Abstract It is broadly known that the Islamic Banking System

(IBS), the main part of the Islamic Financial System, performs better
than conventional banks. However, traditional arguments are used
(the business model of the IBS) to explain this success. This paper
takes a different stand by examining the performance (on
profitability and productivity) of the main Islamic financial
instruments after the recent financial crisis at two levels. Using
balance sheet data for 37 banks of the United Arab Emirates (UAE)
and a compensating differential framework, we assess the
performance gap between the conventional and Islamic banking
systems. Unconditional and conditional performance differences
show that, unlike other Gulf Cooperation Council (GCC) countries,
the conventional banking is performing better than the Islamic one.
However, after the crisis, Islamic banks seem to close the difference
for most of these performance indicators.
KeywordsFinancial crisis, Islamic banks, OLS, UAE.
I. INTRODUCTION
SLAMIC financial institutions (IFIs) have experienced a
steady growth during the last decade thanks to strong
economic development in their host countries. The basic
principles of IFIs have protected it from the global financial
crisis. Even if the sizes of IFIs are relatively small compared
to international standards, it has to be noted that the prospects
for growth and expansion in non-Muslim countries are strong.
Several papers analysed the performance of banking system
across countries. The results from many of the previous
studies comparing performance of Islamic and conventional
banks are unsatisfactory for several reasons, in particular the
significance of the differences in performance between the
two types of banking is often not tested. This paper takes a
different stand by examining the performance (on
profitability, credit and asset growth, and external ratings) of
the main Islamic financial instruments during the recent
financial crisis at two levels. Using balance sheet data for 37
banks of the UAE and a compensating differential framework,
we assess the performance gap between the conventional and
Islamic banking systems. Unconditional and conditional
performance differences show that, unlike other GCC
countries, the conventional banking is performing better than
the Islamic one. However, after the crisis, the Islamic banks
Hela. Miniaoui, is with University of Wollongong in Dubai, Knowledge
Village, P.O. Box 20183 UAE (phone: +971 4 3900469; e-mail:
helaminiaoui@uowdubai.ac.ae).
Gaston. Gohou, is with CESS Institute, G1P4C6 Canada. (e-mail:
ggohou@cessinstitute.org).

seem to close the difference for most of these performance
indicators. Our main objective is to assess the performance
indicators between conventional banks (CBs) and Islamic
banks (IBs) in the UAE. In this paper, we will assess this gap
using two methods: the unconditional and the conditional
performance indicator difference between the banking
systems. In addition, by focusing on one country, we will
remove the bias of economy of scale by doing a study across
countries.
The rest of the paper is structured as follows: section 2
presents an overview of the Islamic banking while section 3
introduces the UAE banking system. The literature review of
banking system comparison is done in section 4. The data and
sample are described in section 5 and section 6 analyses the
performance indicators of both systems. Finally, Section 7
offers concluding remarks.
II. ISLAMIC BANKING SYSTEM REVIEW
An Islamic bank is a financial institution which identifies
itself with the spirit of Islamic legal code (Sharia), as laid
down by the Holy Quran and Sunnah, as regards its
objectives, principles, practices and operations.
As in Fig. 1, IBs adopt various financial instruments in
operating their businesses. The other banks are known as
conventional with an Islamic windowing; that is providing
services to Muslims in accordance with Shari'a principles.

