing in Malaysia. Res J Finance Account 2:22–32

Akhtar MF, Ali K, Sadaqat S (2011) Liquidity risk management: a comparative study between conventional and Islamic banks of Pakistan. Interdiscip J Res Bus 1:35–44

Amin M (2009) Would Islamic finance have prevented the global financial crisis? New Horiz 173:40–44

Anderson JC, Gerbing DW (1984) The effect of sampling error on convergence, improper solutions, and goodness-of-fit indices for maximum likelihood confirmatory factor analysis. Psychometrika 49:155–173

Article   Google Scholar  

Arabi A (2008) Submitted to. Kdi school of public policy and management

Azhar Rosly S, Afandi Abu Bakar M (2003) Performance of Islamic and mainstream banks in Malaysia. Int J Soc Econ 30:1249–1265

Balala MH (2011) Islamic finance and law: theory and practice in a globalized world. Tauris, London

Barbieri K, Keshk OM, Pollins BM (2009) Trading data: evaluating our assumptions and coding rules. Confl Manag Peace Sci 26:471–491

Bashir MS, Nawang WRW (2011) Islamic and conventional unit trusts in Malaysia: a performance comparison. J Islam Econ Bank Finance 7:4

Bidabad B, Allahyarifard M (2008) Efficiency of assets and liabilities management in Islamic banking system. J N Econ Commer 3:109–128

Bourke P (1989) Concentration and other determinants of bank profitability in Europe, North America and Australia. J Bank Finance 13:65–79

Brown K, Hassan MK, Skully M (2007) 7 Operational efficiency and performance of Islamic banks. Handbook of Islamic banking. Edward Elgar Publishing, Cheltenham, p 96

Brown K, Skully M (2006) Ethical investments and performance of Islamic banks. J Islam Econ Bank Finance 5:61–72

Brown K, Skully M (2007) Islamic banks from a global perspective. J Islam Econ Bank Finance 3:105–133

Bryman A, Bell E (2007) Business research strategies. Business research methods. Oxford University Press, Oxford

Byrne B (2001) Structural equation modeling with AMOS: basic concepts, applications, and programming. Lawrence Erlbaum Associates, Rahway

Cant RG (1975) Socio-economic indicators: theories and applications. Int Soc Sci J XXVII(1):190–194

Carr-Lee KG (2013) Master of public policy in public policy. Citeseer

Creswell JW, Plano Clark VL, Gutmann ML, Hanson WE (2003) Advanced mixed methods research designs. Handbook of mixed methods in social and behavioral research. Sage, Thausand Oaks, pp 209–240

Elfakhani S, Hassan MK, Sidani Y (2005) Comparative performance of Islamic versus secular mutual funds. In: 12th economic research forum conference in Cairo, Egypt. pp 19–21

Erol C, El-Bdour R (1989) Attitudes, behaviour, and patronage factors of bank customers towards Islamic banks. Int J Bank Mark 7:31–37

Fan X, Thompson B, Wang L (1999) Effects of sample size, estimation methods, and model specification on structural equation modeling fit indexes. Struct Equ Model Multidiscip J 6:56–83

Furqani H, Mulyany R (2009) Islamic banking and economic growth: empirical evidence from Malaysia. J Econ Cooperation Dev 30:59–74

Gerbing DW, Anderson JC (1984) On the meaning of within-factor correlated measurement errors. J Consum Res 11:572–580

Hair J et al (1995) Multivariate data analysis with readings. Prentice Hall, Englewood Cliffs

Haron S (1996) Competition and other external determinants of the profitability of Islamic banks. Islam Econ Stud 4:49–66

Haron S (2004) Determinants of Islamic bank profitability. Glob J Finance Econ 1:11–33

Hau KT, Marsh HW (2004) The use of item parcels in structural equation modelling: non-normal data and small sample sizes. Br J Math Stat Psychol 57:327–351

Hegazy WS (2006) Contemporary Islamic finance: from socioeconomic idealism to pure legalism. Chic J Int Law 7:581

Hooper D, Coughlan J, Mullen M (2008) Structural equation modelling: guidelines for determining model fit. Electron J Bus Res Methods 6:53–60

Hulland J, Chow YH, Lam S (1996) Use of causal models in marketing research: a review. Int J Res Mark 13:181–197

Imam PA, Kpodar K (2010) Islamic banking: how has it diffused?. International Monetary Fund, Washington, D.C

INC FI (2002) Re: Islamic equity funds, an analysis of the current state of an industry

Jick TD (1979) Mixing qualitative and quantitative methods: triangulation in action. Adm Sci Q 24:602–611

Johnson K (2013) The role of Islamic banking in economic growth

Kamil NK, Alhabshi SO, Bacha OI, Masih M (2014) Heads we win, tails you lose: is there equity in Islamic equity funds? Pac Basin Finance J 28:7–28

Khan A (2014) Sharia stock index and economic activity in Malaysia: is there a connection? J Islam Econ Bank Finance 113:1–6

Khan ZH, Watson PJ (2006) Research: “construction of the Pakistani religious coping practices scale: correlations with religious coping, religious orientation, and reactions to stress among Muslim university students”. Int J Psychol Relig 16:101–112

Kuo T, Wu A (2007) The determinants of organizational innovation and performance: an examination of Taiwanese electronics industry. SSRN Electron J. https://doi.org/10.2139/ssrn.921324

Loan FA (2012) Impact of the internet surfing on reading practices and choices. Webology 9:1–10

Mackinnon DP, Lockwood CM, Williams J (2004) Confidence limits for the indirect effect: distribution of the product and resampling methods. Multivar Behav Res 39:99–128

Moin MS (2008) Performance of Islamic banking and conventional banking in Pakistan: a comparative study. Dissertation, University of Skövde, Skövde

Moisseron JY, Moschetto BL (2014) Islamic finance: a review of the literature. Int Bus Econ Res J 14:745–762

Molyneux P, Thornton J (1992) Determinants of European bank profitability: a note. J Bank Finance 16:1173–1178

Nainggolan YA (2011) Taking a leap of faith: are investors left short changed?

Nawaz H, Bardai B (2017) Profitability of Islamic banks: case of Malaysia. J Islam Bank Finance 34(3):90–103

Nawaz H, Bardai B (2017) Perceptions and acceptance of Islamic banking in Pakistan. Int Sci Manag J 2:1–14

Nguena CL (2013) Inclusive and pro-poor financial system in Africa: does Islamic finance development matter?. Association of African Young Economists, Yaoundé

Nienhaus V (1983) Profitability of Islamic PLS banks competing with interest banks: problems and prospects. J Res Islam Econ 1:37–47

Preacher KJ, Hayes AF (2008) Asymptotic and resampling strategies for assessing and comparing indirect effects in multiple mediator models. Behav Res Methods 40:879–891

Rani S, Sikka G (2012) Recent techniques of clustering of time series data: a survey. Int J Comput Appl. https://doi.org/10.5120/8282-1278

Roy DA (1991) Islamic banking. Middle East Stud 27(3):427–456

Sadeghi M (2008) Financial performance of Shariah-compliant investment: evidence from Malaysian stock market. Int Res J Finance Econ 20:15–26

Saleh MA (2006) Antecedents of commitment to an import supplier. Queensland University of Technology Brisbane, Brisbane

Schreiber JB, Nora A, Stage FK, Barlow EA, King J (2006) Reporting structural equation modeling and confirmatory factor analysis results: a review. J Educ Res 99:323–338

Series OO (2012) Islamic finance in OIC member countries. Kuwait: OIC outlook series

Shahimi S, Ismail A, Ahmed S (2006) A panel data analysis of fee income activities in Islamic banks. Islam Econ 19:23–35

Shaikh SA (2011) An ideal Islamic economic system: a gone case? J Islam Econ Bank Finance 113:1–4

Siddiqui AA (2013) Islamic banking industry–growing amid challenges. J Islam Bank Finance 30:13–18

Subramaniam A, Al Mamun A, Permarupan PY, Zainol NRB (2014) Effects of brand loyalty, image and quality on brand equity: a study among bank islam consumers in Kelantan, Malaysia. Asian Soc Sci 10:67

Tabachnick BG, Fidel LS, Osterlind SJ (2001) Using multivariate statistics. Allyn and Bacon, Boston

Vogel FE, Hayes SL (1998) Islamic law and finance: religion, risk, and return. Brill, Leiden

Williams B, Onsman A, Brown T (2010) Exploratory factor analysis: a five-step guide for novices. Australas J Paramed 8:1–13

Wilson R (2011) Islamic banking and finance in North Africa past development and future potential. African Development Bank, Tunis-Belvedère

Zikmund WG (2003) Business research methods, mason, Ohio, south-western. X the restaurant behaviour of the Berlin people

Download references

Acknowledgements

Huma Nawaz gratefully acknowledges the PHD research supervisor Prof. Dr. Barjoyai Bin Bardai of Al-Madinah International University MEDIU, Malaysia for guidance, and encouragement for carrying out this study.

Funding information is not applicable.

Author information

Authors and affiliations.

Al-Madinah International University MEDIU, Kuala Lumpur, Malaysia

Islamia University Bahawalpur, Bahawalpur, Pakistan

You can also search for this author in PubMed   Google Scholar

Contributions

HN is a single author of this study. The author read and approved the final manuscript.

Corresponding author

Correspondence to Huma Nawaz .

Ethics declarations

Competing interests.

The author declares that there are no competing interests.

Additional information

Publisher's note.

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Summary of statistical analysis for Pakistani dataset

Initial finding: measurement model for pakistani dataset.

See Figs.  3 and 4 .

figure 3

Islamic banks of Pakistan. The path terms used in the above diagram are: Meezan assets = Meezan Bank Limited; DIB assets = Dubai Islamic Bank Pakistan Limited; Baraka assets = AL Baraka Bank (Pakistan) Limited; Bank Islamic assets = Bank Islamic Pakistan Limited; Burj bank assets = Burj Bank Limited

figure 4

Islamic equity funds of Pakistan. The path terms used in the diagram are: MEF = Meezan Islamic fund; JS = JS Islamic fund; Ameen = Al Ameen Shari‘ah stock fund; GHP = Alfalah GHP Stock Fund; Atlas = Atlas Islamic Stock Fund; PIML = PIML Islamic Equity Fund; MCB = MCB Pakistan Islamic Stock Fund; ALM = Al Meezan Mutual fund; HBL = HBL Islamic Stock Fund; ABL = ABL Islamic Stock Fund

Rights and permissions

Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International License ( http://creativecommons.org/licenses/by/4.0/ ), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.

Reprints and permissions

About this article

Cite this article.

Nawaz, H. An investigation into factors that determine the growth rate in the Islamic banking and finance. Futur Bus J 5 , 1 (2019). https://doi.org/10.1186/s43093-019-0003-7

Download citation

Received : 03 August 2019

Accepted : 23 October 2019

Published : 14 November 2019

DOI : https://doi.org/10.1186/s43093-019-0003-7

Share this article

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

  • Ethical finance
  • Islamic financial system
  • Islamic products and services
  • Islamic banking
  • Islamic equity fund
  • Pakistani finance

JEL Classification

research paper of islamic banking

A Systems View Across Time and Space

  • Open access
  • Published: 26 February 2021

Customer satisfaction in the digital era: evidence from Islamic banking

  • Ghazi Zouari   ORCID: orcid.org/0000-0002-8168-3266 1 &
  • Marwa Abdelhedi 1  

Journal of Innovation and Entrepreneurship volume  10 , Article number:  9 ( 2021 ) Cite this article

25k Accesses

25 Citations

Metrics details

Based upon an extended SERVQUAL model, this paper attempts to contribute to the Islamic banking literature by examining the impact of digitalization, as a service quality dimension, on customer satisfaction.

Design/methodology/approach

Two dimensions, i.e., digitalization and compliance, are added to the existing SERVQUAL model of five dimensions. Results are drawn from a self-completed survey of a convenience sample of 145 Tunisian Islamic bank customers for the year 2018. Factor analysis and regression analysis are used to determine factor structure and determine the impact of service quality dimensions, especially digitalization, on customer satisfaction in Islamic banking.

The factor analysis extracted five dimensions of service quality, i.e., confidence, compliance, digitalization, tangibles, and human skills. The paper demonstrates a positive and significant relationship between the main dimensions of customer service quality and customer satisfaction, except for tangibles.

Research limitations/implications

Although the outcomes lend support to the extended SERVQUAL model, the results are derived based on a relatively average sample size in one country (Tunisia). It might also be useful to enlarge the study sample for better generalization of the findings in other countries and include a comparison between Islamic versus conventional banking about service quality and customer satisfaction. Moreover, we can applicate another original method for the Measuring and Implementing Service Quality like the multicriteria method dubbed (MUSA).

Managerial implications

To remain competitive, Tunisian Islamic banks need to pay attention to the way the services are delivered and not take it for granted that customers are only focusing on compliance. Dealing henceforth with Generation Y customers, they must persevere in bringing their customer service into the digital era.

Originality/value

This study is one of the few which tries to investigate the drivers of customer satisfaction for Islamic banks in a Digital Era. It reveals that although customers pay special attention to Sharia laws, the way services are delivered matters to them too. From now on, digital banking must appear among the Islamic bank features to stay relevant in the Digital Era.

Introduction

Across the globe, digital technologies are mushrooming in all areas, including the banking sector (Ganguli & Roy, 2011 ). Especially, newly developed and implemented technologies are changing people’s lifestyle and consumption habits which impacts considerably the nature of companies-customers relationships. This is due to the evolution of the expectations of today’s tech-savvy digital consumers who are looking forward to the delivery of digital solutions by their banks (Sreejesh, Anusree, & Mitra, 2016 ).

The digital transformation in the banking sector is likely to continue and further ramp up given the specifics of the post-crisis market environment. Competing from now on in the digital era, banks are called to greater integration of digital technologies in response to market changes and customers’ needs. Moreover, they must persevere into accumulating digital capabilities to take their customer service into the next level, allowing so to enhance customer satisfaction rates and make higher profits (Reichheld & Sasser Jr., 1990 ) at the same time as ensuring effective automation and related cost efficiency (Alstad, 2002 ).

