islamic banking

Journal of Banking & Finance 37 (2013) 433–447

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Journal of Banking & Finance journal homepage: www.elsevier.com/locate/jbf

Islamic vs. conventional banking: Business model, efficiency and stability
Thorsten Beck a,⇑, Asli Demirgüç-Kunt b, Ouarda Merrouche c a CentER, Department of Economics, Tilburg University and CEPR, The Netherlands
World Bank, Development Research Group, United States c European Securities and Markets Authority, Economic Research and Financial Stability Unit, France b a r t i c l e

i n f o

Article history:
Received 14 February 2012
Accepted 10 September 2012
Available online 8 October 2012
JEL classification:
G21
G01
Z12
Keywords:
Financial intermediation
Islamic banking
Bank stability
Bank efficiency

a b s t r a c t
How different are Islamic banks from conventional banks? Does the recent crisis justify a closer look at the Sharia-compliant business model for banking? When comparing conventional and Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large cross-country variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes.
Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality.
Ó 2012 Elsevier B.V. All rights reserved.

1. Introduction
The recent global financial crisis has not only shed doubts on the proper functioning of conventional ‘‘Western’’ banking, but has also increased the attention on Islamic

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