Fig. 1 Main Sharia contracts applied in Islamic banking

The past two decades have witnessed a substantial increase
in the number of IBs, financial institutions and Islamic funds
in different parts of the world. It was to meet this demand and
capture this emerging market that CBs started opening Islamic
windows and Islamic units for those clients who do not want
to indulge in interest-based transactions. This conviction
Did The Islamic Banking Perform Better During
The Financial Crisis? Evidence from the UAE
Hela Miniaoui and Gaston Gohou
I
International Conference on Management, Economics and Social Sciences (ICMESS'2011) Bangkok Dec., 2011
630
created an increased demand for Islamic products in the field
of financing, and gave birth to a market where only Islamic
products are acceptable. Thus, banks working under Islamic
windows are established to provide an additional service to
Muslim clients or to offer a variety of products for general
clientele.
There are now more than 300 IFIs worldwide including
banks, mutual funds, mortgage companies and insurance
firms. Despite most of IBs are within emerging and/or
Middle-East countries, many universal banks in developed
countries have began to valve the massive demand of Islamic
financial products.
Islamic financing is at the same time becoming more
diverse and venturesome. Its base has both deepened and
widened. IFIs include commercial, investment and offshore
banks, insurance companies and trust funds.
For the principles, Islamic banking has the same purpose as
conventional banking except that it operates in accordance
with the rules of Sharia, known as Fiqh al-Muamalat
(Islamic rules on transactions). The basic principle of Islamic
banking is the sharing of profit and loss and the prohibition of
Riba (interest or usury).
III. THE UAE BANKING SYSTEM
The UAE has a remarkably high number of banks. In fact,
in 2010, the number of finance companies licensed to operate
in the UAE was 23 and the number of licensed investment
companies was 21. Moreover, the number of locally
incorporated commercial banks stood at 23 during 2010, while
the number of their branches increased to 732 at the end of
December 2010 although the number of their
electronic/customer service units remained at 26.
Islamic banking represents a small component (16%) of the
UAE banking sector. All national banks are listed either on
Abu Dhabi Securities Market (ADSM) or Dubai Financial
Market (DFM). According to the International Monetary Fund
report on the UAE, local banks are controlled substantially by
governments, ruling families, or Government-related entities
(GREs), with the exception of one of the 10 largest banks,
which is owned by a Dubai merchant family. Banks majority-
owned by the public sector control 75 percent of local banking
assets90 percent when including substantial minority
shareholdings. Data released by the respective GCC central
banks for 2009 has reaffirmed the UAE banking systems
position as the largest within the GCC, with total assets
expanding to the USD414 billion [1].
IV. LITERATURE REVIEW
Previous literature [2]-[7] has compared the profitability of
IBs to CBs using comparative ratio analysis. Studies [8]-[14],
have examined the performance of IBs using financial ratios.
Several other studies [15]-[28] have examined the efficiency
of IBs and compared with those of CBs and Islamic windows
operation using Data Envelopment Analysis (DEA) and/or
Stochastic Frontier Analysis (SFA). Moreover, competitive
conditions are likely to affect bank performance and
efficiency [29], in addition to equity capitalization levels [30].
In fact, several authors [31]-[36] have investigated the
importance of competitive conditions on bank profitability,
distinguishing among Islamic and conventional banks and
using a variety of key indicators (traditional concentration
measures, the PR-statistic, the Lerner index).
Different studies assessed the determinants of profitability
of banks. Indeed, accounting-based studies of bank
performance generally use comprehensive information from
financial statements to identify the determinants of bank
profitability, as measured by return on assets (ROA) or return
on equity (ROE).
Some studies [37]-[40] have examined bank-specific factors
of profitability (e.g., size, revenue growth, risk, and control of
expenses), while cross-countries researches [41], [42] have
considered external factors (e.g., inflation, concentration, and
GDP growth) in addition to a few internal factors of
profitability.
The results from many of the previous studies comparing
performance of IBs and CBs are unsatisfactory for several
reasons. First a large proportion of the studies are based on
small samples (particularly of IBs). Second, where sample
sizes are large, the data have often been collected across a
variety of countries with very different economy size. Third,
the significance of the differences in performance between the
two types of banking is often not tested. Studies have
generally employed few financial ratios mainly ROE and
ROA to examine the performance of banks.
The main research questions in this paper are twofold: (i)
Which banking system in the UAE perform better before and
after the 2008 financial crisis? (ii) What is the level of this
performance gap between CBs and IBs in the UAE in terms of
profitability and productivity? The paper contributes to the
literature at two levels. First, it is one of the first papers that
used conditional and unconditional gap estimation methods to
estimate the difference between IBs and CBs. Moreover, by
focusing on one country, the bias of economy of scale is
eliminated.
V. DATA AND METHODOLOGY
The data used in this paper are collected from the balance
sheet of each bank in the UAE. The data sources are mainly
from banks annual and interim reports, Zawya database, and
Zawya Dow Jones for financial statements and interim
accounts and the Bankscope database. The data covers 37
main banks in the UAE, whenever data is available. The
balance sheet of each bank allowed us to collect the data to
assess the performance of the two systems. The main purpose
of this paper is to assess the magnitude of the gap between the
conventional and the Islamic banking systems using
conditional and unconditional methodology. To do so, we
used two sets of performance indicators to compare the
performance of the conventional and Islamic banking systems
in the UAE. The first set of performance indicators are six
profitability indicators and the second set are two productivity
variables.
International Conference on Management, Economics and Social Sciences (ICMESS'2011) Bangkok Dec., 2011
631
The profitability indicators measure the ability of the banks
to effectively employ their resources. The indicators are the
Return on Average Asset (ROAA); the Return on Average
Equity (ROAE); the Net Income on Average Asset (NIAA);
the Net Income on Average Asset growth rate (NIAAG); the
Net Income growth rate (NIG) and the Gross Loan (or credit)
Growth (GLG).
The productivity indicators measure the efficiency of the
banking system. We use the Cost to Income Ratio (CTIR) and
the bank total asset rate (AssetG). The CTIR is useful to
measure how costs are changing compared to income. It is the
ratio of operating expenses to operating income.
The following sections describe the summary statistics of
the two banking systems in the UAE. The distinction is done
between the periods before and after the financial crisis. Table
I provides the distribution of market share of IBs and CBs. In
terms of market share, measured by the net interest profit, the
Islamic system increased its market share from 17% on
average between 2000 and 2007 to 20% between 2008 and
2010. In terms of nominal value, the market share of IBs
almost doubled between this two periods while CBs market
value increased by about 20%.
TABLE I
THE MARKET SHARE BY BANKING SYSTEM AND COUNTRY (%)



1995-
1999

2000-
2007

2008-
2010

1995-
2010
Market
share
IB 7 17 20 18
CB 93 83 80 82
Growth
rate of
assets
IB 27 9 9 10
CB 73 91 91 90
Fig. 2 provides the evolution of the annual market share for
each of the banking system. The market share of IBs is
constantly improving from 1995 to 2010. A feature to notice
is the sharp increase of IBs just before the crisis (an increase
of 5 point of percentage between 2003 and 2006). The gain of
market share of the IBs continued after the 2007-2008 to
reach 20% in 2009.