A dynamic segment that is emerging in the banking sector is Islamic banking. Thanks to the relatively resilient performance of this sector during the most serious financial crisis ever seen, Islamic finance has witnessed remarkable development around the world. Nevertheless, this is not the case in North African countries. The factors that account for this underdevelopment were summarized by Wilson ( 2011 ) as follows: firstly, the limited development of retail banking generally, second the lack of consumer awareness about Islamic banking, and third, the low scale of government support. In Tunisian banking, the Islamic banking sector remains embryonic and struggles to gain market share (Boulila & Ben Slama, 2014 ). The current Islamic banking system comprises four Islamic banks. The first one is “Al Baraka Bank Tunisia” licensed to offer Islamic banking as an offshore institution since 1983. The second is a regional office of the United Arab Emirates (UAE)-based Islamic bank “Noor Islamic Bank” established in June 2008. The third and the most expanded one is “Zitouna Bank” launched in May 2010 by the son in law of the deposed president. The last one is “El Wifak Bank” launched in May 2017. However, there is a sustainable development scope for Islamic banking given the relevant political changes in post-revolution Tunisia and the presence of market push (Gallup, 2014 ), and hence, Tunisian Islamic banks need to take advantage of opportunities associated with the development of the Islamic financial landscape in Tunisia.

Although the whole notion of Islamic banking hints at the fulfillment of religious obligations of pious Muslim customers, Tunisian Islamic banks should not take it for granted that customers are only focusing on compliance and must be more conscious about the service quality evaluation according to customers’ expectations given the fact that service quality is closely related to customer satisfaction in Islamic banking (Janahi & Almubarak, 2017 ). Most banks are on the path to digital adoption to fulfill the ever-increasing needs of the digital generation; however, Islamic banking constitutes a particular banking segment to which conventional marketing rules do not necessarily apply (Muslim, Zaidi, & Rodrigue, 2013 ).

So, does the digital transformation phenomenon have any impact on the major service evaluation criteria for Tunisian Islamic banking? And what should be the potential benefits of a customer service digitalization process concerning customer satisfaction in Islamic banking?

The underpinning theme of this study is that the underlying religious philosophy of Islamic finance can no longer be the only source of competitiveness, but that a marketing strategy of ongoing service quality improvement in light of market changes is even more necessary for banks to remain competitive. Given the above, the elaboration of an adapted measurement model of service quality with consideration for new consumption habits seems to be more prominent than ever to enhance service offerings and meet digital consumers’ expectations with the ultimate goal of reaching high levels of customer satisfaction.

This paper looks at the importance of integrating digitization and compliance into consumers’ satisfaction dimensions for the Islamic banking context. To do that, a review of the literature is presented hereafter. The section that follows looks at the methodology and reports on data collection, analysis, and results. The discussion of the findings and subsequent implications are then provided. The final part of the paper draws the concluding remarks and sums up the limitations of the study.

Literature review

Customer satisfaction and service quality.

Customer satisfaction is what a consumer feels about a particular service or product after it has been used (Solomon, 1996 ). It would be considered as one of the primary strategic goals to which every organization shall pay particular attention (Dabholkar, Thorpe, & Rentz, 1996 ). That is because almost all studies show a tight connection between customer satisfaction and repurchase intentions, positive word of mouth (Dispensa, 1997 ), market reputation, and customer loyalty (Cronin & Taylor, 1992 ) leading so to profit increase and cost reduction (Cooil, Keiningham, Aksoy, & Hsu, 2007 ; Kumar & Reinartz, 2006 ). Now, the first thing that came in mind when dealing with customer satisfaction is service quality since satisfaction is particularly sensitive to the level of service quality provided by the organization. It is suggested that service quality is an underlying determinant of customer satisfaction (Yavas, Bigin, & Shenwell, 1997 ); hence, it is important for management to find a concise definition of service quality and search for the most reliable assessment process to ensure high-quality service offerings.

Service quality is defined by Gronroos ( 1983 ) as the fact of meeting what one company’s customers expect from its service offerings while it represents the gap which may exist between what customers expected to get as service and service quality as perceived by them (Parasuraman, Zeithaml, & Berry, 1988 ). Although providing a meaningful measurement tool is essential for service quality management, it is often hard to measure the quality of service due to certain inherent characteristics including heterogeneity, intangibility, perishability, and inseparability (Hoffman & Bateson, 2001 ).

The increasing awareness about the key role of both the concepts of quality and satisfaction in a constantly changing banking market have made of them the focus of a multitude of studies Throughout the body of academic literature, scholars continually refer to Parasuraman, Zeithaml, and Berry’s ( 1985 , 1991 ); Parasuraman et al.’s ( 1988 ) original work. Through numerous qualitative researches, these authors concluded that customers provide a congruous evaluation of service quality regardless of the service industry and then conceived a five-dimension measure scale of service quality and provided concise definitions for each of these dimensions.

Reliability: the ability to be trusted because of performing the promised with precision

Tangibles: the tangible aspects associated with the service like the appearance of employees, physical facilities, and equipment

Responsiveness: the willingness of staff to react to customers quickly and positively

Assurance: the knowledge and courtesy of employees and their ability to convey trust, faith, and confidence among customers

Empathy: the caring and individual attention provided for customers.

Careful empirical testing of the theorized service quality dimensions has led to the recognition of a 22-item scale named SERVice QUAlity (SERVQUAL, Parasuraman et al., 1991 ). The basic assumption underlying the SERVQUAL model is that service quality is interpreted in terms of the gaps which may exist between what customers expected to get as service and service quality as perceived by them. Thus, a low-quality service corresponds to that case in which customers’ expectations are greater than their perceptions while exceeding expectations implies that service quality is deemed high. Since its conception in 1988, SERVQUAL has gained high attention and has been applied in a multitude of service industries, including the banking industry (e.g., Veysel, Erkan, & Hüseyin, 2018 ). Nevertheless, the model faced a wide criticism, mainly directed at its conceptual appropriateness, its operationalization, and the ambiguity of the expectations construct (Buttle, 1996 ). Moreover, empirical evidence does not support the dimensional stability of SERVQUAL, the five-dimensional concept of service quality does not hold up when the research is replicated in different contexts (Babakus & Boller, 1992 ), and the 22 defined items do not load on to the corresponding dimensions regularly (e.g., Carman, 1990 ). Consequently, there may not be a relevant and universal measure of service quality for service industries. Indeed, the relative importance of these dimensions differs from one country to another as well as the demographic characteristics and cultural background of customers. Despite these criticisms, it is recognized that the SERVQUAL measurement tool represents a generic instrument that enables a meaningful assessment for service quality in terms of assurance, reliability, tangibles, empathy, and responsiveness (Saleem, Zahra, Ahmad, & Ismail, 2016 ).

Customer satisfaction and service quality in Islamic banking

Service quality is more likely to gain weight in the banking industry given the constantly changing banking environment. The highly competitive financial market is pushing the banks, including Islamic banks, to constantly rethink their service offerings in light of the evolving customers’ expectations for service quality aspects. Together with conventional banks, Islamic banks aim to meet customers’ banking needs. The main difference between them is mere that Islamic banking conducts its operation based on the principles and teachings of Islam known as Islamic law (Shariah).

Islamic banking transactions are carried out following the rules, regulations of Islamic Shariah, known as fiqh muamalat (Islamic rules on transactions). There is no place for interest receipts and payments, excessive uncertainty (gharar), gambling, speculations, and illegitimate transactions in the Islamic financial system (Khan, 2010 ). It is a complete set of the financial framework based on discipline and promotes the level of fairness and equity in the carrying out of the banking business. However, Profits and Loss Sharing (PLS) remains the feature most emphasized by Islamic banking advocates (Zaher & Hassan, 2001 ). The ban of interest-based financial transactions in Islamic religion and the aspiration of pious Muslims to making a practical reality of their religious values has made from Islamic banking a key player in global financial circles over the past four decades.

Customer service is a major organizational process that companies should optimize to enhance customer satisfaction rates, reach a wider market, and increase earnings (Jahanshahi, Gashti, Mirdamadi, Nawaser, & Khaksar, 2011 ). So, roughly speaking, a large number of the studies analyzing the relationship between service quality and customer satisfaction within Islamic banking have adopted the original SERVQUAL tool as it was conceived by its authors and some of them have used an adjusted version of it. Abdullah and Kassim ( 2009 ) explored the dimensional structure of banking services offered by Qatari Islamic banks.

They defined a set of four quality dimensions that are tangibles, human skills, online banking, and empathy. However, they noted that only two dimensions that are empathy and human skills were significant when examining customer satisfaction. Al-Tamimi and Al-Amiri ( 2003 ) studied the service quality pattern of UAE Islamic banks else.

One of the contributions of the study is the confirmation of the validity of SERVQUAL for Islamic banks, at least for their sample. They also realized that empathy and tangibles were the most important dimensions. In another distinctive study, Amin and Isa ( 2008 ) focused on the association between service quality as perceived by Malaysian customers and their satisfaction level with Islamic banks using an adjusted SERVQUAL model consisting of six dimensions. They added a new dimension under service quality dimensions which they called “compliance” given the foundation philosophy underlying Islamic banking. In conclusion, the researchers suggested that that the standard pattern of Islamic banking service quality should consist of the six dimensions and that the quality of Islamic banks service offerings was correlated with their customers’ satisfaction scores. Furthermore, it is important to highlight the exceptional work of Owen and Othman ( 2001 ) who suggested a new service quality assessment tool for Islamic banks which they called CARTER (Compliance, Assurance, Reliability, Tangibles, Empathy, Responsiveness). The novel set of service quality was defined based on a customized Parasuraman et al.’s ( 1985 , 1988 , 1991 ) five dimensions to suit Islamic banking industry specificities. Yet, a new dimension named “Compliance with Islamic law” had to be included in the existent five-dimensional concept that refers to the ability of the Islamic bank to fulfill with Islamic law and operate under the Islamic banking principles. This dimension includes such items as “Run on Islamic law and principles,” “no interest rates are applicable for neither loans nor savings,” “provision of Islamic products and services,” “provision of free interest loans,” and “provision of PLS-based products.” The study of Owen and Othman has probably some uniqueness despite the handicap of the model’s validity (Hafsa, 2013 ). The problem derives mainly from the sample which took part in this study because it had to represent the clients of only one bank. Later on, some researchers like Osman, Ali, Zainuddin, Rashid, and Jusoff ( 2009 ) and Janahi and Almubarak ( 2017 ) opted for the testing of the CARTER’s validity in different Islamic banks from other regions.

Customer satisfaction and service quality in the digital era

Over time, and due to the digital revolution, society is being confronted with an unprecedented shift away from an industrial to a digital orientation. A new customer generation who grew with Internet democratization is more prone to technological developments. Consequently, the digital transformation has become an obligation rather than a choice for today’s organizations, banks are not excepted given the breakthrough development in fintech solutions. Financial technology, often shortened to Fintech, has become a widely used term today which refers to the adoption of new technologies by the financial service institutions, especially banking institutions. However, by further examining the history of banking activity development, it appears that this is not a brand-new concept. The banking sector is seen as the vanguard sector of the fintech-based service revolution (Barras, 1990 ) so that the banking landscape has witnessed the development of a multitude of fintech innovations that includes Electronic Fund Transfer at the Point of Sale (EFTPOS), Automated Teller Machine (ATM), Internet banking, and mobile banking. Owing to ever-increasing competition within banking services, banks have embarked on the development of technology-driven strategies since empowering customers with technology-based service delivery systems generates cost-savings and improves operational efficiency (Alstad, 2002 ) and should boost customer satisfaction level, allowing to strengthen customer retention and generate further revenues (Reichheld & Sasser Jr., 1990 ).

With more widespread internet penetration and mobile devices especially smartphones, the innovations became more intense from the 2000s onward which may be the starting point for the digital revolution. There is often a great difference between the era of the internet during the 1990s and the digital era at present. Digital has been dramatically reshaping the habits and preferences of consumers, whose lives are more and more involved with digital innovation, leading to a profound impact on the banking industry (Ganguli & Roy, 2011 ). Nevertheless, the impact is not all negative for traditional banks. There are still considerable customer segments showing a preference for brick and mortar experience. However, over time, banks may face a considerable reduction in their customer base when digital natives, who have been immersed in technology their entire lives (Prensky, 2001 ), form the majority of the population unless the banking sector embraces digital transformation. That seems to be more relevant as previous studies show that differences do exist in acceptance and usage levels of technologies across customer segments depending on their beliefs about technology (Dabholker, 1996 ).

Digitalization refers to the process in which the use of digital technology by an organization is adopted or increased (Castells, 2009 ). Regarding banking, that means acquiring technology-centric capabilities that enable new methods of interaction and service delivery to improve customer’s experience. Owing to the technological evolution in the banking sector, we will probably witness another revolution in banks’ marketing strategies (Dootson, Beatson, & Drennan, 2016 ). Although digital banking is technology related, it is service-oriented and designed around the needs of digital natives that grew up with computers as a daily part of their lives and that are living in a broadly interconnected world. To reach a younger and more digitally savvy customer base, marketing efforts should hinge revolve around the offering of personalized services and digitally empowered experiences to enhance customer satisfaction since the latter is widely assumed and assessed to determine repeat sales, positive word of mouth recommendations, and mostly customer loyalty (Bearden & Teel, 1983 ).

In most of the previously undertaken studies, it was suggested that service quality dimensions are the determinant criteria that influence the customers’ decision over the choices in the banking selection. Nevertheless, Islamic banking constitutes a particular segment in which the traditional rules of marketing in the banking industry may not apply due to religious-based reasons. Religion is considered to be the most important bank selection factor (Metawa & Almossawi, 1998 ). However, the evidence did not bear out the claim that Islamic banking reflects Islamic values, previous studies found that the selection of Islamic banks is not founded solely on the customers’ religious beliefs (Dusuki & Abdullah, 2006 ). Therefore, Islamic banks must persevere in working on the demand of, or response to its customers’ needs and wants because it is obvious these factors that develop their perception of quality. The latte, however, is strongly influenced by customers’ demographic characteristics (Urban & Pratt, 2000 ), the development of a valid and distinct measure of service quality is even more vital to address customer needs in an increasingly digital world. Customers are already ahead of many banks in how they use digital technology to manage their financial lives, in fact, according to Ernst and Young ( 2016 ), 81% of Gulf Cooperation Council (GCC) Islamic banking customers are expected to be ready to switch to the bank offering a greater digital experience. This shift towards digital banking means that banks’ marketing management model is changing, making it crucial for Islamic banks to understand the impact of digital banking on customer satisfaction. Previous research has focused on the relationship that may exist between customer satisfaction and e-service quality within the banking sector (e.g., Isaac, 2011 ) and the factors influencing customers’ acceptance of e-banking (e.g., Martins, Oliveira, & Popovic, 2014 ), but digital banking should not be treated as a separate dimension among those which define and shape the service quality concept as pursued in this paper. Digital banking should not only be considered as a kind of service but also as a new feature that must exist among the essential features a bank must acquire.

In brief, overall satisfaction with a service arises from a complex and multidimensional process. Thus, developing service marketing theory requires an understanding of customers’ needs to translate these into the delivery of services matching those needs. The research conducted by Parasuraman et al. ( 1985 , 1988 , 1991 ) claimed that the developed theoretical model will successfully act as a basic template for the assessment of service quality. Nonetheless, this research was conducted 30 years ago. Thus, what may have constituted as significant previously may not be entirely relevant to today’s customers.

