How Do Islamic Banks Perform during

Global Financial Crises?

Evidence from the Gulf Cooperation Council.

Research Proposal

Your Name

2023

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 Introduction
International financial crises now seem to develop more rapidly and with more

disastrous consequences than in the past. The effects of the current global financial crisis

(GFC) have been widespread, with the economic downturn affecting large sectors in both

developed and developing countries. The global banking system has been devastated by what

has been described as the worst financial crisis since the Great Depression, forcing into

bankruptcy large players within the banking sector, such as Lehman Brothers.

The purpose of this study is to provide an understanding of how well the Islamic

banking sector performed before and during global financial crises in terms of financial

performance, market performance and the existence of financial integration with the world

banking sector / the American banking sector. By comprehensively studying the performances

and the degree of financial integration, bankers, policymakers, economists and regulators of

Islamic financial institutions might then be in a position to face any future financial crises

with appropriate policies, practices and theories in place.

Literature Review
Literature comparing the financial performances of the Islamic banking sector and nonIslamic

banking sector is inconclusive and provides varied conclusions depending on the region and

the period studied Literature comparing the financial performances of the Islamic banking

sector and non-Islamic banking sector is inconclusive and provides varied conclusions

depending on the region and the period studied Such as Abdul-Majid, Saal, & Battisti, 2010;

Awan, 2009; Olson & Zoubi, 2008; Samad, 2004; Samad & Hassan, 2000; Saud, 2011; Rosly

and Abu Bakar ,2003, as indicated in this brief literature review. This research proposal will

focus only on countries with dual banking systems in order to compare like with like, in terms

of bank data and ratios.

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 Literature Review on Financial Performances:

Awan (2009) studied the financial performances and quality of service of six Islamic

banks and six selected conventional banks between 2006 and 2008 in Pakistan. The author’s

findings indicate surprisingly that newly formed Islamic banks outperform non-Islamic banks,

not only in terms of profitability but also in terms of assets, financing, deposits, investments,

efficiency and quality of services. One of the limitations of this paper is the small sample

which only consists of 6 Islamic and 6 non-Islamic banks during a short period of time (3

years). In my research, I will use a sample of 55 banks in six countries with longer

timehorizon.

Rosly and Abu Bakar (2003) examine the profitability of 26 Islamic and conventional

financial intuitions in Malaysia between 1996 and 1999.Their paper reports that Islamic banks

experienced higher returns on assets (ROA) due to their ability to reduce existing overheads

carried by conventional institutions. Also they conclude that conventional banks outperform

Islamic banks on efficiency.

Abdul-Majid, Saal, & Battisti ( 2010) conducted an international comparison by

investigating the efficiency of Islamic and non-Islamic banks in 10 countries Including

Sudan, Tunisia, Bangladesh, Iran, Jordan, Malaysia, Yemen, Indonesia, Bahrain and Lebanon,

with dual banking systems during the period of 1996 and 2002, employing an output distance

function methods. Their data consists of 23 Islamic and 88 conventional banks with total

observation of 558. Non-Islamic banks account for 463 observations and Islamic account the

remaining of the total observations. The authors find Islamic banks are found to be associated

with higher input usage, and Islamic banking appears to have slightly higher returns to scale

than its counterparts of non-Islamic banks. One serious limitation of this paper is that the

sample used for this study gathered from countries ranged from rich to poor countries or low

income countries with many major differences such as social, economic, political and

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geographic differences. These differences make the authors to devote a substantial proportion

of their study on attempting to control for these characteristics differences to generate reliable

results.

In my thesis I will do an international comparison for six-nation states of the GCC. However,

it will avoid the characteristics differences of Abdul-Majid et al (2010) the 6 countries have

homogeneous characteristics which will make the result of my thesis is more reliable.

Literature review on Financial Performances of the GCC banks

In this section, I separately review the prior studies which have been done on the GCC region

as it is the region that my thesis will cover.

Samad (2004) examines and compares the performance of Bahrain Islamic banks with

the performance of non-Islamic commercial banks in terms of profitability, liquidity risk and

credit risk during the period after the Second Gulf War between 1991 and 2001. The author

utilises nine financial ratios to measure these three aspects (profitability, liquidity risk and

credit risk) and then applies t-test to financial ratios for Islamic and conventional banks.

Samad concludes that there is an insignificant difference in performance between Islamic

banks and commercial banks in terms of profitability and liquidity. However, Samad finds

that there is a large difference in regards to credit performance.

