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MF
44,6
704
Received 22 November 2016
Revised 18 March 2017
3 September 2017
31 October 2017
Accepted 4 January 2018
Managerial Finance
Vol. 44 No. 6, 2018
pp. 704-721
© Emerald Publishing Limited
0307-4358
DOI 10.1108/MF-11-2016-0327
The determinants of
intermediation margins in Islamic
and conventional banks
Khemaies Bougatef
University of Kairouan, Kairouan, Tunisia, and
Fakhri Korbi
Universite Paris 13 Nord, Paris, France
Abstract
Purpose – The distinctive feature of Islamic financial intermediation is its foundation on profit-and-loss
sharing which reinforces solidarity and fraternity between partners. Thus, the bank margin and its
determinants may differ between Islamic and conventional banks (CBs). The purpose of this paper is to
empirically assess the main factors that explain the bank margin in a panel of Islamic and CBs operating in
the Middle East and North Africa (MENA) region. This study will permit to identify the common and the
specific determinants of the intermediation margins in dual banking systems.
Design/methodology/approach – The authors use a dynamic panel approach. The empirical analysis is
carried out for a sample of 50 Islamic banks (IBs) and 126 CBs from 14 MENA countries.
Findings – The results reveal that net profit margins of IBs may be explained for the most part by risk
aversion, inefficiency, diversification and economic conditions. With regard to CBs, their margins depend
positively on market concentration and risk aversion and negatively on specialization, diversification,
inefficiency and liquidity.
Practical implications – The significant impact of the degree of diversification on margins suggests that any
policy analysis of the pricing behavior of banks should rely on its whole output. The high levels of margins in
Islamic and CBs based in the MENA region may represent an obstacle to these countries to pursue their
development process. Thus, policy makers in these countries should consolidate the role of capital markets and
nonbanking financial institutions to provide alternative sources of funding and stimulate more competition.
Social implications – The positive relationship between concentration and net interest margins requires
that policy makers should create competitive conditions if they want to lower the social cost of financial
intermediation. The creation of competitive conditions may be achieved through encouraging the
establishment of new domestic banks or the penetration of foreign banks.
Originality/value – The present study aims to contribute to the existing literature on the determinants of
bank margins in three ways. First, the authors identify the factors that most explain bank margins for both
conventional and IBs. The majority of previous studies examine the determinants of the profitability or the
overall performance of banks and in particular conventional ones. Second, this paper employs two generalized
method of moments (GMM) approaches introduced by Arellano and Bover (1995) and Arellano and Bond (1991).
It differs from Hutapea and Kasri (2010) who employed the co-integration technique to examine the long-run
relationship between Islamic and CB margins and their determinants in Indonesia. Third, unlike previous
studies focusing on MENA region that use a small number of countries and a short sample period, the period of
study covers 16 years from 1999 to 2014 and a large sample of countries (14 countries). This paper differs from
Lee and Isa (2017) who applied the dynamic two-step GMM estimator technique introduced by Arellano and
Bond (1991) to study the determinants of intermediation margins of Islamic and CBs located in Malaysia.
Keywords Islamic banking, Dynamic panel data, Conventional banking, Intermediation margin, Mudharaba
Paper type Research paper
1. Introduction
Islamic banking intermediation is based on ethical standards stem from Islamic beliefs and
teachings. Indeed, Islam represents for Muslims an all-encompassing way of life and not
only a religion. Hence, if the individuals are Muslims so their personalities are Islamic and
their culture is Islamic (Gambling and Karim, 1986). The ethical foundations of Islamic
banking make it distinct from conventional banking (Mansour et al., 2015). Thus, their
JEL Classification — G22, C33
intermediation should be based on Islamic ethical principles rather than economic Determinants
considerations (Naqvi, 1981). Theoretically, the ultimate objective behind the establishment of
of Islamic banks (IBs) is to promote justice (al-adl) and welfare (al-khayr) in society intermediation
(Haniffa and Hudaib, 2007). The most important challenge for IBs is to mobilize the existing
financial resources and employ them in the best way for the development of the Muslim margins
population and countries, without losing their specific ethical characteristics.
The relationship between IBs and their depositors differs in several ways from that in 705
the case of conventional banks (CBs). In the conventional banking system, depositors are
rewarded with a predetermined fixed interest rate while depositors of IBs may be considered
as investors or partners since they may share with the bank the profit made from the
allocation of deposit funds, or lose a part of their capital in the opposite case. Islamic
scholars consider interest-based lending as unfair and exploitative practice because it does
not serve the society at large (Saidane, 2009; Zaher and Hassan, 2001).
The IBs provide their depositors with financial contracts compliant with Shariah and
based on the profit-and-loss sharing (PLS) principle. The most common contract used by IBs
to collect funds from their customers is called the Mudharaba. The Mudharaba contract is
based on a partnership in which the customers (called rabb-ul-mal or also sahib-ul-mal)
deposit their money in an investment account at a bank (called Mudhareb) which exploits its
managerial skills to invest the depositors’ funds in valuable projects. The IB engages itself
to look for a profitable investment but it does not guarantee a fixed return on deposits.
The depositors perceive remuneration based on the profit-loss sharing principle which also
means a risk sharing contrary to the conventional banking system. Thus, the rate of return
on deposits depends on the profit ratio agreed up front. Consequently, this type of
contractual relationship implies that depositors would be concerned about the profitability
and the quality of the projects financed by the IB (Kettell, 2011; Haron et al., 1994).
It is important to note that there are two categories of Mudharaba accounts. The Restricted
Investment Account (called Al-Mudharaba al-Muqayyadah) is a type of Mudharaba where the
depositor can choose the particular business in which he/she prefers to invest his/her money.
The Unrestricted Investment Account (called Al-Mudharaba al-Mutlaqah) is a type of
Mudharaba where the funds will be instantaneous integrated with the bank’s funds to create
an investment pool.
Consequently, IBs seem to operate differently from CBs. CBs make gains from the
difference between the interest income received from borrowers and the interest paid to
depositors. In contrast, IBs are not allowed to make money through pure financing
activities, and financial contracts must be linked directly to real economy (Gulzar and
Masih, 2015; Kammer et al., 2015). Each financial transaction is linked to an existing or
potential real asset, in contrast to the case of CBs that can provide credit without such
conditions (see Siddiqi, 2006). IBs share the actual profit with investment account holders
(IAH) and bear losses if these latter are caused by misconduct, negligence or breach of
contracted terms by the bank[1]. Thus, the intermediation margin of IBs will be equal to the
difference between the revenues generated by the investment and financing projects carried
out and the return distributed to depositors.
The investigation of the determinants of intermediation margins for IBs as well as for
CBs is very interesting for a number of reasons. First, the intermediation margin indicates
the cost that will be borne by the customer if he/she wants to rely on bank finance. Thus, it is
worthwhile to identify the determinants of the intermediation cost of banks and control
them since the majority of Middle East and North Africa (MENA) countries rely heavily
on the role of their banking systems to continue their economic development process.
Second, the intermediation margin is an indicator of the profitability of the bank and hence
the performance of the financial system. Third, unlike conventional banking, the IB is not a
simple intermediary which collects deposits and supply loans, it operates as Mudhareb.
MF Unlike in CBs where the rates on deposits and the rates on loans may be set independently
44,6 (Pyle, 1971), the returns on investment (Mudharaba) paid and received by IBs may be
interdependent. Therefore, knowing the determinants of intermediation margins for each
type of banks will permit to explain why IBs operate with higher margin compared to CBs
(Olson and Zoubi, 2008).
Given the importance of this topic, the current paper attempts to empirically assess
706 the main factors that explain the bank margin in a panel of Islamic and CBs operating in the
MENA region. This study will permit to identify the common and the specific determinants
of the intermediation margins in dual banking systems.
Our findings suggest that intermediation margins of IBs depend positively and significantly
on risk aversion and economic growth and negatively on inefficiency and diversification, while
interest margins of CBs are negatively and significantly related to inefficiency, liquidity,
diversification and specialization and positively related to risk aversion and concentration.
The present study aims to contribute to the existing literature on the determinants of bank
margins in three ways. First, we identify the factors that most explain bank margins for both
conventional and IBs. The majority of previous studies examine the determinants of the
profitability or the overall performance of banks and in particular conventional ones. Second,
this paper employs two generalized method of moments (GMM) approaches introduced by
Arellano and Bover (1995) and Arellano and Bond (1991). It differs from Hutapea and Kasri
(2010) who employed the co-integration technique to examine the long-run relationship
between Islamic and CB margins and their determinants in Indonesia. Third, unlike previous
studies focusing on MENA region that uses a small number of countries and a short sample
period, our period of study covers 16 years from 1999 to 2014 and a large sample of countries
(14 countries). This paper differs from Lee and Isa (2017) who applied the dynamic two-step
GMM estimator technique introduced by Arellano and Bond (1991) to study the determinants
of intermediation margins of Islamic and CBs located in Malaysia.
The remainder of the paper proceeds as follows: Section 2 examines previous literature
on the factors influencing the intermediation margin. Section 3 presents data and
the methodology. The empirical results are displayed in Section 4, while Section 5 checks the
robustness of our findings. Section 6 concludes.