Based on the explanations mentioned above and like several studies that have used an adjusted version by integrating compliance (Amin & Isa, 2008 ; Owen & Othman, 2001 ) or online banking (Abdullah & Kassim, 2009 ), this study adopts an adjusted SERVQUAL model applicable to the Islamic banking sector as an instrument to measure customers’ satisfaction. Indeed, the original version of Parasuraman et al. ( 1985 , 1988 , 1991 ) also considers two additional dimensions.

The first one, named “compliance,” refers to the ability of the Islamic bank to comply with the rules and regulations of Islamic Shariah and operate under Islamic banking principles. According to Owen and Othman ( 2001 ), this dimension is the most important when assessing customer satisfaction of Islamic banks. In this context, several studies (Janahi & Almubarak, 2017 ; Osman et al., 2009 ) confirm that this new dimension is essential in the study of the relationship between service quality and the level of customer satisfaction of Islamic banks.

The second one, called “digitalization” refers to the extent to which Islamic banks are embracing digital transformation. This factor is defined by variables such as the provision of online services, whether the bank offers electronic payment solutions, whether it is active in social media, and whether it provides mobile banking services and apps. Several authors (Abdullah & Kassim, 2009 ; Isaac, 2011 ; Martins et al., 2014 ) show that the decision-making process for customers has changed with the proliferation of digital technologies and mobile phone devices. Competing in the digital age, Islamic banks must also take the real “digital train.” They must therefore not only meet the religious needs of the Muslim community but above all understand the environment of their future customers and exploit technological advances to meet the ever-growing needs of the digital generation and create an atmosphere where they represent the bank “Most admired” that young people want to work with.

Measurement instrument

A self-reporting questionnaire was designed to take account of previous research. The instrument contains three sections. The first section was designed to elicit demographic information of Tunisian Islamic banking customers. In the second one, the theoretical service quality dimensions as advanced by Parasuraman et al. ( 1988 ) were adjusted by integrating simultaneously two additional dimensions, compliance, and digitalization, to suit the research context. The original items were translated to French since this language is the most used in the business industry in Tunisia. A pre-test was then conducted with some Tunisian Islamic banks’ customers, and minor modifications were made accordingly to ensure that the questions were not repetitive. A total of 28 items are used to capture respondent views about service quality. Moreover, the paper had to deal only with service quality perception to be more effective (Dabholkar et al., 1996 ). Respondents were invited to rate their answers on a five-Likert scale to improve response rate and avoid respondent fatigue (Herington & Weaven, 2009 ). They were required to point out the level of service quality comprising of seven constructs with various statements ranging from strongly dissatisfied to strongly satisfy. The scale was taken from existing research of Naser, Jamal, and Al-Khatib ( 1999 ) and Akhtar, Hunjra, Syed Waqar Akbar, Ur-Rehman, and Niazi ( 2011 ) to measure satisfaction level of employees regarding the service quality provided by bank. Through the latter section, overall satisfaction is measured using a four-item measure identified based on previous studies (Manrai & Manrai, 2007 ; Munusamy, Chelliah, & Hor, 2010 ; Owen & Othman, 2001 ). To ensure the validity of this research study, the respondents were required to respond to each question. SPSS was used for recording and statistical analysis part and linear regression was used to test the model (Akhtar et al., 2011 ; Fakhfakh, Zouari, & Zouari-Hadiji, 2012 ; Zouari, 2008 , 2011 ; Zouari-Hadiji, 2010 ).

Sampling and data collection

Data collection has been made based on an online questionnaire for the customers of the two leading Islamic banks in Tunisia “Zitouna” and “Al Baraka.” The choice of the Tunisian context is justified by the fact that households and firms are increasingly interested in the services provided by Islamic banks especially after the Revolution of 2011. So, it is very useful to study the reality of Tunisian Islamic banks which have specificities compared to their counterparts in particular with the promulgation of the new banking law of 2016 recognizing for the first-time banks which apply Islamic law.

The sample which is composed of 145 respondents from all Tunisian governorates was chosen using the convenience sampling technique Footnote 1 . Based on the general guidelines by prior researchers on the sample size (Boomsma, 1985 , Kerlinger, 1986 and MacCallum, Widaman, Zhang, and Hong ( 1999 ) Footnote 2 and given the number of items used in this study (28 items), our sample of 145 respondents therefore meets the minimum requirements from the statistical perspective. We audited the reliability of the survey results based on the Cronbach alpha coefficient. All service quality dimensions, namely compliance, assurance, reliability, tangibles, empathy, responsiveness, and digitalization showed high reliability (0.815, 0.826, 0.896, 0.835, 0.761, 0.899, and 0.825, respectively, See Table 1 ). Moreover, alpha for the overall model had a high score (0.948). This result is obviously within the range accepted by Nunnally and Bernstein ( 1994 ), indicating the measure was robust.

Examination of demographic characteristics indicates that the percentage of male and female respondents is almost equally distributed among the surveyed Islamic bank customers (48% female, 52% male). The sample consisted mostly of young customers (83% aged between 20 and 38) because they have greater access to technology, and they are more likely to reflect digitally savvy customer needs.

Data analysis and results

Descriptive statistics.

The descriptive statistics of the 28 service quality items as well as four customer satisfaction measurement items are shown in Table 2 . Overall, it seems that Tunisian Islamic banking customers dare not fully satisfied with their banks’ services (mean = 3.44). Concerning service quality dimensions, Tunisian Islamic banks are found to be performing best on “tangibles,” displaying a mean rating of 4.06. More importantly, the “compliance” dimension exhibits the lowest mean rating (3.45). This would imply that Islamic banking customers in Tunisia lack confidence that their banks are compliant with Islamic banking principles.

Service quality measurement

Factor analysis was carried out to establish the factor structure of the service quality model relative to the industry and service context under study. Bartlett’s test for sphericity was used to test the null hypothesis that the correlation matrix between the 28 items has an identity matrix. The null hypothesis was rejected (χ 2 = 2917,128 df = 378, p - value = 0.000, Table 3 ). In the Table 4 , The Kaiser Meyer-Olkin measure of sampling adequacy yielded a coefficient of 0.919 which is interpreted as marvelous (Kaiser, 1974 ). These two tests mean the items have adequate common variance and acceptable factorability (Tabachnick & Fidell, 1996 ).

Thus, the 28 items were factor analyzed, producing five oblique factors to retain given that they have eigenvalues greater than one (Kaiser, 1974 ). Oblique factors were preferred because they rotate to simple structures and agree more with psychological theory than do orthogonal factors (Kline, 2000 ). The five-factor solution accounted for a combined 69.93 percent of the total variance (See Table 5 ). A total of 28 items were loaded on the factors but two items had to be removed because their factor loadings are less than 0.4 (Floyd & Widaman, 1995 ). The reliability of the factors was calculated using Cronbach’s alpha. All five factors demonstrate reliability, with Cronbach’s alphas all above the required 0.8 cut-offs (Hair, Anderson, & black, 1998 ). Factors extracted, along with their labeling and analysis, are discussed hereafter. The first factor is labeled “confidence” and it comprises items from the basic Parasuraman et al.’s ( 1988 ) scale regarding the two dimensions of assurance (items 5, 6, 7, and 8) and reliability (items 9, 10, 11, and 12). The “compliance” factor encompasses the need for confidence about the compliance of Islamic banks with Shariah principles (items 1, 2, 3, and 4). We label the third-factor “digitalization,” as these items pertain to the ability of the bank to offer digitally empowered experience to its customers (items 25, 26, 27, and 28). Consistent with Parasuraman et al. ( 1988 ), the fourth-factor “tangibles” refers to the quality of the intangible aspects and visible attributes of the service (items 14, 15, and 16). The last factor includes items of the responsiveness (items 21, 22, 23, and 24) and the empathy (items 18, 19, and 20) dimensions as proposed by Parasuraman et al. ( 1988 ), accordingly, we named it “human skills.”

Satisfaction

The Kaiser Meyer-Olkin measure of sampling adequacy yielded a coefficient of 0.797 which is interpreted as meritorious. The four items used to measure form a single factor accounting for 70.13 percent of the total variance. A Cronbach’s alpha of 0.841 establishes reliability for the measure (See Table 6 ).

Satisfaction is a cognitive evaluation, while loyalty is related to commitment (satisfaction is a necessary but not sufficient condition to loyalty). We note that these four specific items cover both satisfaction and loyalty measures.

Regression analysis

To study the impact of the service quality factors (the five-factor scores as the independent variables) on the satisfaction of Tunisian Islamic banking customers (the dependent variable), multiple regression analysis was applied. The results of the multiple regression analysis are reported in Table 7 .

The service quality dimensions accounted for a significant amount of variance in satisfaction ( R 2 = 68.3, Fisher = 59.91, p value = 0.000). All service quality dimensions tend to be highly correlated with satisfaction, except for tangibles.

The greatest influence on satisfaction is made by “Confidence” ( ß = 0.376, t student = 4.850, p value = 0.00) and then “Human skills” ( ß = 0.297, t student = 4.127, p value = 0.00). Hence, the need for a positive personal interaction inspiring trust and engagement is a significant predictor of customer satisfaction in Tunisian Islamic banking. The next strongest contribution is made by “Compliance” ( ß = 0.207, t student = 3.895, p value = 0,00). Accordingly, running on Islamic law principles is of special interest to Islamic banking customers. “Digitalization” is found to have the fourth strongest influence on satisfaction ( ß = 0.190, t student = 3.414, p value = 0.001). Therefore, the results show that digitalization of Islamic banking is in the customers’ interest. “Tangibles” makes the smallest contribution ( ß = −0.029, t student = −0.485, p value = 0.628) which is not statistically significant. The results provide predictive validity for the model, with examination of the t values indicating that “Human skills,” “Confidence,” “Compliance,” and “Digitalization” contribute to prediction of satisfaction.

In today’s digital era, Islamic bank managers need to understand what criteria are being used by customers to evaluate their services as consumer behavior patterns are changing due to the current digital trend. The current research makes important contributions to the field of banking services by identifying the major service evaluation criteria for Islamic banking by Tunisian Customers. The analysis of the 28 items expected to assess the service quality in this study allows us to identify five dimensions of service quality in the case of Tunisian Islamic banking. These dimensions are confidence (reflecting reliability and assurance), compliance, digitalization, human skills (reflecting empathy and responsiveness), and tangibles.

In the previous empirical studies, which employed the SERVQUAL instrument in modified form, a wide variety of service quality structure has been revealed, the number varying according to the examined service sector (Buttle, 1996 ). Consequently, keeping in mind that the adjusted SERVQUAL instrument was used in a context (the Tunisian Islamic banking sector) different from those investigated by Parasuraman et al. ( 1991 ), it seems to be not surprising to identify a distinct standard for banking service quality evaluation.

As expected, the findings of this study prove that providing the best service quality may result in higher satisfaction levels among Tunisian Islamic banking customers. This result goes online with previous research that stated that there was a strong link between service quality and customer satisfaction in Islamic banking (Owen & Othman, 2001 ). Although Islamic banking customers are satisfied with the overall service quality provided by their banks, it is not guaranteed that their customers do not switch to other banks. Therefore, Islamic banks need to strengthen their customer relationship management through the enhancement of customers’ trust in Shariah compliance. Our results suggest that Islamic banking customers attach great importance to the compliance dimension. The latter may determine the decision-making behavior of pious customers on whether they will continue the relationship with Islamic banks (Hassan & Lewis, 2007 ). Although Shariah compliance was well ranked as a determining factor, it was not the most significant factor. This result is in line with those of Hayat and Khuram ( 2011 ) who specified that the majority of Islamic banks customers value product features and quality of service as major factors for making a selection of Islamic banks at the expense of religious beliefs. Therefore, Islamic banks need to better examine the drivers of their market identity and must consider service quality as equally important to “Sharia compliance” in designing the marketing strategy of Islamic banking services. The development of valid and distinct measures of service quality according to the upcoming digital customer needs remains one of the most important aspects to make customers, especially with the quick-spreading digital transformation all over the world. Indeed, our results prove that digital banking is a major determinant when it comes to overall customer satisfaction and that Generation Y displays a clear preference for digital channels. That result was not surprising since customers’ intentions to use technology are heavily influenced by their attitude towards technology (Gurjeet & Sangeeta, 2013 ). Given the fact that Tunisia, and the world, by and large, are becoming increasingly more digitalized, the ease of switching banks will increase customers’ expectations (Heffernan, 2005 ). The challenge for Islamic banks is to adapt their strategy to match Millennials’ habits and behaviors who are looking for digital banking offerings matching their lifestyle needs. Be that as it may, some considerations should be taken into account when implementing digital banking. Convenience and security issues play a crucial role (Anthony & Yamit, 2017 ; Mbama & Ezepue, 2018 ). By 2025, Josh ( 2014 ) estimated that Generation Y would represent nearly half of the total active population in the world. Hence, to remain competitive, Islamic banks must thrive to move away from traditional banking to develop products and services that truly reflect the digital transformation of today’s young customers’ demand. More importantly, the research findings suggest that human-based service delivery is the most relevant customer satisfaction criteria most customers ever have. People still like human interaction and trust people more than technology, even if customers are increasingly interacting with technology. This result goes online with Luiz and Smith ( 2000 ) who stated that “bank customers’ attitudes towards the human provision of services and subsequent level of satisfaction will impact on bank switching more than when the same service delivery is made through automation.” Better experiences are not exclusively about better technology. The human resources factor also matters and customers are always in need for a positive personal interaction inspiring trust and engagement (Jabnoun & Al-Tamimi, 2003 ). In other words, digital is not an end in itself, but it is serving as a means to reach the organizational objectives of Islamic banks. Consequently, Islamic banks must leverage appropriate technology to develop new digitalized systems but most importantly commit to a new engagement model that focuses on the human touch while matching the customers’ level of expectation with the new systems. Finally, “tangibles” are found to have the least impact upon satisfaction which is not significant. In our opinion, “tangibles” are important, but automatically expected by Tunisian Islamic banks customers. Islamic banking is a relatively recent phenomenon in Tunisia, and Islamic banks have mostly new buildings and modern looking equipment. Thus, tangibles may constitute a hygiene factor (Herzberg, 1982 ), so that it is considered by customers as an expected requirement but leads to no dissatisfaction rather than satisfaction.