Olson and Zoubi (2008) investigate whether it is possible to identify any differences

between conventional banks and Islamic banks in the GCC region based on financial

characteristics between 2000 and 2005. They apply 26 financial ratios. Their results indicate

that Islamic banks are more profitable and riskier than non-Islamic banks, but probably less

efficient. The authors state that one of their research limitations was that they used only an

accounting approach without considering market variables. In this thesis, I will incorporate

financial (accounting) and market performance; therefore, my sample will consider only

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publicly listed banks during the period before the GFC 2005 – 2007, and during the GFC

2008 and 2009.

Saud (2011) evaluates only the financial performance using Return on Equity (ROE),

Return on Total Assets (ROA), and Net Special Commission (NSC) and the effect of assets

management, operational efficiency and size on the performance of 11 listed banks in the

Kingdom of Saudi Arabia between 2005 and 2009, using ratio analysis. She finds that a single

Islamic bank experiences a superior performance in terms of liquidity, profitability and capital

structure. Regarding to size, medium-sized institutions are growing rapidly to compete

against the larger institutions within the industry. Larger banks have reached a higher level of

mature growth. Small sized banks are facing some difficulties reach reasonable growth. The

author also finds that there is no significant difference between Islamic and conventional

banks in terms of profitability and activities.

It can be seen from the studies that I have reviewed earlier, that all of them focus only

on ratio analysis approach during different times and periods. However, my research will be

the first to evaluate the financial performance with a greater emphasis on the GFC in six

countries with homogeneous characteristics which will make the result of my research is

more reliable. Also it will be the first to evaluate the market performance of both

counterparts.

Research problem

The GFC’s effect on the global banking sector has stimulated intense interest from

academic researchers, economists and bankers who are examining the phenomenon.

However, the fast-growing and unique Islamic banking sector has not attracted as much

interest in terms of investigation and academic research as has banking sectors within the

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conventional banking system. This is largely because the Islamic banking sector is a very

recent development in international banking.

Objectives
The objectives of this study are classified into two parts including general and

specific objectives. General objective is to offer bankers, policy makers, economists and

regulators of Islamic financial institutions, with a better understanding of how Islamic banking

sector performs during global financial crises. Specific objectives including the followings.

Firstly, to evaluate the financial performance of Islamic banks prior to and during the GFC and to then

compare that performance with the performance of non-Islamic banks in the Gulf Cooperation Council

(GCC) during the same period. Secondly, to evaluate the market performance of Islamic banks prior to

and during the GFC and to then compare that performance with the performance of non-Islamic banks

in the Gulf Cooperation Council (GCC) during the same period. Thirdly, to investigate whether any

degree of financial integration exists between the GCC Islamic banking sector (non-Islamic just to

compare), the global banking system and the United States (US) banking sector, the latter being the

largest trading partner of the GCC and the source of the GFC.

Contribution of the study

To the best of my knowledge, there is no single study that investigated and

compared the financial performance of Islamic banks during the global financial

crisis, in comparison to conventional banks. Therefore, this study is going to

contribute to the extant literature by showing how the two types of banks

performed during the GFC. In addition, this study will show which theory is better

able to predict banks' performance during times of global economic drop.

Research questions
The research will address the following questions:

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 • Has the market performance of the Islamic banking sector differed from the

performance of the non-Islamic banking sector prior to and during financial crises?

• Has the financial performance of the Islamic banking sector differed from the

financial performance of the non-Islamic banking sector prior to and during

financial crises?

Methodology and Data

The quantitative methodology will be used in my research through the utilisation of

the following. Financial ratio analysis to measure financial performance. Finally, using

correlation and regression analysis to examine any relationships between the Islamic banking

sector and the world/US banking sectors. The research will be built on the positivism

paradigm and deductivism approach due to the nature and scope of this kind of study.

Data
The research will comprehensively analyse the financial and market performances of

all publicly listed Islamic and non-Islamic banks with sufficient financial and market data in

the GCC region and also the degree of interrelationship and financial integration with the

global banking system and the US banking sector prior to (2005–2007) and during (2008–

2009) the U.S. subprime mortgage crisis which widely spread worldwide. Comparing the two

periods will enable a time series analysis, and studying two sets of data (Islamic and

nonIslamic banks) will enable a cross-sectional analysis to be performed. Financial data,

market prices, indices and the daily banking price index data will be collected for each

country and/or region. Also collected will be the world and US banking price index from

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DataStream, Thomson One Banker and Bankscope for the periods of 2005–2007 and 2008–

2009. This research will be limited in that it will consider a relatively short period due to the

insufficiency of market data for Islamic banks.