2. Literature review
2.1 Theoretical literature
The seminal model proposed by Ho and Saunders (1981) represents the first attempt to
identify the fundamental elements affecting the intermediation margin and has been so long
used as a reference framework to empirically determine the factors influencing bank margins.
This model focuses solely on pure intermediation activities. A bank is viewed as a simple
intermediary channeling funds from economic agents with surplus to others with deficit.
According to Ho and Saunders (1981), the interest spread depends on four factors the degree
of bank management risk aversion, the market structure in which the bank operates, the
average size of bank transactions and the variance of interest rates. Maudos and Guevara
(2004) developed a theoretical model to explain the interest margin by taking into account the
influence of operating costs. They demonstrated that banks with higher operating costs
are expected to operate with higher margins. Valverde and Fernandez (2007) extended the
Ho-Saunders model to a multi-output framework. They argued that banks set prices for loans
relative to deposits and prices for non-traditional activities relative to deposits.
Unlike conventional banking system, the intermediation margins of IBs cannot be known
ex ante since it is prohibited to set a predetermined rate of return on the use of money
(Karsten, 1982; Khan, 1986). According to the Islamic banking theory, IBs cannot mobilize
funds by offering predetermined fixed rate on deposits. They raise funds in the form of
profit-sharing investment account through Mudharaba contracts (Farooq and Zaheer, 2015;
Zainol and Kassim, 2010). However, IBs are required to purpose competitive rates compared Determinants
to their conventional peers in order to mitigate potential withdrawal of funds by depositors[2] of
(Sundararajan and Errico, 2002; Zainol and Kassim, 2010; Farook et al., 2012; Abedifar, intermediation
Molyneux and Tarazi, 2013). In fact, the depositor makes a trade-off between the
maximization of his/her wealth and the respect of Islamic teaching (Farooq and Zaheer, 2015). margins
According to the smoothing hypothesis, IBs use their Profit Equalization Reserve and
Investment risk reserve to adjust their deposit rates to those proposed by 707
CBs[3] and to be able to pay the IAH a steady rate of return and keep their capital intact
(Farook et al., 2012).
With regard to the “lending” rates, IBs may exploit the demand inelasticity of their
“religious” clientele and charge higher rates without losing clients (Weill, 2013).