Conclusion and recommendations

A rich stream of literature in the areas of service quality and customer satisfaction has evolved and reproduced over the past two decades. Nevertheless, such studies in Tunisian Islamic banks remain scarce. In this age of digital transformation, Islamic bank managers need to understand what criteria are being used by customers to evaluate their services. This paper highlights the importance of the service quality-adjusted pattern and its potential impact on customer satisfaction of Tunisian Islamic banks. The study proposed that the SERVQUAL dimensions would replicate in the Islamic banking industry but with certain modifications given the foundation philosophy underlying this banking sector. Most importantly, the research proposed that digitalization is an essential determinant of service quality and overall customer satisfaction for today’s digital customers. The findings reveal that Islamic banks need to pay attention to the way the services are delivered and not take it for granted that customers are only focusing on compliance. To remain competitive, Islamic banks must update their service quality set to align with the upcoming digital customer needs. However, it is important not to neglect the core role of human-based service delivery in driving engagement, loyalty, and customer satisfaction.

Limitations and future research

First, further research should be considered to gather more information regarding the impact of the digital transformation on the evaluation of service quality and customers’ satisfaction by Islamic vs conventional banks. Second, the study utilized an average convenience sample instead of a random sample. Therefore, it is suggested to enlarge the sample size for better generalization of the findings in other countries. Moreover, although the web-based survey approach has enabled the research to prevent respondents from submitting incomplete questionnaires, which is an advantage, any study based on a predesigned questionnaire suffers from the limitation of dishonesty and differences in understanding and interpretation. Third, although tests for reliability and validity provide initial support for the adopted measures, there remains a possibility that not all service quality dimensions are captured. Thus, qualitative interviews with customers are recommended to explore any other aspects that may contribute to the development of a more meaningful measurement of service quality. Fourthly, another limitation concerns the strong assumption adopted for the transformation of Likert scales which give ordinal data into a cardinal scale in order to quantify customer satisfaction. Finally, and to test our model, we can future studies can applicate another original method for Measuring and Implementing Service Quality like the multicriteria method dubbed MUSA (MUlticriteria Satisfaction Analysis) Footnote 3 .

Availability of data and materials

All data generated or analyzed during this study are included in this published article (and its supplementary information files).

This is a non-probability sampling technique which implies that the sample was chosen for accessibility reasons (Bryman & Bell, 2007 ).

As the factor analysis method will be used for processing the data collected through the questionnaire, the sample size must meet the requirements of said method. Researchers are far from unanimous on this point. Indeed, some consider that the size of a sample must be greater than 100, that the size of 200 is considered important, and that 50 represents a minimum threshold required (Boomsma, 1985 ). In general, the proposed ratios range from an absolute minimum of 5: 1 (5 responses per item) to an absolute maximum of 10: 1 (Kerlinger, 1986 ). According to MacCallum et al. ( 1999 ), a size between 100 and 200 is recommended.

The chief objective of MUSA is the development of a model able to evaluate the level of customer satisfaction both globally and partially for each of the characteristics or attributes of the product or service being considered. Furthermore, the method aims at providing an integrated set of results capable of analyzing customer needs and expectations and to justify their satisfaction level. (Grigoroudis & Siskos, 2010 )

Abbreviations

Automated Teller Machine

Compliance, Assurance, Reliability, Tangibles, Empathy, Responsiveness

Electronic Fund Transfer at the Point of Sale

Gulf Cooperation Council

MUlticriteria Satisfaction Analysis

SERVice QUAlity

United Arab Emirates

Abdullah, A. and Kassim, N. (2009), Measuring perceived quality in Qatari Islamic banks, International Business and Entrepreneurship Development, 4, ½, 90-106.

Article   Google Scholar  

Akhtar, M. N., Hunjra, A. I., Syed Waqar Akbar, S. W., Ur-Rehman, K., & Niazi, G. S. K. (2011). Relationship between customer satisfaction and service quality of Islamic banks. World Applied Sciences Journal , 13 (3), 453–459.

Google Scholar  

Alstad, J. (2002). Use your service edge to your online advantage. American Banker , 167 (46), 1–3.

Al-Tamimi, H. A. H., & Al-Amiri, A. (2003). Analysing service quality in the UAE Islamic banks. Journal of Financial Services Marketing , 8 (2), 119–132.

Amin, M., & Isa, Z. (2008). An examination of the relationship between service quality perception and customer satisfaction: A SEM approach towards Malaysian Islamic banking. International Journal of Islamic and Middle Eastern Finance and Management , 1 (3), 191–209.

Anthony, L., & Yamit, V. (2017). Building customer loyalty in digital banking: A study of bank staff’s perspectives on the challenges of digital CRM and loyalty. International Journal of Bank Marketing , 35 (6), 858–877. https://doi.org/10.1108/IJBM-08-2016-0112 .

Babakus, E., & Boller, G. W. (1992). An empirical assessment of the SERVQUAL scale. Journal of Business Research , 24 , 253–268. https://doi.org/10.1016/0148-2963(92)90022-4 .

Barras, R. (1990). Interactive innovation in financial and business services: The vanguard of the service revolution. Research Policy , 19 , 215–237.

Bearden, W. O., & Teel, J. E. (1983). Selected determinants of consumer satisfaction and complaint reports. Journal of Marketing Research , 20 , 21–28.

Boomsma, A. (1985). Nonconvergence, improper solutions, and starting values in LISREL maximum likelihood estimation. Psychometrika , 50 (2), 229–242.

Boulila, T. N., & Ben Slama, Z. S. (2014). Tunisia Islamic finance: Overview and future prospects. Journal of Islamic Accounting and Business Research , 5 (1), 2–14.

Bryman, A., & Bell, E. (2007). Business research methods , (2nd ed., ). New York: Oxford University Press Inc.

Buttle, F. (1996). SERVQUAL: Review, critique, research agenda. European Journal of Marketing , 30 (1), 8–32.

Carman, J. M. (1990). Consumer perceptions of service quality: An assessment of the SERVQUAL dimensions. Journal of Retailing , 66 (2), 33–55.

Castells, M. (2009). Rise of the network society . Malden: Wiley-Blackwell.

Book   Google Scholar  

Cooil, B., Keiningham, T. L., Aksoy, L., & Hsu, M. (2007). A longitudinal analysis of customer satisfaction and share of wallet: Investigating the moderating effect of customer characteristics. Journal of Marketing , 71 , 67–83.

Cronin, J., & Taylor, S. (1992). Measuring service quality: A re-examination and extension. Journal of Marketing , 56 (3), 55–68.

Dabholkar, P. A., Thorpe, D. I., & Rentz, J. O. (1996). A measure of service quality for retail stores: Scale development and validation. Journal of the Academy of Marketing Science , 24 , 3–16.

Dabholker, P. A. (1996). Consumer evaluations of new technology based self-service options: An investigation of alternative models of service quality. International Journal of Research in Marketing , 3 (1), 29–51.

Dispensa, G. (1997). Use logistic regression with customer satisfaction data, Marketing News. :13.

Dootson, P., Beatson, A., & Drennan, J. (2016). Financial institutions using social media – Do consumers perceive value? International Journal of Bank Marketing , 34 (1), 9–36.

Dusuki, A. W., & Abdullah, N. I. (2006). Why do Malaysian customers patronize Islamic banks? International Journal of Bank Marketing , 25 (3), 142–160.

Ernst, & Young (2016). World Islamic banking competitiveness report 2016 Available at : https://ceif.iba.edu.pk/pdf/EY-WorldIslamicBankingCompetitivenessReport2016.pdf .

Fakhfakh, H., Zouari, G., & Zouari-Hadiji, R. (2012). Internal capital markets and investment decisions, corporate governance. The International Journal of Business in Society , 12 (2), 179–198.

Floyd, & Widaman, K. (1995). Factor analysis and development and refinement of clinical assessment instruments. Psychological Assessment , 7 , 286–299.

Gallup (2014), Islamic banking remains niche market in North Africa, on the future of Islamic banks in North Africa, A Survey Conducted by in Collaboration on Behalf of the World Bank, January, Available at: www.gallup.com/poll/166583/islamic-banking-remainsniche-market-north-africa.aspx

Ganguli, S., & Roy, S. K. (2011). Generic technology-based service quality dimensions in banking impact on customer satisfaction and loyalty. International Journal of Bank Marketing , 29 (2), 168–189.

Grigoroudis, E., & Siskos, Y. (2010). Customer satisfaction evaluation: methods for measuring and implementing service quality. 1st ed.  International Series in Operations Research & Management Science, Vol. 139. Springer Science & Business Media.

Gronroos, C. (1983). Strategic management and marketing in the service sector . Cambridge: Marketing Science Institute.

Gurjeet, K. S., & Sangeeta, G. (2013). Predicting customers’ behavioral intentions toward ATM services. Journal of Indian Business Research , 5 (4), 251–270.

Hafsa, Z. O. (2013). Survey on customer related studies in Islamic banking. Journal of Islamic Marketing , 4 (3), 294–305.

Hair, J. E., Anderson, R. L. T., & black, W. C. (1998). Multivariate data analysis , (7th ed., ) Pearson New International Edition, USA.

Hassan, M. K., & Lewis, M. K. (2007). Product development and Shariah issues in Islamic finance. Thunderbird International Business Review , 9 , 281–284.

Hayat, M. A., & Khuram, S. B. (2011). Customer’s criteria for selecting an Islamic bank: Evidence from Pakistan. Journal of Islamic Marketing , 2 (1), 14–27.

Heffernan, S. (2005). Modern banking . Chichester: Wiley.

Herington, C., & Weaven, S. (2009). E-retailing by banks: E-service quality and its importance to customer satisfaction. European Journal of Marketing , 43 (9/10), 1220–1231.

Herzberg, F. (1982). The managerial choice: To be efficient and to be human, revised edition . Salt Lake City: Olympus.

Hoffman, K. D., & Bateson, J. E. (2001). Essentials of services marketing: concepts, strategies and cases . South-Western College Pub.

Isaac, W. K. (2011). Student evaluation of e-service quality criteria in Uganda: The case of automatic teller machines. International Journal of Emerging Markets , 6 (3), 200–216.

Jabnoun, N., & Al-Tamimi, H. (2003). Measuring perceived service quality at UAE commercial banks. International Journal of Commerce and Management , 13 (2), 29–53.

Jahanshahi, A. A., Gashti, M. A. H., Mirdamadi, S. A., Nawaser, K., & Khaksar, S. M. S. (2011). Study the effects of customer service and product quality on customer satisfaction and loyalty. International Journal of Humanities and Social Science , 1 (7), 253–260.

Janahi, M. A., & Almubarak, M. (2017). The impact of customer service quality on customer satisfaction in Islamic banking. Journal of Islamic Marketing , 8 (4), 595–604.

Josh, Z. (2014). How to tell if a ‘fact’ about millennials isn’t actually a fact, the wall street journal 27 November, https://blogs.wsj.com/economics/2014/11/27/how-to-tell-if-a-fact-about-millennials-isnt-actually-a-fact/ .

Kaiser, H. F. (1974). An index of factorial simplicity. Psychometrika , 39 , 31–36.

Kerlinger, F. N. (1986). Foundations of behavioral research , (3rd ed., ). Philadelphia: Harcourt Brace College Publishers.

Khan, F. (2010). How “Islamic” is Islamic banking? Journal of Economic Behaviour and Organization , 76 , 805–820.

Kline, P. (2000). Handbook of psychological testing , (2nd ed., ). London: Routledge.

Kumar, V., & Reinartz, W. J. (2006). Customer relationship management: a databased approach . Hoboken: Wiley.

Luiz, M., & Smith, A. (2000). Modelling bank customer satisfaction through mediation of attitudes towards human and automated banking. International Journal of Bank Marketing , 18 (3), 124–134.

MacCallum, R. C., Widaman, K. F., Zhang, S., & Hong, S. (1999). Sample size in factor analysis. Psychological Methods , 4 (1), 84–99.

Manrai, L. A., & Manrai, A. K. (2007). A field study of customers’ switching behaviour for bank services. Journal of Retailing and Consumer Services , 14 , 208–215.

Martins, C., Oliveira, T., & Popovic, A. (2014). Understanding the internet banking adoption: A unified theory of acceptance and use of technology and perceived risk application. International Journal of Information Management , 34 (1), 1–13.

Mbama, C. I., & Ezepue, O. P. (2018). Digital banking, customer experience and bank financial performance: UK customers’ perceptions. International Journal of Bank Marketing , 36 (2), 230–255. https://doi.org/10.1108/IJBM-11-2016-0181 .

Metawa, S. A., & Almossawi, M. (1998). Banking behaviour of Islamic bank customer’s: Perspectives and implications. International Journal of Bank Marketing , 16 (7), 299–313.

Munusamy, J., Chelliah, S., & Hor, W. M. (2010). Service quality delivery and its impact on customer satisfaction in the banking sector in Malaysia. International Journal of Innovation, Management and Technology , 1 (4), 398–403.

Muslim, A., Zaidi, I., & Rodrigue, F. (2013). Islamic banks: Contrasting the drivers of customer satisfaction on image, trust, and loyalty of Muslim and non-Muslim customers in Malaysia. International Journal of Bank Marketing , 31 (2), 79–97.

Naser, K., Jamal, A., & Al-Khatib, K. (1999). Islamic banking: A study of customer satisfaction and preferences in Jordan, international J. Bank Marketing , 17 (3), 135–150.

Nunnally, J. C., & Bernstein, I. H. (1994). The assessment of reliability. In Psychometric theory , (3rd ed., pp. 248–292). New York: McGrawHill.

Osman, I., Ali, H., Zainuddin, A., Rashid, W. E. W., & Jusoff, K. (2009). Customers satisfaction in Malaysian Islamic banking. International Journal of Economics and Finance , 1 (1), 197–202.

Owen, L., & Othman, A. (2001). Adopting and measuring customer service quality (SQ) in Islamic banks: A case study in Kuwait finance house. International Journal of Islamic Financial Services , 3 (1), 1–26.

Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1985). A conceptual model of service quality and its implication for future research. Journal of Marketing , 49 (4), 41–50.

Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1988). SERVQUAL: A multiple-item scale for measuring consumer perceptions of service quality. Journal of Retailing , 64 (1), 12–40.

Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1991). Refinement and reassessment of the SERVQUAL scale. Journal of Retailing , 67 (4), 420–450.

Prensky, M. (2001). Digital natives, digital immigrants, part 1. On the Horizon , 9 (6), 1–6.

Reichheld, F. F., & Sasser Jr., W. E. (1990). Zero defections: Quality comes to services. Harvard Business Review , 68 (5), 105–111.

Saleem, M. A., Zahra, S., Ahmad, R., & Ismail, H. (2016). Predictors of customer loyalty in the Pakistani banking industry: A moderated-mediation study. International Journal of Bank Marketing , 34 (3), 411–430.

Solomon, M. (1996). Consumer behavior , (2nd ed., p. 346). Boston: Allyn and Bacon.

