Performance of Islamic Banks vis-a-vis conventional banks : the case of Malaysia

Abstract

This is a comparative study between Islamic and conventional banks of Malaysia. The study aims to evaluate the performance of the two banking systems in terms of profitability, liquidity, and long-term solvency risk for a period of 20 years (1984- 2003). T-test is used to determine the ratios significance. Furthermore, Islamic banks' contribution in the development of the country's economy and the social well-being of the community has also been examined. In addition, the Islamic banking divisions (Islamic banking windows) of two conventional banks were examined by the study in terms of profitability and they had been compared with the two fully-fledged Islamic banks. The profitability ratios applied in this study showed that, on average (for all the 20 years studied), the Islamic bank (BIMB) was more profitable than two of the conventional banks. These ratios also clearly pointed out that Islamic banks could survive in the long run. In addition, these measures showed that the Islamic bank of Malaysia had significantly been affected by the Asian currency crisis. On the other hand, and in terms of liquidity, the study found that conventional banks are more liquid than Islamic banks. However, the long-term solvency risk ratio showed mixed results. Moreover, the commitment ratios used in the study indicated that Islamic banks' contribution to the well being of the community appeared to be not significant. Importantly, the capital adequacy ratio applied showed that, on average, the Islamic bank (BIMB) contributes more than the conventional banks towards the stability and efficiency of the financial system and thereafter the economy.