2.2 Empirical literature

Examining the existing literature on the determinants of bank margins, we point out that
previous studies have focused on CBs particularly in the USA and European countries. By
contrast, there are only few studies that focused on the financing margins in IBs.
Ho and Saunders (1981) tested the validity of their model using quarterly data from US
banks between 1976 and 1979. Their empirical analysis consists in two steps. In the first
step, they estimated the pure spread and in the second step they investigated the
determinants of this spread. They found that largely banks tend to operate with lower pure
margins. Saunders and Schumacher (2000) applied the model of Ho and Saunders (1981) to
determine the factors influencing intermediation margins in a sample of commercial banks
operating in the USA and six European countries over the period 1988-1995.
They decomposed the bank margin into a regulatory component, a market structure
component and a risk premium component. The authors found that market structure,
capital-to-asset ratio and interest rate risk exposure have a positive effect on net interest
margins. Moreover, they pointed out that the equity capital reduces bank profitability which
makes the bank seeks to compensate this via a higher net interest margin.
Valverde and Fernandez (2007) applied a dynamic panel approach to a sample of CBs
operating in seven European countries from 1994 to 2001. They concluded that bank margins
may be explained by traditional factors such as liquidity and interest risk as well as by the
degree of diversification of their activities. Maudos and Guevara (2004) showed that bank
margins in European banking systems depend positively on credit risk, risk aversion, average
operating costs and implicit payments. Nguyen (2012) applied a dynamic panel approach to
assess the determinants of bank margins in 28 liberalized countries. He found that the
intermediation margins may be explained by market structure, level of risk aversion,
diversification and operating costs. Doliente (2005) applied the dealer model of Ho and
Saunders (1981) to determine the factors explaining the interest margins in four Southeast
Asian countries (Philippines, Indonesia, Thailand and Malaysia). His findings show that
collaterals play a primordial role in reducing the spread between lending and deposit rates in
all those countries with exception of Malaysia. In contrast, operating expenses and the capital
ratio are found to have a positive effect on the intermediation margins.
With regard to the determinants of profit margins in IBs, some studies argue that there is
no difference between Islamic and CBs regarding profitability and risk (Akhtar et al., 2011).
Due to their high-quality of assets, Masruki et al. (2011) found that CBs are more profitable
and less liquid compared to Islamic ones.
Kaleem and Isa (2003) investigated the causal relationship between the rates of return on
deposits and interest rates in the Malaysian banking system between 1994 and 2002.
Their findings indicate that the remuneration of depositors of IBs does not depend solely on
the return of assets financed by depositors’ funds but also on the evolution of the interest rate
proposed by CBs. Chong and Liu (2009) confirmed previous findings in Kaleem and Isa (2003)
MF by providing evidence that IBs in Malaysia adjust the returns on deposit accounts to the
44,6 returns on conventional banking deposits. They argued that the low adoption of the PLS
paradigm may be explained by competitive reasons.
Zainol and Kassim (2010) employed monthly data from January 1997 to October 2008 to
examine the determinants of investment returns and total deposits in Islamic banking in
Malaysia. They found that IBs’ rate of return and CBs’ interest rate are cointegrated and
708 have a long-run equilibrium. This two-way relationship suggests that each banking system
adjusts its rate according to the rate offered by its competitor. This result suggests that CBs
also response to the increasingly competition of IBs by offering attractive rates.
Hutapea and Kasri (2010) investigated the determinants of intermediation margins in
Islamic and CBs. They used data for two IBs and three CBs in Indonesia. Their results show
that bank margin depends on interest rate volatility. When the interest rate increases, IB
margin responds negatively, whereas CB margin responds positively. The authors
concluded that the stability of interest rates is crucial for the development and soundness of
Islamic banking industry.
The study of Shawtari et al. (2015) compares the discretionary loans/finance loss provision
(DLLP) of Islamic and CBs operating in Yemen. Using data of 16 banks over the period
1996-2011, the authors tested seven hypotheses with relation to DLLP. They tried to identify
how DLLP is manipulated with regard with some other variables. The results indicate that IBs
have incentives to smooth their earnings for various factors. However, the magnitude of
earnings management in IBs is significantly lower than CBs with exception of foreign CBs.
This means that IBs in Yemen are not abiding by Shariah law in their operations.
More recently, Lee and Isa (2017) examined the factors influencing intermediation
margins of Islamic and CBs located in Malaysia. Their findings reveal that there are great
similarities between the factors determining intermediation margins of conventional and IBs
in Malaysia. They concluded that operating costs, efficiency, credit risk, market share and
implicit interest payments are the common determinants of the bank margins.
The review of the existing literature reveals that previous studies have investigated the
determinants of intermediation margins of IBs in a sole country ( for instance, Hutapea and
Kasri, 2010 in Indonesia; Lee and Isa, 2017 in Malaysia) which does not make it possible to
generalize their findings. In addition, previous empirical research works have employed a
sole technique of estimation ( for instance, the Arellano and Bond, 1991 estimator in Lee and
Isa, 2017) which may raise the question on the robustness of their findings. The present
paper is an attempt to fill that gap.

3. Empirical analysis
3.1 Data
Our sample consists in an unbalanced panel of 50 IBs and 126 CBs operating in 14 MENA
countries. To construct the sample, we began with all banks whose data are reported by the
Bankscope for the period between 1999 and 2014. Then, we restricted the sample to exclude
banks with a lot of missing data. Table I shows that Islamic finance is still less developed in
North Africa (Tunisia and Egypt) compared to the countries of the Gulf Cooperation Council
(Saudi Arabia, Bahrain, Oman, Qatar, the United Arab Emirates and Kuwait). The bank-specific
data are collected from the Bureau Van Dijk Bankscope database while the annual percentage
growth rates of gross domestic product (GDP) are taken from the World Bank database.

3.2 Model specification

Theoretical models developed by Valverde and Fernandez (2007), Maudos and Guevara
(2004), Saunders and Schumacher (2000) and Ho and Saunders (1981) and the business
model under PLS paradigm suggest that bank margins may be explained by
macroeconomic and bank-specific factors. In the current paper, we assume that the
Region Country Islamic banks Conventional banks Total
Determinants
of
Middle East United Arab Emirates 8 17 25 intermediation
Bahrain 10 8 18
Yemen 4 3 7 margins
Iraq 1 2 3
Jordan 3 11 14
Kuwait 6 5 11 709
Lebanon 1 18 19
Oman 1 6 7
Palestine 2 2 4
Qatar 4 6 10
Saudi Arabia 4 8 12
Syria 2 9 11
North Africa Tunisia 1 10 11 Table I.
Egypt 3 21 24 Sample composition
Total 50 126 176 by country