Sreejesh, S., Anusree, M. R., & Mitra, A. (2016). Effect of information content and form on customers’ attitude and transaction intention in mobile banking: Moderating role of perceived privacy concern. International Journal of Bank Marketing , 34 (7), 1092–1113.

Tabachnick, B. G., & Fidell, L. S. (1996). Using multivariate statistics , (3rd ed., ). New York: Harper Collins.

Urban, J. D., & Pratt, D. M. (2000). Perception of banking services in the wake of banking mergers: An empirical study. Journal of Services Marketing , 14 (2), 118–131.

Veysel, Y., Erkan, A., & Hüseyin, G. (2018). Investigating the relationship between service quality dimensions, customer satisfaction and loyalty in Turkish banking sector: An application of structural equation model. International Journal of Bank Marketing , 36 (3), 423–440.

Wilson, R. (2011), Islamic banking and finance in North Africa: past development and future potential.  Report by African Development Bank .  https://www.afdb.org/en/news-and-events/islamic-banking-and-finance-in-north-africa-8436 .

Yavas, U., Bigin, Z., & Shenwell, D. (1997). Service quality in the banking sector in an emerging economy: A consumer survey international journal of banking. Marketing , 15 (6), 217–223.

Zaher, T. S., & Hassan, M. K. (2001). A comparative literature survey of Islamic banking and finance, financial markets. Institutions and Instruments , 10 (4), 155–199.

Zouari, G. (2008). L'architecture organisationnelle et la décision d'investissement: Le cas tunisien, Thèse de Doctorat en sciences de Gestion (finance) . Dijon: Université de Bourgogne, Janvier.

Zouari, G. (2011). Specific knowledge, investment decision and organizational architecture. Journal of Research in International Business and Management , 1 (3), 49–61.

Zouari-Hadiji, R. (2010). Modes de gouvernance et Investissement en R&D : Une perspective de comparaison international, Thèse de Doctorat en Méthodes de finance et Comptabilité (option finance) . FSEG Sfax: Université de Sfax, Décembre.

Download references

Acknowledgements

No acknowledgements.

About the authors

Ghazi Zouari is an Associate Professor in Finance and Accounting Methods at the Faculty of Economic Sciences and Management of Sfax, University of Sfax, Tunisia. He is a Head of the Management Department, Chairman of the Thesis and Habilitation Research Committee, Responsible for a research team at the Research Laboratory of Information Technologies, Governance, and Entrepreneurship (LARTIGE) at University of Sfax and Official subscription representative of the Publishing house “Virtus Interpress.” His domain of expertise is the decision process, organizational architecture, R&D investment, behavioral finance, Islamic finance, FinTech, and corporate governance.

Marwa Abdelhedi is a PhD Student in Finance and Accounting Methods at the University of Sfax, Tunisia. Her main research interests are related to corporate governance, Islamic finance, Fintech, and firm value.

None declared under financial, general, and institutional competing interests.

Author information

Authors and affiliations.

Faculty of Economic Sciences and Management, University of Sfax, Sfax, Tunisia

Ghazi Zouari & Marwa Abdelhedi

You can also search for this author in PubMed   Google Scholar

Contributions

Zouari G and Abdelhedi M analyzed and interpreted the association between digitalization and compliance, as a service quality dimension, and customer satisfaction. They proposed an extended SERVQUAL model that has five dimensions of service quality, i.e., confidence, compliance, digitalization, tangibles, and human skills and they demonstrate a positive and significant relationship between the main dimensions of service quality and customer satisfaction, except for tangibles. Consequently, Tunisian Islamic banks seeking performance need to pay attention to the way the services are delivered and not take it for granted that customers are only focusing on compliance. Dealing henceforth with Generation Y customers, digital banking must appear among the Islamic bank features to stay relevant in the Digital Era. The authors read and approved the final manuscript.

Corresponding author

Correspondence to Ghazi Zouari .

Ethics declarations

Competing interests.

On behalf of all authors, the corresponding author states that there is no conflict of interest.

Additional information

Publisher’s note.

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/ .

Reprints and permissions

About this article

Cite this article.

Zouari, G., Abdelhedi, M. Customer satisfaction in the digital era: evidence from Islamic banking. J Innov Entrep 10 , 9 (2021). https://doi.org/10.1186/s13731-021-00151-x

Download citation

Received : 22 April 2020

Accepted : 01 February 2021

Published : 26 February 2021

DOI : https://doi.org/10.1186/s13731-021-00151-x

Share this article

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

  • Service quality
  • SERVQUAL model
  • Customer satisfaction
  • Digital banking
  • Islamic banks

JEL classification

research paper of islamic banking

Book cover

Enhancing Financial Inclusion through Islamic Finance, Volume II pp 259–279 Cite as

The Impact of the Islamic Banking Industry on Economic Growth and Poverty Reduction in Pakistan

  • Muhammad Abubakar Siddique 7 ,
  • Mirajul Haq 7 &
  • Memoona Rahim 7  
  • First Online: 02 July 2020

430 Accesses

4 Citations

Part of the Palgrave Studies in Islamic Banking, Finance, and Economics book series (IBFE)

Pakistan’s banking sector has been under Islamic financial paradigm since 2004. According to various studies, it is performing well in terms of efficiency, profitability, and growth. Limited focus is placed on its role in achieving Sustainable Development Goals (SDGs) of poverty eradication and economic growth—the basis for this chapter. The study uses Salam, Murabaha, Diminishing Musharakah (DM), Ijarah, and Istisna as dependent variables. Four fully fledged and five standalone branches of conventional banks were selected. It employs annual unbalanced panel data for 2004 to 2017. Based on the findings for Im, Pesaran, and Shin panel unit root test, Breusch-Pagan LM test, and Hausman test, random-effect (RE) estimation technique is applied. The results show that Islamic bank-specific and macroeconomic variables have significant impact on poverty reduction and economic growth implying that Islamic Banking Industry (IBI) has potential in the achievement of SDGs and therefore recommends for its promotion.

  • Islamic banking
  • Economic growth
  • Poverty alleviation
  • Unemployment

This is a preview of subscription content, log in via an institution .

Buying options

  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
  • Available as EPUB and PDF
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
  • Durable hardcover edition

Tax calculation will be finalised at checkout

Purchases are for personal use only

There are five broad categories of higher Shariah objectives, for example, protection of religion, life, property, progeny, and intellect. All other objectives are covered under the umbrella of these five in different capacities.

Abdin, J. (2016). Financial Development and Poverty Reduction: Exploring the Links between the Issues Using Evidence from Bangladesh. International Journal of Financial Research, 7 (4), 44–65.

Google Scholar  

Abduh, M., & Chowdhury, N. T. (2012). Does Islamic Banking Matter for Economic Growth in Bangladesh? Journal of Islamic Economics, Bank and Finance, 8 , 104–113.

Abduh, M., & Omar, M. A. (2012). Islamic Banking and Economic Growth: The Indonesian Experience. International Journal of Islamic and Middle Eastern Finance and Management, 5 (1), 35–47.

Abdullah, S. T., Ali, A., & Siraj, W. (2015). The Effect of Foreign Direct Investment on Economic Growth of Pakistan. Journal of Poverty, Investment and Development, 14 , 80–88.

Aburaida, K. M. M. (2011). Rural Finance as a Mechanism for Poverty Alleviation in Sudan, With an Emphasis on Salam Mode. European Scientific Journal, 7 (26), 157–166.

Ahmadi, R., & Ghanbarzadeh, M. (2011). Openness, Economic Growth and FDI: Evidence from Iran. Middle East Journal of Scientific Research, 10 (2), 168–173.

Ali, M. A., & Hussain, T. (2017). Murabaha Perceptions of Islamic Bankers: Case of Pakistan. COMSATS Journal of Islamic Finance, 2 (2), 42–58.

Ali, S. (2014). Foreign Capital Flows and Economic Growth in Pakistan: An Empirical Analysis. World Applied Sciences Journal, 29 (2), 193–201.

Ansari, S. (2014). Islamic Banking in Pakistan: Past, Present and Future. Retrieved from https://doi.org/10.2139/ssrn.2483861

Antwi, S., Mills, E. F. E. A., Mills, G. A., & Zhao, X. (2013). Impact of Foreign Direct Investment on Economic Growth: Empirical Evidence from Ghana. International Journal of Academic Research in Accounting, Finance and Management Sciences, 3 (1), 18–25.

Arsalan, M. (2015). Islamic Banking in Oman—Today & the Way Forward. CPI Financial , July 2014, Issue 84. Retrieved from https://www.researchgate.net/publication/273447583

Banerjee, A., Marcellino, M., & Osbat, C. (2005). Testing for PPP: Should We Use Panel Methods? Empirical Economics, 30 (1), 77–91.

Bendjilali & Khan. (1995). Perpetual Modaraba and Musharkah Contracts: Problems of Application to Ongoing Enterprises, Economics of Diminishing Musharkah, Ch. 1 . Working Paper No. 31. IRTI, IDB, Jeddah, pp. 11–15.

Bhandari, R., Dhakal, D., Pradhan, G., & Uphayaya, K. (2007). Foreign Aid, FDI and Economic Growth in East European Countries. Economics Bulletin, 6 (13), 1–9.

Blomstrom, M., & Kokko, A. (2003). The Economics of Foreign Direct Investment Incentives . EIJS Working papers 168. Retrieved from http://www.hhs.se/eijs

Borenzstein, E., De Gregorio, J., & Lee, J.-W. (1998). How does Foreign Direct Investment Affect Economic Growth? Journal of International Economics, 45 , 115–135.

Bosworth, B. (1998). The Asian Financial Crisis. The Brookings Review, 16 (3), 6–9.

Bustami, B. (2017). The Application of Al-Ijarah Muntahiya Bi Al Tamlik (Financial Lease With Purchase Option) as a Financing Solution in the Sharia Non-Bank Finance Industry. AFEBI Islamic Finance and Economic Review, 2 (1), 13–24.

Chakraborty, C., & Nunnenkamp, P. (2008). Economic Reforms, FDI, and Economic Growth in India: A Sector Level Analysis. World Development, 36 (7), 1192–1212.

Cutler, D. M., & Katz, L. F. (1990). Macroeconomic Performance and the Disadvantaged. Brookings Papers on Economic Activity, 2 , 1–61.

Dandume, M. Y. (2014). Financial Sector Development, Economic Growth and Poverty Reduction: New Evidence from Nigeria. Journal of the Faculty of Economics and Administrative Sciences, 4 (2), 1–20.

de Dios, E. S., & Dinglasan, K. (2014). Just How Good is Unemployment as a Measure of Welfare? A Policy Note . UPSE Discussion Paper, No. 2014-01. University of the Philippines, School of Economics (UPSE), Quezon City.

Dollar, D., & Kraay, A. (2000). Growth is Good for the Poor. In Development Research Group . Washington, DC: World Bank. Retrieved from http://www-wds.worldbank.org/ .

Dupasquier, C., & Osakwe, P. N. (2005). Foreign Direct Investment in Africa: Performance, Challenges and Responsibilities. Africa Trade Policy Center (ATPC) . Work in Progress No. 21. Retrieved from http://www.uneca.org/atpc/

Ebeinstein, A., Harrison, A., McMillan, M., & Shannon, P. (2009). Estimating the Impact of Trade and Offshoring on American Workers Using the Current Population Surveys . NBER Working Papers No. 15107.

Echchabi, A., & Dhekra, A. (2015). Islamic Finance Development and Economic Growth Nexus: The Case of the United Arab Emirates (UAE). American Journal of Economics and Business Administration, 7 (3), 106–111.

Furqani, H., & Mulyany, R. (2009). Islamic Banking and Economic Growth: Empirical Evidence from Malaysia. Journal of Economic Cooperation and Development, 30 (2), 59–74.

Garson, J. (1998). Financial Intermediation at the Local Level. In Microfinance and Anti-poverty Strategies: A Donor Perspective . New York: UN Capital Development Fund.

Goaied, M., & Sassi, S. (2011). Financial Development, Islamic Banking and Economic Growth: Evidence from MENA Region. International Journal of Business and Management Science, 4 (2), 105–128.

Goaied, M., & Seifallah, S. (2010). Financial Development and Economic Growth in the MENA Region: What about Islamic Banking Development.

Goldsmith, R. W. (1969). Financial Structure and Economic Growth in Advanced Countries. In National Bureau Committee for Economic Research, Capital Formation and Economic Growth . Princeton: University Press.

Hamzah, N., Ishak, N. M., & Nor, N. I. M. (2015). Customer Satisfactions on Islamic Banking System. Journal of Economics, Business and Management, 3 (1), 140–144.

Hassen, S., & Anis, O. (2012). Foreign Direct Investment (FDI) and Economic Growth: An Approach in Terms of Cointegration for the Case of Tunisia. Journal of Applied Finance & Banking, 2 (4), 193–207.

James, W. E., & Fujita, N. (2000). Employment and Manufacturing Exports in Indonesia: An Input-Output Analysis . Working Paper Series Vol. 2000-06, May 2000. The International Centre for the Study of East Asian Development (ICSEAD), Kitakyushu

Janjua, M. A. (2004). History of the State Bank of Pakistan . Karachi: SBP. Vol. 3 (1977–1988), 2003 and Vol. 4 (1988–2003), 2004 (Chapters on Islamisation of Economy).

Jelilov, G., Obasa, O. J., & Isik, A. (2016). Impact of Inflation and Unemployment on Economic Growth in Ten (10) Selected Member’s States of Economic Community of West Africa States (ECOWAS) (2001–2014). Advances in Economics and Business, 4 (5), 222–244.

Kalim, R., Mushtaq, A., & Arshad, N. (2016). Islamic Banking and Economic Growth: A Case of Pakistan. Islamic Banking and Finance Review, 3 (1), 14–28.

Karnani, A. (2011). Reducing Poverty Through Employment. Innovations: Technology, Governance, Globalization, 6 (2), 73–97.

King, R. G., & Levine, R. (1993). Finance, Entrepreneurship and Growth. Journal of Monetary Economics, 32 (3), 513–542.

Klein, M., Aaron, C., & Hadjimichael, B. (2003). Foreign Direct Investment and Poverty Reduction . World Bank. Retrieved from http://lcgbangladesh.org

Lateef, A. W., Shukur, S., & Tajudin, A. A. (2017). Maqasid Al-Shari’ah in Ijarah (Leasing) Contract of Islamic Banking System. Journal of Islamic Finance, 6 (2), 38–44.

Levine, R., Norman Loayza, & Thorsten Beck, (2000). Financial Intermediation and Growth: Causality and Causes. Journal of Monetary Economics 46 , 31–77.

Liang, H.-Y., & Reichert, A. (2006). The Relationship Between Economic Growth and Banking Sector Development. Banks and Bank Systems, 1 (2), 19–35.

