The impact of the global financial crisis on financial performance of Islamic banks
Modern Islamic banking was established with the creation of the Dubai Islamic Bank in the United Arab Emirates in 1975. Islamic banks have grown rapidly since the 1980s. Today, Islamic banks, based on Islamic principles, are considered a viable alternative to conventional commercial banks. While investments in conventional banks are based on guaranteed principal and interest, Islamic banks operate on the basis of a profit-and-loss sharing arrangement.
In a comparative analysis, the efficiency and profitability of Islamic banks are measured over the study period of 1985-2013. In a highly competitive market environment, banks look for a method to identify and compare the performance of various units during a given time period. As such banks are able to effectively allocate resources and to motivate portfolio managers to achieve optimum results. The non-parametric Data Envelopment Analysis (DEA) method and a panel regression analysis are applied to determine the efficiency and profitability of Islamic banking. This study investigates the profitability of Islamic banks during the Great Recession of 2007-2009 by employing financial variables such as return on equity (ROE), return on assets (ROA), and economic variables such as growth rate of real GDP and inflation. The goal of this research is to provide empirical evidence on the performance of Islamic banks during the period of 1985-2013. The preliminary empirical results suggest that the selected Islamic banks displayed higher efficiency than conventional banks during the global financial crisis of 2007-2009.