intermediation margins of Islamic and CBs may be influenced by risk aversion,

diversification, specialization, market structure, quality of management, liquidity and
overall economic environment. In addition, to take into account the time persistence of NIMs,
we introduce the lagged dependent variable on the right side of the equation. This procedure
assumes that previous values of NIMs may affect their current values. Thus, the model used
to investigate the determinants of the bank margin may be formulated as follows:
NIMit ¼ ai þgNIMi;t1 þb1 CAPit
þb2 DEPit þb3 INEFFit þb4 LIQit
þb5 LOANit þb6 OOIit þb7 GDPt
þb8 HHIt þeit
where subscripts i and t indicate bank and year, respectively. α is the constant term. NIMit
represents the net interest margin for CBs and the net profit margin for IBs. The net interest
margin is defined as the difference between the interest income received from borrowers and
the interest paid to depositors. It is expressed as a percentage of earning assets. In contrast,
since usury (Riba) is forbidden in Islamic banking, the net profit margin represents the
difference between the revenues generated by the investment and financing projects carried
out by the IB and return distributed to depositors. The ratio of equity-to-total assets (CAP) is
employed to proxy for the risk aversion of banks as in Valverde and Fernandez (2007),
Maudos and Guevara (2004) and Nguyen (2012). The higher the capital, the greater the bank
is risk-averse. Thus, we expect that this ratio will have a positive effect on intermediation
margins. The level of capital can be also used as a measure of the soundness of the bank and
reflects its ability to absorb losses arising from its activities. The ratio of deposits-to-total
liabilities (DEP) and the ratio of financing to total assets (LOAN) are used as indicators of
specialization. The ratio of other operating income to total assets (OOI) is used as a proxy of
diversification. Diversified banks may have stronger market power than specialized ones
because they can draw on profits earned from non-traditional activities and hence they can
operate with competitive prices (Valverde and Fernandez, 2007). Thus, the degree of
diversification is expected to be negatively associated with intermediation margins since
diversified banks will tend to reduce their lending rates or increasing deposit rates.
In contrast, the indicators of specialization (DEP and LOAN) are expected to be negatively
related to bank margins. The ratio of operating expenses to gross income (INEFF) is used to
MF measure the quality of bank management. This variable is expected to have a positive
44,6 effect on intermediation margins if banks tend to charge higher lending rates to cover the
increase of their operating expenses (Altunbas et al., 2001). However, the ability of operating
with higher margins depends on the market power of the bank. The ratio of liquid assets to
deposits and short-term funding (LIQ) reflects the ability of the bank to face a suddenly
withdrawal of funds. Thus, the higher this ratio, the more liquid the bank is. Banks with
710 high levels of liquid assets may receive lower interest (profit) income than banks with less
liquid assets (Demirgüç-Kunt et al., 2004). Thus, the liquidity level is expected to be
negatively related to bank margin. The annual growth rate of the GDP is employed to
control overall economic environment. There is no consensus on the effect of economic
growth on bank margin. According to the intertemporal risk smoothing hypothesis, banks
are predicted to smooth deposit rates during downturns and compensate this during
upturns by requiring high loan rates. Consequently, economic growth may be associated
with an increase in bank margins (Claessens et al., 2001). In contrast, Valverde and
Fernandez (2007) found a negative relationship between economic growth and interest
margins. The Herfindahl-Hirschman index (HHI) is used as a proxy of the market structure.
This index is calculated as the sum of the squares of the ratio of each bank’s total assets to
total assets within the banking sector of the country in which the bank operates. It ranges
from 0 to 1, with 0 indicating high levels of competition and 1 high levels of concentration.
The relationship between banking competition and intermediation margins is not obvious.
On the one hand, the effect of competition pressure depends on the degree of elasticity of the
demand for financing and/or the supply of deposits (Maudos and Guevara 2004). In the case
of strong elasticity, competitive conditions force banks to lower their margins[4]. On the
other hand, creditors, in more concentrated markets, may tend to smooth interest rates
intertemporally (Petersen and Rajan, 1995). Consequently, the coexistence of decreasing
bank margins and increasing market concentration is also possible. In a dual banking
system, IBs operate side by side with CB and hence they are exposed to a displaced
commercial risk. Thus, their intermediation margins are expected to be more affected by
competition pressure.
The addition of a lagged dependent variable renders traditional panel data estimators
(OLS, fixed effects and random effects) biased. Arellano and Bond (1991) proposed the GMM
as an estimation method for dynamic panel data. They suggested a first-difference equation
for unbalanced panels in order to eliminate the bank-specific effects. Therefore, the equation
may be presented as follows:

DNIMit ¼ gDNIMit1 þb0 DX it þDeit

NIMit NIMi;t1 ¼ g NIMi;t1 NIMi;t2
0


þb X it X i;t1 þ eit ei;t1
where Xit is the vector of explanatory variables and β is the vector of coefficients.
However, this procedure raises the problem of correlation between the new error term
(εit−εi,t−1) and the lagged dependent variable introduced in the right side of the equation.
However, NIMit−2 which is expected to be correlated with ΔNIMit−1 and not correlated with
Δεit for t ¼ 3, …, T can be used as instruments since the error terms are not serially
correlated. Another raison to use the GMM estimation is the potential endogeneity of the
explanatory variables and the resulting correlation with the error term. The use of lagged
variables as instruments varies according to the nature of explanatory variables. If the
explanatory variable is strictly exogenous (i.e. uncorrelated to past, present and future
values of the term error), their current values could be used as instruments. In the case of
predetermined or weakly exogenous variables (variables that can be influenced by past Determinants
values of the dependent variable, but which are uncorrelated with future realizations of the of
error term), their lagged values of at least one period could be used as instruments. Finally, intermediation
in the case when the explanatory variable is endogenous, its lagged values of two periods
and more may be valid instruments. Given that the assumption of strict exogeneity is very margins
restrictive, the factors used in this paper to explain the intermediation margin are assumed
weakly exogenous. Thus, we use their lagged values as instruments. 711
To deal with correlation, measurement and possible endogeneity problems, Arellano and
Bond (1991) proposed using the lagged values of the explanatory variables in levels as
instruments. They proposed a two-step GMM estimator. In the first step, the error terms are
assumed to be both independent and homoscedastic across sections and over time. In the
second step, the residuals estimated in the first step are used to construct a consistent
variance-covariance matrix.