Marzban, S., & Asutay, M. A. (2014). Shariah-compliant Crowd Funding: An Efficient Framework for Entrepreneurship Development in Islamic Countries . Paper presented at the Harvard International Islamic Finance Form, Boston, April.

Matarneh, B., & Almanaseer, M. (2015). Contribution of Islamic Banks in Financing Small and Medium Enterprises in the Kingdom of Bahrain. International Journal of Financial Research, 6 (3), 49–55.

Millanei, A., Dorafshan, S. M. H. G., & Bayrami, A. (2016). Effects of Istisna Contract Legally and Illegally according to Islamic Banking View. Iranian Journal of Social Sciences and Humanities Research, 4 (1), 28–31.

Mocan, H. N. (1995, January 7). Income Inequality, Poverty, and Macroeconomic Conditions . Paper presented at the American Economic Association Meetings, Washington, DC.

Muntah, S., Khan, M., Haider, N., & Ahmad, A. (2015). Impact of Foreign Direct Investment on Economic Growth of Pakistan. American Research Journal of Business and Management, 1 (1), 7–11.

Naseer, M. A. (2013). A Causal Relationship between Trade, FDI, Exchange Rates and Economic Growth of Pakistan. African Journal of Business Management, 7 (21), 2020–2025.

Nyazee, I. A. K. (2009). Murabahah and the Credit Sale (Islamic Banking Series no. 2) (p. 49). Islamabad: Institute of Advanced Legal Studies.

Omri, A., Nguyen, D. K., & Rault, C. (2014). Causal Interactions between CO2 Emissions, FDI, and Economic Growth: Evidence from Dynamic Simultaneous-Equation Models. Economic Modelling, 42 , 382–389.

Ozturk, I., & Kalyoncu, H. (2007). Is Per Capita Real GDP Stationary in The Oecd Countries? Evidence from a Panel Unit Root Test. Ekonomski Pregled, 58 (11), 680–688.

Pierce, J., & Schott, P. (2013). The Surprisingly Swift Decline of US Manufacturing Employment . mimeo, Yale University.

Rashid, A., & Intartaglia, M. (2016). Financial Development—Does It Lessen Poverty? Journal of Economic Studies, 44 (1), 69–86.

Rewilak, J. (2017). The Role of Financial Development in Poverty Reduction. Review of Development Finance, 7 (2), 169–176.

Rutihinda, C. (2007). Impact of Globalization on Small and Medium Size Firms in Tanzania. ABR & TLC Conference Proceedings , Oahu, HI, USA. Retrieved from http://www.cluteinstitute.com/Programs/Hawaii-2007/Article%20293.pdf

Saleem, S. (2007). Role of Islamic Banks in Economic Development (December 25, 2007) . MPRA Paper No. 6449. Retrieved from SSRN: https://ssrn.com/abstract=989055

Saqib, N., Masnoon, M., & Rafique, N. (2013). Impact of Foreign Direct Investment on Economic Growth of Pakistan. Advances in Management & Applied Economics, 3 (1), 35–45.

Saunders, P. (2002). The Direct and Indirect Effects of Unemployment on Poverty and Inequality . SPRC Discussion Paper No. 118.

Suryahadi, A., Suryadarma, D., & Sumarto, S. (2009). The Effects of Location and Sectoral Components of Economic Growth on Poverty: Evidence from Indonesia. Journal of Development Economics, 89 (1), 109–117.

Tabash, M., & Dhankar, R. S. (2014). The Relevance of Islamic Finance Principles in Economic Growth. International Journal of Emerging Research in Management &Technology, 3 (2), 49–54.

Tang, W. W. (2010). Impact of Corporate Image and Corporate Reputation on Customer Loyalty: A Review. Management Science and Engineering, 1 (2), 57–62.

Tiwari, A. K., & Mutascu, M. (2011). Economic Growth and FDI in Asia: A Panel-Data Approach. Economic Analysis and Policy, 41 (2), 173–187.

Umair, M., & Ullah, R. (2013). Impact of GDP and Inflation on Unemployment Rate: A Study of Pakistan Economy in 2000–2010. International Review of Management and Business Research, 2 (2), 388–400.

Yolanda. (2017). Impacts of Export Development on Unemployment in Indonesia. European Research Studies Journal, XX (3A), 758–773.

Zaidi, S. A. (2005). The Issues in Pakistan Economy . Karachi: Oxford University Press.

Download references

Author information

Authors and affiliations.

International Islamic University, Islamabad, Pakistan

Muhammad Abubakar Siddique, Mirajul Haq & Memoona Rahim

You can also search for this author in PubMed   Google Scholar

Corresponding author

Correspondence to Muhammad Abubakar Siddique .

Editor information

Editors and affiliations.

Islamic Research and Training Institute, Islamic Development Bank, Jeddah, Saudi Arabia

Abdelrahman Elzahi Saaid Ali

Khalifa Mohamed Ali

Ibn Sina University, Khartoum, Sudan

Mohamed Hassan Azrag

figure a

Rights and permissions

Reprints and permissions

Copyright information

© 2020 The Author(s)

About this chapter

Cite this chapter.

Siddique, M.A., Haq, M., Rahim, M. (2020). The Impact of the Islamic Banking Industry on Economic Growth and Poverty Reduction in Pakistan. In: Elzahi Saaid Ali, A., Ali, K., Hassan Azrag, M. (eds) Enhancing Financial Inclusion through Islamic Finance, Volume II. Palgrave Studies in Islamic Banking, Finance, and Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-39939-9_11

Download citation

DOI : https://doi.org/10.1007/978-3-030-39939-9_11

Published : 02 July 2020

Publisher Name : Palgrave Macmillan, Cham

Print ISBN : 978-3-030-39938-2

Online ISBN : 978-3-030-39939-9

eBook Packages : Economics and Finance Economics and Finance (R0)

Share this chapter

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

  • Publish with us

Policies and ethics

  • Find a journal
  • Track your research

Academia.edu no longer supports Internet Explorer.

To browse Academia.edu and the wider internet faster and more securely, please take a few seconds to  upgrade your browser .

Enter the email address you signed up with and we'll email you a reset link.

  • We're Hiring!
  • Help Center

paper cover thumbnail

Published by Centre for Research on Islamic Banking & Finance and Business Finance: An Islamic Perspective

Profile image of Centre for Research on Islamic Banking & Finance and Business

Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities with the development of credit.In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities.In fact, many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen. The aim of this research work is to examine the finance as an Islamic Perspective.

Related Papers

Kyoto Bulletin of Islamic Area Studies

Bochra Kammarti

Born in Muslim countries in the 1950s, the Islamic finance industry became a European social fact from the end of the 1970s. Islamic finance differs from conventional finance in its contractual practices of prescriptions issued from the Sharîa (Qur'an and Sunna). The European conventional use of financial capitalism contravenes these practices, such as the practice of interest, ribâ, hazard, gharar, speculation, maysir, and hoarding. This chapter observes the plasticity of Islamic and national norms in the European context and the arrangements needed to overcome the conflicts of norms, practices, and linguistics to create a European repertoire of Islamic finance. This repertoire is relayed by new European Muslim figures, including bankers, brokers, insurers, consultants, and jurisconsults, who root Islamic finance in Europe through their professional practices.

research paper of islamic banking

Lateef Adeyemo

Far from being a curiosity, Islamic banking and finance products have come of age as a force to be reckoned with in the international financial market, breaking new ground and making giant strides by the day. This growth and geographical expansion has given rise to several challenges which can no longer be ignored but must be addressed by academics and scholars, professionals and practitioners in the industry, technocrats in government circles, standards boards and allied organisations, and Shariah experts and other jurist consultants. Some of these challenges pose a significant threat to the further growth and development of the industry, if left unaddressed. This paper attempts to look into such issues and to proffer solutions to them in order to ensure the even and healthy growth and development of the industry.

Global Economics Review

Muhammad Sohail alam Khan

This paper is an attempt to analyze the practices of Mudarabah and Musharakah been held by the existing Islamic banking. This paper aims to explore the different aspects where Islamic banks were found to be violating the basic rules in these two primary modes of Islamic finance. This paper denies the current practices of Mudarabah and Musharakah at many grounds, like its existence with the concept of limited liability, absentee as a partner, supervisory role of the state bank, and its role as sleeping Mudarib. Similarly, the expense and profit estimation techniques and the acquired procedure to maintain the minimum account balance requirement were also inappropriate with the basic tenets of Shari’ah Principles. This article argues that the structure of overall Islamic banking is purely based on interest bearing investment and financing. It further argues that they deal only in money; they are not involved in any kind of business or trade. According to the authors, the contemporary I...

Choice Reviews Online

Reazul Islam

Journal of King Abdulaziz University-Islamic Economics

Abdelkader Chachi

International Journal Of Creative and Innovative Research In All Studies

IJCIRAS Research Publication

In the last three decades, and Islamic finance system has greatly expanded. However, people are still not completely aware of how it is different from conventional finance system. Thus, it can be implied that it is widely unrecognized in the western nations and poorly comprehended among people in the Muslim countries (Hassan & Lewis, 2017). Currently, there is an adequate amount of researches relating to the Islamic finance system. Therefore, this study intends to review the literature on Islamic banking.

Hussein Elasrag

Islamic finance is one of the fastest growing segments of global financial industry. In some countries, it has become systemically important and, in many others, it is too big to be ignored.Islamic finance is based on shariah, an Arabic term that often is translated to “Islamic law.”Shariah provides guidelines for aspects of Muslim life, including religion, politics, economics,banking, business, and law.The basic sources of Shari’ah are the Qur’an and the Sunna, which are followed by the consensus of the jurists and interpreters of Islamic law. The central feature of the Islamic finance system is the prohibition in the Qur’an of the payment and receipt of interest (or riba). Islamic finance is a rapidly growing industry. While it represents a small proportion of the global finance market (estimated at 1%-5% of global share), the Islamic finance industry has experienced double-digit rates of growth annually in recent years (estimated at 10%- 20% annual growth). Industry experts estimate that assets held under Islamic finance management doubled between 2007 and 2010 to reach around $1 trillion. This paper tries to note the main Principal of Islamic finance. In addition to discuss the Improvement can be made in several areas to promote and enhance the providing Islamic financial services.

ISLAMIC FINANCE: AN INTRODUCTORY INSIGHT

Opeyemi Toyeeb Yusuf

This article attempts to introduce the reader to the fundamentals of Islamic finance with special emphasis on its philosophical distinguishing factors. Thus, an attempt was made to define, explain the divisions and the salient features of Islamic finance.

IJARW Research Publication

Islamic System of Baking and Finance is based on the principles of Sharia Law and is applicable all over the Islamic economies. In this paper, the objective is the study the history of Islamic financial system, its origin, the concepts and terminologies used. The main differences with conventional banking system shall be highlighted. Regulatory bodies like Sharia Auditors and Sharia governing bodies shall also be discussed. The main focus would on discussing the main financial tools used in Islamic banking and the concepts behind those terminologies.

Management Accountant--Official Journal of ICMA-P

Muhammad Hanif

Article includes Introduction Historic Developments Principles Financial products

Fitch Takes Rating Action on 12 Nigerian Banks Following Naira Devaluation

Thu 15 Feb, 2024 - 12:40 PM ET

Fitch Ratings - London - 15 Feb 2024: Fitch Ratings has downgraded Ecobank Nigeria Limited's (ENG) Long-Term Issuer Default Rating (IDR) to 'CCC+' from 'B-' and removed it from Rating Watch Negative (RWN) following the recent devaluation of the Nigerian naira. The agency has also downgraded the bank's National Long-Term Rating to 'BB+(nga)' from 'BBB(nga)'. The Outlook on the Long-Term IDR and National Long-Term Rating is Stable.

Fitch has also maintained the RWN on First City Monument Bank's (FCMB) and Union Bank of Nigeria PLC's (UBN) Long-Term IDRs of 'B-' and National Long-Term Ratings of 'BBB+(nga)' and 'BBB(nga)', respectively.

Fitch has simultaneously affirmed eight other Nigerian banks' and two bank holdings companies' (BHCs) Long-Term IDRs at 'B-', while also affirming the issuers' National Long-Term Ratings with Stable Outlooks. These entities are Access Bank Plc, Zenith Bank Plc, FBN Holdings Plc, First Bank of Nigeria Ltd, United Bank for Africa Plc (UBA), Guaranty Trust Holding Company Plc (GTCO), Guaranty Trust Bank Limited (GTB), Fidelity Bank PLC, Wema Bank PLC and Jaiz Bank PLC. The National Long-Term Ratings of Stanbic IBTC Holdings PLC (SIBTCH) and Stanbic IBTC Bank PLC (SIBTC) have also been affirmed at 'AAA(nga)' with a Stable Outlook.

ENG's Shareholder Support Rating (SSR) and the other issuers' Government Support Ratings are unaffected by the event. A full list of rating actions is below.

Key Rating Drivers

The Nigerian naira was recently devalued sharply (end-2023: 899/USD; 13 February: 1,516/USD; about 40% devaluation), exceeding our expectations of a more moderate depreciation in 2024. The large devaluation is the second within a year (70% devaluation since end-2022) and has converged the official exchange rate with the parallel market rate.

The continued move away from a longstanding managed exchange rate regime is conducive to restoring capital inflows and reducing foreign-currency (FC) shortages that have weighed on economic activity in recent years. However, it creates short-term macroeconomic risks, such as accentuating already-high inflation (December 2023: 29% yoy) that may weigh on economic growth, heightening loan quality and capital pressures already facing the banking sector.

Fitch now expects the banking sector's impaired loans (Stage 3 loans) ratio to increase at a faster pace than before the devaluation, which itself has caused already material FC-denominated problem loans (Stage 2 and Stage 3 loans; predominantly oil and gas sector loans) to have inflated relative to gross loans and core capital and accentuated credit concentration risks.

However, asset-quality risks are mitigated by the small size of banks' loan books (end-3Q23: net loans represented 35% of domestic banking sector assets; non-loan assets mainly being sovereign exposure) and most FC loans having been extended to borrowers with FC receivables. Furthermore, pre-impairment operating profit, which we expect to benefit from rising interest rates, generally provides a sufficient buffer to absorb loan impairment charges without affecting capital.

The Central Bank of Nigeria (CBN) has published new circulars and made a number of statements accompanying the recent devaluation. One circular issued after the devaluation on 31 January, aimed at increasing the supply of FC, prohibited banks from having net long FC positions, and set 1 February as the deadline for compliance. Net long FC positions have mitigated the impact of past devaluations, including the recent devaluation, on capital ratios as they result in foreign-exchange revaluation gains that cushion the impact of inflated FC-denominated risk-weighted assets (RWAs). Without net long FC positions, banks' capital positions are now more exposed to Fitch's expectation of a further moderate depreciation of the naira, but total capital adequacy ratios (CAR), in most cases, will remain above regulatory minimum requirements.

