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Efficiency, Survival, and Non-Performing Loans in Islamic and Conventional Banking in the GCC

ALANDEJANI, MAHA,ABDULAZIZ,Y (2014) Efficiency, Survival, and Non-Performing Loans in Islamic and Conventional Banking in the GCC. Doctoral thesis, Durham University.



The success of Islamic banks is determined by several factors, among which are their performance, efficiency, stability and ability to grow in conjunction with the economic and financial growth of the GCC’s national economy. Due to the successes resulting from these factors, which are located within the inherent value system of Islamic finance, the GCC’s Islamic banks were praised for their resilience during the recent financial crisis. This research thus aims to examine the efficiency, performance, survival-time analysis and issues related to non-performing loans (NPL) in the case of the Islamic banks within the GCC through four different yet interconnected empirical essays.
The first essay aims to examine the technical efficiency of the Saudi Arabian Islamic banks in a comparative analysis with the Sharia-compliant windows of Saudi Arabian conventional banks by using Data Envelopment Analysis (DEA) for the period from 2005 to 2010. In doing so, some selected variables related to the banks’ characteristics also are examined through second stage regression of the DEA model. Overall, the results indicate that the performance of Islamic banks decreased sharply until it reached its lowest level in 2008. In addition, as a result of the influence of environmental variables, it has been found that the efficiency of Islamic banks was affected negatively more than traditional banks during the period in question.
The second essay aims to measure the efficiency and productivity growth of the banking sector in the GCC through DEA meta-frontier analysis for the period from 2005 to 2010. This essay offers a comparative study on two levels: between each country and between three types of bank, namely Islamic banks, conventional banks providing Islamic windows and conventional banks. The second stage of the analysis attempts to examine the influence of the banks’ characteristics, financial structures and rule-of-law variables on technical efficiency (TE) scores by applying a two-stage approach via panel random effect and bootstrap models. The findings reveal that Islamic banks have underperformed in comparison with Islamic window banks during the specified period. However, the catch-up value of the total factor productivity illustrates that Islamic banks appear to be the most productive group.
The third essay aims to investigate the survival time of Islamic and conventional banks in the GCC countries, taking into account the impact of the global financial crisis by employing the discrete-time duration models for the period of 1995 to 2011. In addition, to examine the differences between banks, a range of explanatory variables from both the micro- and macro-levels are included in several models. The results from hazard and survivor functions indicate that the Islamic and conventional banks form two distinct bank types, where Islamic banks potentially have a higher incidence of failure and therefore a shorter survival time. The discrete-time duration model findings for the all-banks-pooled model confirm that the hazard rate increases with Islamic banks. Furthermore, the analysis of each bank type reveals that the effect of covariates on survival time differs between Islamic and conventional banks. For instance, increasing the net interest margin ratio causes the hazard rate in Islamic banks to rise, whereas this rate is lowered in conventional banks.
The fourth essay aims to identify the macro- and micro-level factors determining NPL in Islamic banking within the GCC via the panel data econometrics model for the period from 2005 to 2011. In addition, this paper examines the impact of the sectoral distribution of Islamic financing on the NPL in the GCC banking system as a whole by utilising dynamic panel data models. The findings indicate that the relationship between efficiency and NPL supports the “bad management” and “bad luck” hypotheses. Further, the sectoral distribution of Islamic financing extended by the GCC Islamic banks shows an adverse impact on NPL, thus demonstrating that Islamic bank financing, which is related to real estate and construction projects, increases the credit risk exposure. It is suggested that increasing financing by profit-and-loss-sharing instruments could enhance loan quality, thereby implying that the growth influence of fixed-income debt contracts could increase NPL more than profit-and-loss-sharing contracts.

Item Type:Thesis (Doctoral)
Award:Doctor of Philosophy
Faculty and Department:Faculty of Social Sciences and Health > Economics, Finance and Business, School of
Thesis Date:2014
Copyright:Copyright of this thesis is held by the author
Deposited On:02 Dec 2014 10:34

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