3.3 Descriptive statistics and correlations

Table II displays the means of bank margins and their potential determinants across
countries. As can be seen, intermediation margins vary among countries and this difference
is in some cases important. The margin of IBs ranges from a low of 2.15 percent for Oman to
a high of 6.28 percent for Lebanon. Regarding CBs, those operating in Yemen achieve the
highest margin of 5.22 percent against the lowest margin of 2.578 percent for banks
operating in Lebanon.
Figure 1 shows that IBs have operated with higher intermediation margins all along the
sample period. There are two possible explanations of this evidence. First, IBs rely, for their
funding, on high amounts of non-profit bearing deposits, or non-remunerated current
accounts. Its lower costs of funding are an advantage which makes them operate with
higher intermediation margins. Second, IBs benefit from a clientele with a more inelastic
demand coming from religious principles and as a consequence IBs can charge higher rates
than CBs without losing clients (Weill, 2013).
Table II displays the means of the dependent and explanatory variables by country. IBs
have high operational costs in all countries with a low of 28 percent for Qatar and a high of
196 percent for Oman. This difference may be explained by the underdevelopment of the
Islamic banking industry in Oman compared to Qatar[5]. In contrast, the operational
efficiency for CBs is comparable for all countries with values around 45 percent.
The GDP growth rate ranges from a low of 2.892 percent for Palestine to a high of 11.627
percent for Qatar. This allows us to study the behavior of banks in different economic
contexts. The HHI is used to measure the structure of the banking sector, a level close to 0
indicates that the market is very competitive and 1 very concentrated. This index varies
from 0.658 (Palestine) to 0.113 (Lebanon).
Table III allows us to compare between Islamic and CBs and test whether this difference is
statistically significant. The intermediation margin is higher (but not statistically significant)
for IBs. This evidence is consistent with findings in Olson and Zoubi (2008). IBs recognized as
new players on the financial market provide products compliant with the principles of Shariah
but more expensive than conventional loans. These banks were also less generous with their
depositors by offering lower rates of return than conventional interest rates. The plausible
explanation of this evidence is that IBs believe that some customers are very faithful and
devout to the Islamic teaching and they choose IBs on this basis. As a consequence, they may
exploit this attachment and charge higher rates to borrowers and give lower rates to
depositors. This cost named by some authors as the “cost of being Muslim.”
IBs are significantly more capitalized than their conventional counterparts. The plausible
explanation is that regulators impose larger capital requirements for the establishment of an
IB compared to those required of a CB (Ariss, 2010). In addition, the result may be due to the
MF Country NIM CAP DEP INEFF LIQ LOAN OOI GDP HHI
44,6
Panel A: Islamic banks
Bahrain 4.674 22.553 59.156 68.193 30.834 46.837 2.240 4.930 0.220
Egypt 2.193 5.348 93.377 58.863 19.164 45.553 0.777 4.172 0.168
United Arab Emirates 3.026 15.841 77.897 50.744 23.809 66.142 1.465 4.486 0.120
Iraq 4.550 44.610 97.602 29.430 97.481 43.285 6.350 5.882 0.491
712 Jordan 2.269 11.636 75.972 55.978 38.509 46.021 1.534 5.128 0.313
Kuwait 3.098 14.348 75.424 65.653 31.625 50.426 1.937 4.605 0.214
Lebanon 6.277 21.194 74.792 103.593 83.050 7.423 6.587 4.196 0.113
Oman 2.151 52.169 77.528 196.463 77.801 53.541 1.545 3.240 0.273
Palestine 4.500 13.940 70.206 73.661 50.125 42.730 1.488 2.892 0.658
Qatar 3.865 19.046 83.933 27.205 24.634 61.657 1.550 11.627 0.303
Saudi 3.905 18.625 90.319 53.609 31.950 60.445 2.178 4.814 0.122
Syria 4.516 17.232 61.879 66.682 65.640 29.177 1.454 3.854 0.353
Tunisia 2.634 22.849 89.951 47.821 54.003 47.919 0.987 4.110 0.222
Yemen 2.802 13.713 73.565 74.703 47.846 28.942 2.334 2.701 0.383
Panel B: conventional banks
Bahrain 2.708 13.061 86.902 47.801 37.577 43.371 1.105 4.930 0.220
Egypt 2.743 9.483 93.478 48.649 37.177 36.966 1.546 4.172 0.168
United Arab Emirates 3.579 16.743 90.691 33.757 29.368 63.884 1.606 4.486 0.120
Iraq 4.634 24.084 90.648 40.107 74.782 33.738 4.586 5.882 0.491
Jordan 3.736 12.935 92.336 49.770 37.411 49.261 1.389 5.128 0.313
Kuwait 2.793 12.823 95.862 30.979 28.372 38.040 1.188 4.605 0.214
Lebanon 2.578 8.053 94.654 53.975 31.849 26.152 0.860 4.196 0.113
Oman 3.679 13.229 92.532 46.075 27.663 52.145 1.360 3.240 0.273
Palestine 3.135 11.654 94.983 63.303 58.509 54.150 1.091 2.892 0.658
Qatar 3.161 15.272 93.090 34.726 30.217 54.829 1.423 11.627 0.303
Saudi 2.957 12.467 94.629 35.180 24.312 46.263 1.271 4.814 0.122
Syria 2.802 11.513 92.345 48.726 59.372 59.093 2.918 3.854 0.353
Tunisia 2.882 12.051 87.617 49.946 27.791 54.135 2.263 4.110 0.222
Yemen 5.225 9.666 96.235 37.047 58.182 10.141 1.182 2.701 0.383
Notes: NIM, net intermediation margin defined as the difference between the revenues generated by
investment and financing projects and the return distributed to depositors divided by earning assets for IBs
and net interest margin defined as the difference between interest income and interest expenses divided by
earning assets for CBs; CAP, ratio of equity-to-total assets; DEP, ratio of deposits-to-total liabilities; INEFF,
ratio of operating expenses to gross income; LIQ, ratio of liquid assets to deposits and short-term funding;
Table II. LOAN, ratio of financing to total assets for IBs and ratio of loans-to-total assets for CBs; OOI, ratio of other
Means of variables operating income to total assets; GDP, annual change of the GDP; HHI, Herfindahl-Hirschman index. The
by country table displays the means of the dependent and explanatory variables by country

ownership structure since IBs are in most cases private, owned by wealthy people and
monarchical families of Gulf countries.
The ratio of deposits-to-total liabilities is significantly smaller at the 1 percent level for
IBs. This evidence presumes that CBs are abler to attract deposits and implies that IBs
should enhance their competitive ability.
The lending ratio is higher for IBs. This intermediation ratio reflects the bank’s ability to
convert deposits into credits or investment projects. This result suggests that IBs allocate a
greater share of their assets in financing activities compared to CBs (Ariss, 2010). However,
the difference between the two types of banks is not statistically significant.
The inefficiency measured by the ratio of operating expenses to gross income
is significantly higher for IBs perhaps because of lack of qualified personnel
and unsuitable software and hardware. This evidence is consistent with findings in
Beck et al. (2013).
 3.35 Determinants
3.30
of
intermediation
3.25 margins
3.20
713
3.15
Figure 1.
Evolution of means of
3.10
intermediation
margins of Islamic
3.05 and conventional
2000 2002 2004 2006 2008 2010 2012 2014 banks over the period
1999-2014
Islamic banks Conventional banks

Mean Standard deviation t-Test for equality of means

Variable Islamic Conventional Islamic Conventional t-Value p-Value

NIMit 3.312 3.148 3.570 1.489 1.043 0.307

CAPit 15.458 12.439 10.684 5.571 1.95* 0.062
DEPit 72.849 92.312 23.125 6.417 3.926*** 0.001
INEFFit 59.967 44.321 56.511 15.846 2.51** 0.019
LIQit 32.520 34.697 19.687 19.587 0.602 0.552
LOANit 52.988 46.061 18.596 19.065 0.084 0.934
OOIit 2.238 1.510 2.621 1.156 1.092 0.285
Notes: NIM, net intermediation margin defined as the difference between interest income and interest expenses
divided by earning assets for CBs and the difference between the revenues generated by investment and financing
projects and the return distributed to depositors divided by earning assets for IBs; CAP, ratio of equity-to-total Table III.
assets; DEP, ratio of deposits-to-total liabilities; INEFF, ratio of operating expenses to gross income; LIQ, ratio of Comparison of
liquid assets to deposits and short-term funding; LOAN, ratio of financing to total assets; OOI, ratio of other descriptive statistics
operating income to total assets. The table compares the characteristics of Islamic and CBs using seven accounting of Islamic and
variables used in this study. *,**,***Significant at the 10, 5 and 1 percent levels, respectively conventional banks