The Governor of the CBN, Yemi Cardoso, also announced plans to establish a FC gateway bank with the intention of centralising correspondent banking activities, while asserting that a recent audit has determined USD2.4 billion of overdue FX forwards invalid. Fitch believes these measures by the CBN may negatively affect the banking sector's FC liquidity.

The downgrade of ENG's Long-Term IDR follows the downgrade of the bank's VR to 'ccc+' from 'b-', which has been removed from RWN, and reflects Fitch's estimate that the bank has breached its regulatory minimum CAR requirement of 10%. It also reflects our view that, notwithstanding likely material forbearance in respect of single-obligor credit concentration, the bank's internal capital generation is likely to be insufficient to restore compliance with the regulatory minimum and core capital buffers commensurate with its risk profile in the near term. This is in view of pressure on the naira, increased asset-quality risks given material largely FC-denominated Stage 2 and Stage 3 loans (end-3Q23: a combined 38%of gross loans) and heightened credit concentration risks.

The downgrade also reflects FC liquidity risks that may stem from any CAR breach, including due to the accelerated repayment of its USD300 million Eurobond as a result of breach of covenant. ENG's IDRs and National Ratings are now driven by its VR and underpinned by potential support from its ultimate parent, Togo-based Ecobank Transnational Incorporated (B-/Stable), as expressed by its SSR of 'ccc+'.

SIBTCH's and SIBTC's National Ratings are driven by potential support from their ultimate parent, South Africa-based Standard Bank Group Limited (SBG; BB-/Stable). The IDRs and National Ratings of the 10 other banks and two BHCs are driven by their standalone creditworthiness, as expressed by their VRs.

The RWN on FCMB and UBN reflects our view that, while estimated to have remained compliant with their CAR requirements (15% and 10%, respectively) following the devaluation, the banks are at risk of breaching the requirement. This is due to further capital pressure emanating from further naira depreciation and credit losses considering already high Stage 2 and Stage 3 loans (end-3Q23: 31% of gross loans for FCMB; currently estimated at over 40% for UBN).

The RWN on UBN's Long-Term IDR also continues to reflect uncertainty surrounding the background to the recent intervention by the CBN (see: "Fitch Places UBN on RWN Following CBN Intervention"), the potential for further regulatory actions that may contribute to a CAR breach and the negative implications for the bank's standalone credit profile, particularly relating to corporate governance risks and liquidity pressures arising from potential funding instability.

Fitch expects to resolve the RWNs in the next six months when prospects for CAR compliance and, in the case of UBN, the implications of the CBN intervention are clear.

The affirmation of the other Nigerian banks' and BHCs' Long-Term IDRs and National Ratings reflects Fitch's view that these issuers are likely to remain compliant with their respective regulatory minimum CAR requirements despite the devaluation, with sufficient buffers and pre-impairment operating profits to tolerate a further moderate naira depreciation and the second-order effects of a challenging economic environment on loan quality.

The VRs of Zenith Bank, UBA, GTCO and GTB are one notch below their implied VRs of 'b', reflecting the operating environment/sovereign rating constraint. ENG's VR is one notch below its implied VR of 'b-' due to the following adjustment: Weakest Link - capitalisation and leverage.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade.

A further downgrade of ENG's Long-Term IDR would require a downgrade of its VR and SSR. A downgrade of the other issuers' Long-Term IDRs would require just a downgrade of their VRs.

A sovereign downgrade could result in a downgrade of the VRs if Fitch believes that the direct and indirect effects of a sovereign default would likely erode capitalisation and FC liquidity insofar as to undermine viability.

A downgrade of the VRs (including the resolution of the RWN on FCMB and UBN) could result from the combination of the naira devaluation and a marked increase in the problem loans ratio, resulting in a breach of minimum CAR requirements without near-term prospects for recovery. A downgrade of UBN's VR may also result from further regulatory intervention, such as the imposition of restrictive measures on the bank's activities, fines or other regulatory findings, which contribute to a breach of the bank's minimum CAR requirement. A downgrade of UBN's VR may also result from funding instability, such as deposit outflows or additional liquidity sources becoming unavailable to the bank, as a result of the CBN intervention.

A further downgrade of ENG's VR could result from a prolonged breach of CAR requirements, in addition to tightening in FC liquidity resulting from the breach.

A downgrade of the issuers' VRs may also result from a severe tightening in FC liquidity.

A downgrade of ENG's SSR would result from a weakening in ETI's ability or propensity to provide support. A change in ETI's ability to provide support would most likely be indicated by a change in its Long-Term IDR.

National Rating downgrades would result from a weakening in creditworthiness relative to other Nigerian issuers.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade of ENG's Long-Term IDR would require an upgrade of its VR or SSR. An upgrade of the other issuers' Long-Term IDRs would most likely derive from an upgrade of their VRs.

An upgrade of ENG's VR would require restoring CAR compliance with sufficient buffers to tolerate potential further naira depreciation risks, credit losses and increased credit concentration risk.

The RWN on FCMB's and UBN's ratings will be removed and the ratings affirmed at their current levels if Fitch determines that the banks' will remain compliant with their respective CAR requirements with sufficient buffers to accommodate further naira depreciation and asset-quality pressures. In the case of UBN, the affirmation would also require CBN intervention and funding stability risks receding.

An upgrade of the other issuers' VRs would require a sovereign upgrade and an improvement in operating conditions in conjunction with a strong financial profile.

An upgrade of ENG's SSR would require an improved ability of ETI to provide support, which would most likely be indicated by an upgrade of its Long-Term IDR.

National Rating upgrades would result from a strengthening in creditworthiness relative to other Nigerian issuers. SIBTCH's and SIBTC's National Ratings are at the highest level on Fitch's national rating scale and cannot be upgraded.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Senior unsecured debt is rated in line with the respective issuers' IDRs or National Ratings as the likelihood of default on these obligations reflects that of the issuer. Their Recovery Ratings are 'RR4', indicating average recovery prospects.

Access Bank's subordinated debt is rated two notches below its National Long-Term Rating for loss severity, reflecting poor recovery prospects in the event of non-performance.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Senior unsecured and subordinated debt ratings would move in tandem with their anchor ratings.

VR ADJUSTMENTS

Zenith Bank's business profile score of 'b' is below the 'bb' category implied score due to the following adjustment reason: business model (negative).

The earnings and profitability scores of Zenith Bank, GTCO, GTB and UBA of 'b+' are below the 'bb' category implied scores due to the following adjustment reason: earnings stability (negative).

The capitalisation and leverage scores of GTCO, GTB and UBA of 'b-' are below the 'bb' category implied scores due to the following adjustment reason: risk profile and business model (negative).

EXTERNAL APPEAL COMMITTEE OUTCOMES

In accordance with Fitch's policies FCMB appealed and provided additional information to Fitch that resulted in a rating action that is different to the original rating committee outcome.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

SIBTCH's and SIBTC's National Ratings are linked to their parent SBG's Long-Term IDR.

ESG Considerations

Jaiz Bank has an ESG Relevance Score of '4' for Governance. Islamic banks need to ensure compliance of their entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in a Governance Structure ESG Relevance Score of '4', which has a negative impact on the bank's credit profile and is relevant to the ratings in combination with other factors.

Jaiz Bank has an ESG Relevance Score of '3' for Exposure to Social Impact, above sector guidance for an ESG relevance score of '2' for comparable conventional banks. This reflects that Islamic banks have certain sharia limitations embedded in their operations and obligations, although this only has a minimal credit impact on the entities.

UBN's has an ESG Relevance Score of '4' for Governance Structure (in contrast to a typical ESG relevance score of '3') due to the recent dissolution of the board and management by the CBN. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores .

  • senior unsecured

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.

APPLICABLE CRITERIA

  • National Scale Rating Criteria (pub. 22 Dec 2020)
  • Bank Rating Criteria (pub. 01 Sep 2023) (including rating assumption sensitivity)

ADDITIONAL DISCLOSURES

  • Dodd-Frank Rating Information Disclosure Form
  • Solicitation Status
  • Endorsement Policy

ENDORSEMENT STATUS

research paper of islamic banking

DAWN.COM Logo

Today's Paper | February 16, 2024

Meezan bank earns record profit in 2023.

research paper of islamic banking

KARACHI: Meezan Bank Ltd on Thursday announced that its profit-after-tax surged to a record Rs86.02 billion in 2023 compared to Rs45.14bn in 2022, an increase of 91 per cent.

The largest Islamic bank’s earnings per share reached Rs47.66 for the year as compared to Rs25.1 in 2022, on a consolidated basis. The board of directors also announced a final cash dividend of Rs8 per share.

PSO loss surges

The Pakistan State Oil’s loss-after-tax surged to Rs10.4 billion for the second quarter of FY24 from Rs2.083bn in the same period last fiscal year.

However, net sales rose to Rs962bn from Rs874bn in the above period.

The net sales of the state-owned oil giant during 1HFY24 soared to Rs1.92 trillion from Rs1.77tr in the same period last fiscal year, while the profit swelled to Rs14.7bn from Rs64m.

Published in Dawn, February 16th, 2024

Meezan earnings jump 123pc

Meezan bank profit up.

Meezan bags top honours at banking awards

Meezan bags top honours at banking awards

Tapmad scores big by securing multi-year rights for sports streaming

Tapmad scores big by securing multi-year rights for sports streaming

کنڈر گارٹن کی اصطلاح کو فارسی میں ‘کودکستان’ کیوں کہتے ہیں؟

کنڈر گارٹن کی اصطلاح کو فارسی میں ‘کودکستان’ کیوں کہتے ہیں؟

قومی اسمبلی کے 24 حلقوں میں مسترد شدہ ووٹ جیت کے مارجن سے زیادہ رہنے کا انکشاف

قومی اسمبلی کے 24 حلقوں میں مسترد شدہ ووٹ جیت کے مارجن سے زیادہ رہنے کا انکشاف

صدر مملکت نئی قومی اسمبلی کا پہلا اجلاس 29 فروری تک طلب کرنے کے پابند

صدر مملکت نئی قومی اسمبلی کا پہلا اجلاس 29 فروری تک طلب کرنے کے پابند

Why Are Farmers Protesting In India?

Why Are Farmers Protesting In India?

Will Maulana Fazalur Rehman Put Diesel In PTI’s Tank?

Will Maulana Fazalur Rehman Put Diesel In PTI’s Tank?

Can Gaza War Stop Global Production Of F-35 Fighter Jets?

Can Gaza War Stop Global Production Of F-35 Fighter Jets?

Top News Stories: 60.6M Pakistanis Exercised Right To Vote On Feb 8: Fafen

Top News Stories: 60.6M Pakistanis Exercised Right To Vote On Feb 8: Fafen

When Will Pakistan Get A New Govt?

When Will Pakistan Get A New Govt?

Pakistan General Election: “Nobody Is Talking About The Economy”

Pakistan General Election: “Nobody Is Talking About The Economy”

Top News: Imran Khan Warns Against Misadventure Of Forming Govt With Stolen Votes

Top News: Imran Khan Warns Against Misadventure Of Forming Govt With Stolen Votes

What’s Happening In Rafah?

What’s Happening In Rafah?

Dear visitor, the comments section is undergoing an overhaul and will return soon.

Latest Stories

India’s opposition says funds frozen ahead of election

India’s opposition says funds frozen ahead of election

PSX down 900 points as uncertainty on formation of new govt persists

PSX down 900 points as uncertainty on formation of new govt persists

Korean Football Association advisory board recommends sacking head coach Klinsmann

Korean Football Association advisory board recommends sacking head coach Klinsmann

Protesting Indian farmers ready to slug it out until demand for crop prices met

Protesting Indian farmers ready to slug it out until demand for crop prices met

PML-N ‘blowing hot and cold’ over PTI patch-up

PML-N ‘blowing hot and cold’ over PTI patch-up

PTI breaks the ice with perennial nemesis Fazl

PTI breaks the ice with perennial nemesis Fazl

When Anya Taylor-Joy wears a ‘burqa’ it’s okay, but when Muslims do it…

When Anya Taylor-Joy wears a ‘burqa’ it’s okay, but when Muslims do it…

Rakhi sawant is an imran khan fan — who would’ve thought.

5 lessons on love from Zeenat Aman’s age-defying Valentine’s Day confessions for Bumble

5 lessons on love from Zeenat Aman’s age-defying Valentine’s Day confessions for Bumble

Most popular.

CJP comes down hard on military’s businesses

CJP comes down hard on military’s businesses

Contenders emerge for top slots as partners talk

Contenders emerge for top slots as partners talk

Warning for the next PM

Warning for the next PM

Modi opens grand Hindu temple in UAE as election nears

Modi opens grand Hindu temple in UAE as election nears

PML-N rank & file ‘let down’ by Nawaz’s change of heart

PML-N rank & file ‘let down’ by Nawaz’s change of heart

Staged show.

Demand for Saudi riyals jumps by 30pc

Demand for Saudi riyals jumps by 30pc

Cartoon: 15 February, 2024

Cartoon: 15 February, 2024

Polls and their aftermath

Polls and their aftermath

Editorial: King’s parties have a long and chequered history in Pakistan

Editorial: King’s parties have a long and chequered history in Pakistan

People have to think of new ways of organising to be able to counter the state’s new tactics

People have to think of new ways of organising to be able to counter the state’s new tactics

All that we know about PTI’s picks for prime minister, provincial chief executives

All that we know about PTI’s picks for prime minister, provincial chief executives

Wealth and wealth creation by genuine means is something to celebrate rather than scoff at

Wealth and wealth creation by genuine means is something to celebrate rather than scoff at

New realities

New realities

Cultural change for economy

Cultural change for economy

Created in toil

Created in toil

Why we fail

Why we fail

Climate-proofing mandates

Climate-proofing mandates

All the king’s men, hiking gas prices, humane strategy, pti’s options, revitalising the indus, the grapevine.

THE GRAPEVINE

research paper of islamic banking

Research Finds Surprise in Women Lawyers’ Deal Work: Progress

By Roy Strom

Roy Strom

Welcome back to the Big Law Business column . I’m Roy Strom, and today we look at a new paper that studied women’s roles on law firm deal teams. Sign up to receive this column in your Inbox on Thursday mornings. Programming Note: Big Law Business will be off next week.

A trio of legal academics have optimistic news about the state of women in Big Law: Their research suggests women are on track to match men’s roles on large deals over the next decade.

That’s one takeaway from a new paper that studied law firm press releases on 10,000 deals from 2013 to 2023 to analyze the number of women announced on deal teams. While women still lag men in how frequently they lead deals (19% of the time), they show up in more significant and growing numbers on the broader deal teams.