Methods

The methods will cover the following areas: financial performance, market

performance and financial integration. I will adopt mathematical and statistical methods to

analyse the secondary data which are typically used in a substantial body of literature.

• Financial ratio analysis: The research will examine and compare the financial

performance of Islamic banks with the performance of conventional banks. The

ratios suggested by and used in a substantial body of literature, such as Olson and

Zoubi

(2008), include the following:

• profitability ratios

• efficiency ratios

• asset-quality indicators

• liquidity ratios

• risk ratios

• Tobin’s q (a combination of market and financial performance).

Summary and Conclusion

In this research proposal, I introduce my Ph.D. topic which is to investigate how

Islamic banking sector performs during global financial crises. I also review the relevant

studies which have been done on the Islamic banking performance and the financial

integration between markets during financial crises to identify gaps in the literature, state the

main objectives and to formalise the research questions. After reviewing the literature and

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identifying the research gaps, objective and questions, I demonstrate the methodology,

methods and the source of data which will be used to achieve research objectives and address

the research questions. Finally, I determine the scope and limitations of my study which will

help future researchers to build the literature on the performance of Islamic banking systems

during global financial crises.

Research outline
Chapter 1: Introduction

Chapter 2: Literature Review

Chapter 3: Data and methodology

Chapter 4: Analysis of financial performance

Chapter 5: Analysis of market performance

Chapter 6: Summary and Conclusion

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 Timeline
My intended commencement date is July 2012. The research and thesis preparation

will be conducted full-time for two and a half years (see Table 1).

Table 1

Research Program Timetable: Milestones

Stage Part Contents Period*
(months)
1 Introduction and Islamic banking, GCC economies, 3
background financial crises
2 Literature review Prior studies covering the key issues 3

3 Methodology and data 3

4 Data collection Market and financial data 3

5 Data analysis 1 Financial performance 3

6 Results 3

7 Summary and conclusion 3

8 3
Overall review and first
draft

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 Reference
Abdul-Majid, M., Saal, D., & Battisti, G. (2010). Efficiency in Islamic and conventional
banking: an international comparison. Journal of Productivity Analysis, 34(1), 25-43.

Awan, A. G. (2009). Comparison of Islamic and conventional banking in Pakistan.

Department of Economics, Islamic University, Bahawalpur-Pakistan.
BAIG, T., & GOLDFAJN, I. (1999). Financial Market Contagion in the Asian Crisis. IMF Staff
Papers, Vol.46(2), pp. 167-195

Chiang, T. C., Jeon, B. N., & Li, H. (2007). Dynamic correlation analysis of financial
contagion: Evidence from Asian markets. Journal of International Money and
Finance, 26(7), 1206-1228.
Dungey, M. and Zhumabekova, D. (2001) Testing for contagion using correlations: some
words of caution,Working Paper No. PB01-09, Centre for Pacific Basin Monetary and
Economic Studies, Economic Research Department, Federal Reserve Bank of San
Francisco.

Olson, D. & Zoubi, T. A. (2008). Using accounting ratios to distinguish between Islamic and
conventional banks in the GCC region. The International Journal of Accounting,
43(1), 45–65.
Rosly, S. & Abu Bakar, M. (2003). Performance of Islamic and mainstream banks in
Malaysia. International Journal of Social Economics, 30(12), 1249–1265.
Samad, A. (2004). Interest-free Islamic banks vis-à-vis interest-based conventional banks.
IIUM Journal of Economics and Management.
Samad, A., & Hassan, M. K. (2000). THE PERFORMANCE OF MALAYSIAN ISLAMIC BANK

DURING 1984-1997: AN EXPLORATORY STUDY. International Journal of Islamic

Financial Services, Vol. 1 No.3.
Saud, B. S. (2011). Performance analysis of Islamic banking: Some evidence from Saudi
Arabian banking sector. Master’s thesis in Finance, Ritsumeikan Asia Pacific
University (APU), Beppu, Japan
Schaik, D. v. (2001). Islamic Banking. The Arab Bank Review, Vol. 3, No. 1, pp.45-52.

Simpson, J. (2009). Were there warning signals from banking sectors for the 2008/2009
global financial crisis? Journal of Applied Financial Economics.
Yiu, M. S., Alex Ho, W.-Y., & Choi, D. F. (2010). Dynamic correlation analysis of financial
contagion in Asian markets in global financial turmoil. Applied Financial Economics,
20(4), 345-354.

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