The liquidity level measured by the ratio of liquid assets to deposits and short-term
funding is higher (but not statistically significant) for CBs. Further analysis shows that
this ratio increased significantly for CBs in 2007 following the liquidity problems that
occurred in the banking sector. The ratio of other operating income to total assets as an
indicator of the diversification of the banking revenue shows that the activities of IBs are
more diversified.
Table IV reports the correlation coefficients among the variables used to explain the
intermediation margins in Islamic and CBs. It shows that most of the coefficients are low
except the correlation between liquidity (LIQ) and financing (LOAN) for IBs where the
coefficient is above 0.5. This evidence allows us to be comfortable to use simultaneously all
these variables to explain the intermediation margins.
The correlation between the concentration index (HHI) and loans is negative and
statistically significant at 1 percent level for IBs. This evidence implies that policy makers
should create competitive conditions by encouraging the establishment of new banks or
facilitate the penetration of foreign IBs if they want to reinforce the role of Islamic
financing. The liquidity ratios are positively and significantly correlated at 1 percent level
with the concentration index for both Islamic and CBs suggesting that a fierce competition
 MF
44,6

714

Table IV.

matrix among
Pearson correlation

explanatory variables
CAPit DEPit GDPt HHIt INEFFit LIQit LOANit OOIit

Panel A: Islamic banks

CAPit 1
DEPit −0.176*** (0.000) 1
GDPt −0.031 (0.466) −0.029 (0.489) 1
HHIt 0.005 (0.906) −0.057 (0.177) 0.075* (0.078) 1
INEFFit −0.011 (0.798) −0.041 (0.329) 0.017 (0.869) −0.032 (0.444) 1
LIQit 0.204*** (0.000) −0.053 (0.212) 0.144*** (0.001) 0.259*** (0.000) 0.090** (0.033) 1
LOANit −0.059 (0.164) −0.086** (0.041) −0.093** (0.028) −0.241*** (0.000) −0.181*** (0.000) −0.551*** (0.000) 1
OOIit 0.016 (0.707) −0.199*** (0.000) −0.134*** (0.002) −0.024 (0.573) 0.049 (0.252) 0.041 (0.337) −0.026 (0.535) 1
Panel A: conventional banks
CAPit 1
DEPit −0.140*** (0.000) 1
GDPt 0.101*** (0.000) −0.016 (0.575) 1
HHIt 0.008 (0.769) 0.013 (0.644) 0.158*** (0.000) 1
INEFFit −0.273*** (0.000) 0.010 (0.717) −0.098*** (0.001) 0.075*** (0.007) 1
LIQit 0.148*** (0.000) −0.015 (0.582) 0.023 (0.410) 0.215*** (0.000) 0.050* (0.073) 1
LOANit 0.120*** (0.000) −0.179*** (0.000) 0.055** (0.048) −0.017 (0.549) −0.124*** (0.000) −0.257*** (0.000) 1
OOIit 0.324*** (0.000) −0.195*** (0.000) 0.050* (0.076) −0.041 (0.147) −0.236*** (0.000) 0.184*** (0.000) 0.081*** (0.004) 1
Notes: CAP, ratio of equity-to-total assets; DEP, ratio of deposits-to-total liabilities; INEFF, ratio of operating expenses to gross income; LIQ, ratio of liquid assets to
deposits short-term funding; LOAN, ratio of financing to total assets for IBs and ratio of loans-to-total assets for CBs; OOI, ratio of other operating income to total assets;
GDP, annual change of the GDP; HHI, Herfindahl-Hirschman index. The table reports the correlation coefficients between the variables used to explain the intermediation
margins in Islamic and CBs. p-Values in parentheses. *,**,***Significant at the 10, 5 and 1 percent levels, respectively
may expose banks to liquidity risk. The negative and significant relationship between Determinants
loans and liquidity indicates that credit growth may be associated with an increase of of
liquidity risk. intermediation
margins
4. Results
The results of the Arellano-Bond (1991) GMM estimator, with lagged values of the
explanatory variables in levels as instruments, are reported in Table V. As in Maudos and 715
Guevara (2004), we introduce time effects in order to capture the effects of variables specific
to each year.
The Sargan specification test is used to check the validity of the instruments. The
p-values of Sargan permit to accept the null hypothesis of valid moment conditions.
Moreover, the results obtained by the use of lagged values in differences are reported. The
similarity of results between the two methods of estimation for both Islamic and CBs confirms
the validity of our instruments. However, we will focus on results obtained using lagged

Islamic banks Conventional banks

Lagged values in Lagged values in Lagged values in Lagged values in
differences levels differences levels
Variables Coefficients SE Coefficients SE Coefficients SE Coefficients SE