The study reports 78% of deal leadership teams announced in 2023 included at least one woman, up from 42% in 2013. Overall, women made up 31% of deal teams in 2023 compared to 19% a decade earlier.

The numbers don’t show women are close to men in deal team representation, but they indicate women are getting an equal or better shot at working on deal teams relative to their representation inside law firms.

The deal team figures roughly match the progress women have made in partnership ranks at law firms over the same period—increasing from 20% in 2013 to nearly 28% last year, according to the National Association for Law Placement.

“My big takeaway is that women are succeeding and the next generation of women lawyers is going to significantly surpass the current generation,” said Tracey George, a co-author of the paper, who is vice provost for faculty affairs and professional education at Vanderbilt University Law School. “We should expect to see women in equal numbers to men at the top of deals within 10 years.”

The math from the paper works like this: Women’s representation on deal leadership teams increased by 63% over the decade from 2013 to 2023. If that same trajectory holds through 2033, women would account for just over 50% of deal leadership teams.

George said it’s possible that progress slows as women get closer to parity, meaning it could take 15 years to reach that level.

research paper of islamic banking

Women no doubt still face challenges in Big Law. A report from the American Bar Association last fall said there was an “urgent need” to better support women with children in the legal profession. In that study, mothers were more than twice as likely as fathers to report feeling that having children had a negative impact on their legal career.

The new paper, and its optimistic tone, represents a change of tune from the academics, who include University of Virginia School of Law’s Mitu Gulati and Albert Yoon from the University of Toronto Faculty of Law.

The trio in 2021 analyzed US Securities and Exchange filings to report women accounted for less than 10% of lead lawyers on major corporate transactions. The study was portrayed in news articles as another data point to a familiar story: Women were not being given chances to progress inside elite law firms.

The authors heard pushback from women inside those firms, Gulati said in an interview. The SEC data they relied upon was telling a very small story since it only included one or two top lawyers and only included M&A deals. Leading a deal team was not the only barometer of success inside law firms, and women were making progress being part of deal teams.

To broaden their view, they chose to look at press releases from six law firms: Cravath, Swaine & Moore; Hunton Andrews Kurth; Paul, Weiss, Rifkind, Wharton & Garrison; Shearman & Sterling; Sullivan & Cromwell; and White & Case.

The firms were chosen in part because their press releases were available for the reporting period and the firms listed deal teams in a hierarchical manner. The data includes four primary types of announcements: Capital markets, M&A, litigation, and pro bono work. The vast majority (75%) of the releases were for capital markets and M&A deals.

The new paper is the first to look at where women stand in the hierarchy of deal teams. The data show women are more likely to appear as the third, fourth or fifth lawyer mentioned on a deal team.

research paper of islamic banking

The authors question whether that is evidence of a “glass ceiling” for women—they can get positions on the team, but they can’t progress to the top. But they argue that’s not the case. Instead, the data suggest women are climbing the hierarchy ladder and are likely to lead more deal teams in the future as women partners become more senior.

That’s because women who did lead deals were not a small handful of “exceptional” women. Instead, they are represented in roughly equal numbers to their positions at the firm. For instance, 25% of the 1,447 lawyers who appeared as deal leaders were women, roughly in line with their ranks in law firm partnerships.

Video: If Women Still Earn Less, Can Laws Even Fix the Pay Gap?

“There is a superstar effect for men and there is a superstar effect for women, and it doesn’t seem to be that different for either category,” Gulati said.

Women also did not make up a disproportionate number of the lawyers listed in the third through fifth slots—something the authors would expect to see if women were being “shunted down” to lower positions. Instead, they found women associates were more likely than men associates to land a spot on deal teams.

research paper of islamic banking

The authors concluded that women are making progress in their status at law firms commensurate with their titles. Combined with the increases women have made as law firm associates and partners, George sees evidence they will continue to make strides at firms even as diversity, equity and inclusion programs face legal challenges.

“I’m not a Pollyanna. We came into this thinking we’d find more data for the negative story in our last piece,” George said. “But we had to acknowledge that’s not what’s happening. And indeed, I’d say at this point we found evidence that the motion is such that without the support from DEI programs, this progress will continue. We’ve reached the point where it is self-sustaining progress.”

While the report on women was optimistic, the authors also provided a preliminary analysis of Black lawyers’ representation on deal teams. The results were “dismal,” they said. Black lawyers made up less than 3% of deal team leaders, and their representation decreased in spots two through five.

“There is no indication of climbing up the ladder,” the paper says.

The authors plan to continue research into Black lawyers’ roles on deal teams and are also analyzing similar data from six English firms for their next project.

Worth Your Time

On Big Law Layoffs: Fenwick & West is laying off nearly 10% of its associates and staff as demand for legal work continues to drag, Meghan Tribe reports .

On Litigation Funding: A federal judge’s decision to stop plaintiff Sysco Corp. from handing off its claims in ongoing price-fixing lawsuits to litigation funder Burford Capital Ltd. deals a setback to the funder and puts the opaque litigation financing industry in an increasingly glaring spotlight, Emily Siegel and Katie Arcieri report .

On Legal Briefs and AI: A Missouri business owner must pay $10,000 in sanctions for writing legal briefs containing almost two dozen fake case citations generated by artificial intelligence, Isaiah Poritz reports .

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.

To contact the reporter on this story: Roy Strom in Chicago at [email protected]

To contact the editors responsible for this story: John Hughes at [email protected] Alessandra Rafferty at [email protected]

Learn more about Bloomberg Law or Log In to keep reading:

Learn about bloomberg law.

AI-powered legal analytics, workflow tools and premium legal & business news.

Already a subscriber?

Log in to keep reading or access research tools.

IMAGES

  1. (PDF) Islamic banking and real performances in a dual banking system

    research paper of islamic banking

  2. (PDF) Chapter 1 Introduction to Islamic Banking and Finance Learning

    research paper of islamic banking

  3. (PDF) Reality and future of islamic banking in lebanon

    research paper of islamic banking

  4. Islamic Banking and Finance

    research paper of islamic banking

  5. (PDF) Acceptance of Islamic banking as innovation: a case of Pakistan

    research paper of islamic banking

  6. Comparison of Islamic Banking and Conventional Banking Free Essay Example

    research paper of islamic banking

COMMENTS

  1. (PDF) Islamic Banking: Concept and Methodology

    Islamic Banking Islamic Banking: Concept and Methodology Authors: Audil Khaki American University of Middle East, Kuwait Mohiuddin Sangmi University of Kashmir Abstract A Bank is the...

  2. (PDF) Islamic Banking and Finance: Recent Empirical Literature and

    According to Abedifar et al. (2015), there are two reasons capitalization does not affect the market share of Islamic banking: First, Islamic banks do not have flexibility in adjusting the...

  3. Islamic Banking and Finance: Recent Empirical Literature and Directions

    This paper examines the recent empirical literature in Islamic banking and finance, highlights the main findings and provides a guide for future research.

  4. A survey of Islamic banking and finance literature: Issues, challenges

    1. Introduction. This paper undertakes a survey of the literature on Islamic banking and finance. The goal is to provide an understanding of the work published in good journals, 1 the lessons learned, and key issues and challenges that exist for futures researchers to address. The paper concludes a research agenda for future research in Islamic banking and finance.

  5. 13426 PDFs

    Explore the latest full-text research PDFs, articles, conference papers, preprints and more on ISLAMIC BANKING. Find methods information, sources, references or conduct a literature review on ...

  6. Full article: Islamic Banking and Finance, Second Edition

    Islamic Banking and Finance, Second Edition. by Zubair Hasan, Routledge (2023). Hardcover. ISBN 978-1-032-36064-5. E-book. ISBN 978-1-003-36697-3. Islamic Banking and Finance (IBF) has garnered significant attention from international scholars in recent years (Biancone et al. 2020 ). In certain Southeast Asian countries, IBF has demonstrated ...

  7. Islamic banking: A Review of the Empirical Literature and Future

    359-403 Published: 06 November 2019 Annotate Cite Permissions Share Abstract The last two decades have witnessed a tremendous global growth in Islamic finance and banking, mainly prompted by the global financial crisis.

  8. Full article: Mapping Islamic Bank Governance studies: a systematic

    1 CrossRef citations to date 0 Altmetric Listen BANKING & FINANCE Mapping Islamic Bank Governance studies: a systematic literature review Idah Zuhroh Article: 2072566 | Received 09 May 2021, Accepted 17 Apr 2022, Published online: 17 May 2022 Cite this article https://doi.org/10.1080/23311975.2022.2072566 In this article Full Article Figures & data

  9. A systematic literature review of risks in Islamic banking system

    A systematic literature review of risks in Islamic banking system: research agenda and future research directions Original Article Published: 20 December 2023 Volume 26, article number 3, ( 2024 ) Cite this article Download PDF Risk Management Aims and scope Submit manuscript M. Kabir Hassan, Md Nurul Islam Sohel, Tonmoy Choudhury & Mamunur Rashid

  10. PDF Islamic Finance and Financial Inclusion

    of the authors. ey do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its a liated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Policy Research Working Paper 6642. In recent years, the Islamic finance industry has attracted

  11. The topics of Islamic economics and finance research

    Research in Islamic economics and finance has advanced considerably since the middle of the last decade. This reflects the practical growth of the area, with now about $1.7 trillion assets under management ( EY, 2016 ).

  12. Empirical Research in Islamic Banking: Past, Present, and Future

    First Online: 18 October 2016 1071 Accesses 4 Citations Part of the Palgrave CIBFR Studies in Islamic Finance book series (PCSIF) Abstract Islamic banking is an emerging research theme in banking-related studies that can be further expanded owing to a dearth of extensive studies in this field.

  13. PDF An Overview of Islamic Finance; by Mumtaz Hussain, Asghar ...

    holders and deposits of more than $12 billion. Formally, Islamic banking started in the late 1970s with a handful of institutions and negligible amounts, but it has increasingly grown over the past two decades, with total assets reaching about $2 trillion at end-2014. The establishment of the Islamic Development Bank (IsDB) in 1975 was a watershed

  14. An investigation into factors that determine the growth rate in the

    Research Open access Published: 14 November 2019 An investigation into factors that determine the growth rate in the Islamic banking and finance Huma Nawaz Future Business Journal 5, Article number: 1 ( 2019 ) Cite this article 10k Accesses 4 Citations Metrics Abstract

  15. An Empirical Literature Survey of Islamic Banking

    The earlier literature of Islamic banking built a foundation using normative judgment, descriptive analysis, theoretical development, and appraisal of country experiences. Subsequent research focuses on the empirical investigations without extensive analytical and theoretical exploration in the area. Recent studies focus on the financial crisis ...

  16. Customer satisfaction in the digital era: evidence from Islamic banking

    Based upon an extended SERVQUAL model, this paper attempts to contribute to the Islamic banking literature by examining the impact of digitalization, as a service quality dimension, on customer satisfaction. Two dimensions, i.e., digitalization and compliance, are added to the existing SERVQUAL model of five dimensions. Results are drawn from a self-completed survey of a convenience sample of ...

  17. Fintech in islamic finance literature: A review

    This study curated the data from the Scopus database, a well-known and comprehensive database covering various social disciplines including business and finance fields (Guckenbiehl et al., 2021).Alshater et al. (2020) state that the Scopus database contains a greater number of Islamic finance research than other databases such as Web of Science, while it also indexes more well-validated ...

  18. (PDF) Islamic Banking: Past, Present and Future

    To this end, we recognized four streams: (1) Overview, growth, and legal framework of Islamic Banks (Red); (2) Islamic banks' performance and risk management practices (Green); (3) Customer and...

  19. Shariah Compliant Model of Islamic Banking

    Purpose - The purpose of this paper is to assess perception of the stakeholders about Islamic banking and find out approaches to make it closer to the Shari'ah. ... The respondents supported the idea of different model of Islamic banking. Research limitations - The study relies solely on the opinion of limited number of respondents ...

  20. The Impact of the Islamic Banking Industry on Economic ...

    The second phase ranges from 2003 onward during which Islamic banking was practically launched and started to work in parallel with the conventional banking as per new strategy of State Bank of Pakistan (SBP) (Janjua 2004). Since then, Islamic banking has achieved 12.4% of total banking business as indicated in EY 2017 (Fig. 11.1). By the end ...

  21. Published by Centre for Research on Islamic Banking & Finance and

    This paper is an attempt to analyze the practices of Mudarabah and Musharakah been held by the existing Islamic banking. This paper aims to explore the different aspects where Islamic banks were found to be violating the basic rules in these two primary modes of Islamic finance. ... 2017 Published by Centre for Research on Islamic Banking ...

  22. Qatar Islamic Bank (Q.P.S.C)

    Qatar Islamic Bank (Q.P.S.C)'s (QIB) Issuer Default Ratings (IDRs) are based on potential support from the Qatari authorities, if needed. Its Short-Term IDR of 'F2' is the lower of two options mapping to a 'A-' Long-Term IDR because a large proportion of bank sector funding is government-related, and financial stress at QIB is likely when the sovereign itself is experiencing some ...

  23. Fitch Takes Rating Action on 12 Nigerian Banks ...

    Jaiz Bank has an ESG Relevance Score of '3' for Exposure to Social Impact, above sector guidance for an ESG relevance score of '2' for comparable conventional banks. This reflects that Islamic banks have certain sharia limitations embedded in their operations and obligations, although this only has a minimal credit impact on the entities.

  24. Meezan Bank earns record profit in 2023

    KARACHI: Meezan Bank Ltd on Thursday announced that its profit-after-tax surged to a record Rs86.02 billion in 2023 compared to Rs45.14bn in 2022, an increase of 91 per cent. The largest Islamic ...

  25. Research Finds Surprise in Women Lawyers' Deal Work: Progress

    The new paper is the first to look at where women stand in the hierarchy of deal teams. The data show women are more likely to appear as the third, fourth or fifth lawyer mentioned on a deal team. The authors question whether that is evidence of a "glass ceiling" for women—they can get positions on the team, but they can't progress to ...

  26. (PDF) Islamic Banking: Concept and Methodology

    160+ million publication pages 2.3+ billion citations Join for free Public Full-text into practice; Willingness on part of Consumers, Intensive Banks and suitable and favourable norms (and...

  27. BConnect Global on Instagram: "#SpeakerAnnouncement Excited to announce

    2 likes, 0 comments - bconnect_global on February 15, 2024: "#SpeakerAnnouncement Excited to announce Dr. Gulnar Mulla Sr. Fellow HEA UK, Assistant Professor,..."

  28. (PDF) ISLAMIC BANKING IN INDIA: AN OVERVIEW

    This paper attempts to explain the basic principles and various important products of Islamic banking. This paperfurther highlights SWOT analysis, advantages of introducing Islamic banking...