Net intermediation margin

(t−1) 0.536*** 0.090 0.202*** 0.049 0.425*** 0.016 0.327*** 0.009
GDP growth 0.155*** 0.036 0.144*** 0.063 −0.005*** 0.002 −0.020*** 0.004
Herfindahl-Hirshman index −2.215 2.027 0.199 2.489 0.106*** 0.023 2.099*** 0.369
Total equity/total assets 0.066*** 0.017 0.102*** 0.031 0.068*** 0.006 0.030*** 0.005
Operating expenses/gross
income −0.007*** 0.002 −0.009** 0.004 −0.007*** 0.001 −0.013*** 0.002
Liquid assets/deposits and
short-term funding 0.003 0.012 −0.020 0.025 −0.003** 0.001 −0.006*** 0.001
Deposits/total liabilities −0.004 0.014 0.007 0.005 −0.005* 0.003 −0.012** 0.005
Loans/total assets 0.008 0.027 −0.025 0.013 0.020*** 0.003 −0.008*** 0.003
Other operating income/total
assets −0.474*** 0.117 −0.625*** 0.092 −0.149*** 0.017 −0.204*** 0.019
TE(2001) −1.227 0.928 −0.115 0.374 −0.309*** 0.115 −0.446*** 0.112
TE(2002) 0.051 0.615 −0.399 0.249 0.094** 0.048 0.028 0.037
TE(2003) −0.098 0.370 0.178 0.170 −0.070*** 0.028 −0.084*** 0.019
TE(2004) 0.616 0.415 0.335* 0.189 −0.051* 0.028 0.081*** 0.023
TE(2005) 0.327** 0.148 0.637*** 0.172 0.026 0.038 −0.001 0.026
TE(2006) −0.248 0.359 0.103 0.229 −0.121*** 0.023 −0.096*** 0.025
TE(2007) −0.002 0.404 −0.124 0.308 0.262*** 0.026 0.265*** 0.021
TE(2008) −0.310 0.443 0.199 0.189 −0.016 0.028 −0.260*** 0.032
TE(2009) −0.575 0.478 −0.624*** 0.203 −0.167*** 0.023 −0.099*** 0.026
TE(2010) −0.039 0.254 −0.218** 0.098 0.202*** 0.037 0.285*** 0.019
TE(2011) 0.337 0.297 0.132 0.131 0.202*** 0.025 −0.268*** 0.019
TE(2012) 0.138 0.241 0.028 0.122 0.027 0.018 0.093*** 0.018
TE(2013) 0.041 0.256 −0.076 0.072 −0.028 0.017 −0.005 0.023
TE(2014) −0.008 0.152 −0.043 0.062 0.027* 0.016 −0.089*** 0.019
Sargan test ( p-value) 0.938 0.922 0.612 0.461
Serial correlation test
Table V.
( p-value) 0.307 0.588 0.275 0.726
Determinants of net
Periods included 14 14 14 14 intermediation margin:
Observations 445 445 841 841 dynamic panel
Banks 50 50 126 126 approach ( first
Notes: *,**,***Significant at the 10, 5 and 1 percent levels, respectively differences)
MF levels since Arellano (1989) argued that using differenced instruments is inefficient[6].
44,6 The serial correlation test indicates that we can accept the null hypothesis of the absence of no
second-order autocorrelation of errors.
As can be seen, in general all the variables are statistically significant and have the
expected signs. The lagged dependent variable on the right-hand side has a positive and
significant coefficient which emphasizes the utility of using a dynamic panel approach.
716 The equity-to-total assets ratio used as a measure of risk aversion is positively and
significantly related to intermediation margins in both Islamic and CBs suggesting that more
risk-averse banks tend to require a higher risk premium. Another explanation of this positive
relationship is that well-capitalized banks have lower needs for external funding. Hence, they
tend to reduce the rate paid to depositors since they are not exposed to higher insolvency risk.
This result is in line with findings in Saunders and Schumacher (2000) and Valverde and
Fernandez (2007) for European banks and Nguyen (2012) for a sample of commercial banks
from 28 financially liberalized countries. Similarly, Hassan and Bashir (2005) found that high
capital-to-asset ratio leads to higher profitability of IBs. The concentration variable (HHI)
turns out to have a significantly positive effect on intermediation margin only for CBs. This
result is consistent with the predictions of the market structure-conduct performance
hypothesis according to which there is a direct relationship between the degree of market
concentration and the degree of competition. Thus, banks operating in high concentrated (less
competitive) market enjoy a higher intermediation margins. Our result is in line with findings
in Nguyen (2012). The GDP is found to be positively related to profit margins of IBs. This
result is predicted since favorable economic conditions foster the profitability of the projects
financed by the IB and as a consequence increase the return of its partnership. This result
corroborates with previous findings in Khediri and Khedhiri (2009) indicating the existence of
positive relationship between the improvement of economic conditions and the profitability of
IBs. This evidence also represents a support to the intertemporal risk smoothing hypothesis
suggesting that IBs exploit their long-term relationship with depositors and as a consequence
they employ their higher level of liquidity holdings and their reserves accounts to smooth
returns on investment accounts during downturns and compensate this during upturns.
Our findings corroborate with those found by Hamza (2016) suggesting the existence of an
inverse relationship between economic growth and the level of return paid to IAHs.
In contrast, the improvement of economic conditions induces a decrease of the interest
margins of CBs. The plausible explanation of this inverse relationship is that the increase of
the demand for bank loans during economic booms increases may increase the possibility of
approving loans for bad borrowers which, in turn, decreases the interest revenue of CBs[7].
With regard to the specialization variables, the ratio “loans-to-total assets” is found to
affect negatively and significantly the intermediation margins of CBs, suggesting that
banks concentrated on lending activities are more likely to evaluate effectively the true
credit quality of borrowers, and hence offer lower intermediation costs. In contrast, this
variable has no significant effect on the net profit margins of IBs. This result may be
explained by the fact that IBs do not have enough investment opportunities since they are
allowed to invest only in Shariah-compliant projects. The second variable “deposits-to-total
liabilities” turns out to have a negative sign with a significant effect only in the case of CBs
indicating that interest margins fall after an increase of deposits. This evidence suggests
that these banks tend to offer higher return rates to depositors in order to stand a long-term
relationship with them.
Regarding the degree of diversification measured by ratio of other operating income
reported to total assets, we find that non-traditional activities permit to Islamic and CBs to
operate with lower intermediation margins. This evidence suggests that diversification may
allow banks to reduce their lending rates and/or increase deposit rates since the revenue
earned from non-traditional activities can offset the decline in the intermediation margin.
As a consequence, diversified banks become more competitive. This result is in line with Determinants
findings in Valverde and Fernandez (2007) for European commercial banks. of
The quality of management measured by the ratio of operating expenses divided by intermediation
gross income is found to have a negative relationship with bank margins. This result
indicates that Islamic and CBs do not charge higher interest rates on lending to cover the margins
increase of operating expenses. Our findings are in line with those in Maudos and Guevara
(2004) for banks operating in the European Union. 717
The liquidity level, measured by the ratio of liquid assets reported to deposits and short-term
funding, has a negative and significant effect only for CBs. This result suggests that banks
holding more liquid assets such as cash, government bonds and stocks operate with lower
intermediation margins as previously found by Doliente (2005) for banks located in Thailand and
Malaysia and by Nguyen (2012) for commercial banks from 28 financial liberalized countries.

5. Robustness test
To check the robustness of our findings, we apply another GMM approach proposed by
Arellano and Bover (1995). This estimation procedure consists in using orthogonal
deviations instead of the first differenced data (Arellano and Bond, 1991) to remove the
individual effects. Table VI displays the results obtained using this alternative method.
As can be seen, the results are similar to those given by the first differences in two steps.
In general, all the variables maintain the same signs and degree of significance. We point out

Variable Islamic banks Conventional banks

Coefficients SE Coefficients SE

Net intermediation margin (t−1) 0.516*** 0.042 0.463*** 0.009

GDP growth 0.115*** 0.035 −0.004 0.004
Herfindahl-Hirschman index 3.852** 1.720 2.433*** 0.295
Total equity/total assets 0.094*** 0.016 0.035*** 0.005
Operating expenses/gross income −0.010*** 0.003 −0.008*** 0.002
Liquid assets/deposits and short-term funding −0.024** 0.009 −0.007*** 0.002
Deposits/total liabilities −0.001 0.006 0.001 0.004
Loans/total assets/ −0.019 0.013 0.004 0.003
Other operating income/total assets −0.549*** 0.059 −0.190*** 0.014
TE(2001) −0.394 0.343 0.206*** 0.064
TE(2002) −0.726** 0.329 −0.107** 0.048
TE(2003) −0.696** 0.282 0.029 0.034
TE(2004) −0.343* 0.194 −0.091** 0.037
TE(2005) −0.121 0.134 −0.030 0.033
TE(2006) 0.509*** 0.155 0.006 0.030
TE(2007) 0.371 0.234 −0.088*** 0.021
TE(2008) 0.739*** 0.261 0.250*** 0.024
TE(2009) 0.578** 0.243 −0.039* 0.021
TE(2010) −0.061 0.113 −0.077*** 0.018
TE(2011) −0.179 0.115 0.185*** 0.020
TE(2012) −0.039 0.064 −0.081*** 0.016
TE(2013) 0.098 0.079 0.012 0.016
TE(2014) 0.004 0.039 0.054*** 0.015
Sargan test ( p-value) 0.906 0.474
Table VI.
Wald test ( p-value) 0.000 0.000
Determinants of net
Periods included 14 14 intermediation margin:
Observations 445 841 dynamic panel
Banks 50 126 approach (orthogonal
Notes: *,**,***Significant at the 10, 5 and 1 percent levels, respectively deviations)
MF a great similarity between the determinants of intermediation margins in the two types of
44,6 banks. The bank margin turns out to be positively associated to concentration, capitalization
level and to depend negatively on inefficiency, liquidity and diversification. However, we point
out the existence of two differences between the results obtained by these two GMM methods.
We notice that the economic growth has lost the significance of its effect on the intermediation
margins of CBs. In addition, the influence of the competitive structure of the markets becomes
718 highly significant for the two types of banks. This result suggests that the low elasticity of the
demand for loans (financing) and the supply of deposits allows the bank to exercise its
monopoly power and to apply high margins (Maudos and Guevara, 2004).

6. Conclusion
Using a dynamic panel approach, this study investigates the factors explaining intermediation
margins in Islamic and CBs. The empirical analysis is carried out for a sample of 50 IBs and
126 CBs from 14 MENA countries. The net profit margin of IBs and the net interest margin of
CBs are employed as dependents variables. The descriptive statistics reveal that IBs benefit
from a clientele with more inelastic demand. Consequently, they exhibit higher margins
compared to CBs. Moreover, there seems to be time series differences of intermediation
margins of both groups of banks. Empirical results suggest that economic expansion may
widen this difference in bank margins. This evidence indicates that IBs are not abiding by the
social aspect of their mission. Thus, they should behave according to Islamic ethics to not lose
the confidence of the majority of its consumers and business clients.
Our results also indicate the existence of two common determinants of intermediation
margins in Islamic and conventional banking systems. The degree of diversification permits
banks to operate with lower margins and exploit the revenue from non-traditional activities
to compensate the decrease in intermediation margin. The degree of risk aversion is among
the principal factors responsible for the increase of bank margins. This relative similarity
between the determinants of intermediation margins in Islamic and conventional banking
suggests that further research should be devoted to the analysis of the causal relationship
and the co-integration between the intermediation behaviors of Islamic and CBs.
Examining the effects of other explanatory variables, we notice that CBs operating in
concentrated market exhibit higher margins. The credit growth contributes in reducing
intermediation margins of CBs perhaps because they benefit from economic of scales.
Our findings have several policy implications given the important role of banking
intermediation in achieving greater social welfare (al-khayr). First, the positive relationship
between concentration and net interest margins requires that policy makers should create
competitive conditions if they want to lower the social cost of financial intermediation. The
creation of competitive conditions may be achieved through encouraging the establishment
of new domestic banks or the penetration of foreign banks. Second, the significant impact of
the degree of diversification on margins suggests that any policy analysis of the pricing
behavior of banks should rely on its whole output. Third, the high levels of margins in
Islamic and CBs based in the MENA region may represent an obstacle to these countries to
pursue their development process. Thus, policy makers in these countries should
consolidate the role of capital markets and nonbanking financial institutions to provide
alternative sources of funding and stimulate more competition.

Notes
1. The breach of contract or mismanagement of funds by the bank is called fiduciary risk.
2. This risk is called displaced commercial risk and is defined by the IFSB (2015) as the case when the
Islamic bank is obliged to donate a part of its Mudharib share and/or its profit to the IAHs in order
to smooth the returns payable for them.
 3. For further details on the smoothing practice, see the “guidance note on the practice of smoothing Determinants
the profits payout to investment account holders” issued by IFSB on December 2010. of
4. In the case of high elasticity of demand for credit (or the supply of deposits), even concentrated intermediation
banking system will not be able to apply high margins.
margins
5. Indeed, the legal authorization for Islamic banking in Oman was issued in December 2012, while
the first financial institution in Qatar, namely, Qatar Islamic Bank has been established since 1982.
6. The IV estimator for dynamic panel data using differenced instruments was proposed by
719
Anderson and Hsiao (1982).
7. Table IV reveals that the growth of loan supply by conventional banks is positively related to the
GDP growth.

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Further reading
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) (1997), “Disclosure
of bases for profit allocation between owners’ equity and investment account holders”, Financial
Accounting Standard No. 5 (FAS 5), Bahrain.
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) (1997), “Equity of
investment account holders and their equivalent”, Financial Accounting Standard No. 6 (FAS 6),
Bahrain.
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) (2014), “Investment
accounts”, Financial Accounting Standard No. 27 (FAS 27), Bahrain.
Dusuki, A.W. (2008), “Understanding the objectives of Islamic banking: a survey of stakeholders’
perspectives”, International Journal of Islamic and Middle Eastern Finance and Management,
Vol. 1 No. 2, pp. 132-148.
Islamic Financial Services Board (IFSB) (2010), “Guidance note on the practice of smoothing the profits
payout to investment account holders”, December.

Corresponding author
Khemaies Bougatef can be contacted at: khemaies_bougatef@yahoo.fr

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