Fig. 2 The market share by banking system per year
The descriptive statistics of profitability and productivity
variables are displayed in Tables II and III.






TABLE II
DESCRIPTIVE STATISTICS, 1995-2010 (IBS AND CBS)
Variable Mean Std,
Dev,
Min Max Observation
s
ROAA overall 2,5 3,6 -25,3 35,1 N = 381
betwee
n
2,2 -2,2 9,0 N = 37
within 3,3 -24,9 30,6 T-bar = 10,3
ROAE overall 15,7 31,3 -233,1 246,5 N = 381
betwee
n
19,1 -14,8 111,0 N = 37
within 23,2 -202,7 151,2 T-bar = 10,3
NIAA overall 3,1 1,7 -2,0 18,7 N = 378
betwee
n
1,8 -1,3 10,2 N = 36
within 1,0 -4,6 11,7 T-bar = 10,5
NIAAG overall 0,1 1,1 -7,6 16,8 N = 340
betwee
n
0,9 -0,4 3,8 N = 36
within 1,0 -8,1 16,2 T-bar = 9,4
NIG overall 0,9 8,3 -20,8 131,0 N = 342
betwee
n
21,6 -3,2 131,0 N = 37
within 3,9 -18,6 45,6 T-bar = 9,2
GLG overall 0,3 1,8 -0,8 31,2 N = 332
betwee
n
1,2 -0,2 6,1 N = 36
within 1,6 -6,4 25,4 T-bar = 9,2
CTIR overall 43,2 37,9 6,3 402,3 N = 373
betwee
n
39,3 12,2 250,0 N = 36
within 30,0 -100,8 357,0 T-bar = 10,4
AssetG overall 0,2 0,3 -0,4 2,6 N = 344
betwee
n
0,4 -0,2 2,1 N = 37
within 0,3 -0,8 2,0 T-bar = 9,3
leverage overall 6,9 2,8 1,9 23,0 N = 146
betwee
n
2,5 2,6 13,9 N = 26
within 1,8 3,4 19,9 T-bar = 5,6
invcap overall 22,4 13,7 7,2 86,0 N = 206
betwee
n
12,6 9,7 68,2 N = 24
within 4,7 7,3 49,5 T-bar = 8,6
EquLoa
n
overall 62,8 107,8 -4,3 866,7 N = 355
betwee
n
97,7 13,7 540,0 N = 36
within 46,2 -227,0 389,5 T-bar = 9,9
EquAss overall 22,7 16,6 -3,2 100,0 N = 382
betwee
n
15,7 2,9 65,3 N = 37
within 7,9 -6,7 79,5 T-bar = 10,3
CusDep overall 86,5 17,6 0,0 100,0 N = 338
betwee
n
21,4 4,3 100,0 N = 32
within 6,8 59,8 114,7 T-bar = 10,6
BankDep overall 22,1 30,6 0,0 100,0 N = 329
betwee
n
32,9 2,0 100,0 N = 34
within 6,8 -14,7 48,8 T-bar = 9,7
CAR overall 21,5 9,3 10,8 81,6 N = 192
betwee
n
10,4 12,8 62,4 N = 27
within 5,7 2,3 40,8 T-bar = 7,1
CB overall 0,7 0,4 0,0 1,0 N = 592
betwee
n
0,5 0,0 1,0 N = 37
within 0,0 0,7 0,7 T = 16
Bsize overall 0,7 0,5 0,0 1,0 N = 592
betwee
n
0,3 0,0 1,0 N = 37
within 0,3 -0,3 1,6 T = 16
Overall, it seems that IBs in the UAE has been hit harder by
the financial crisis. Indeed, the ROAA grew on average by 4.6
percent per year between 2000 and 2007 while it grew by 16.2
International Conference on Management, Economics and Social Sciences (ICMESS'2011) Bangkok Dec., 2011
632
percent over the same period of time. We observe a similar
trend for the other performance indicator (ROAE and GLG).


TABLE III
EVOLUTION OF PERFORMANCE VARIABLES, ALL BANKING SYSTEMS,
1995-2010 (%)
ROAAG
ROAEG
NIAAG NIG GLG CTIRG
Asset
G
All banks
95-99 13.11 7.37 1.40 6.37
13.7
2 -6.59 7.73
00-07 5.00 6.80 -2.47
23.3
2
22.5
6 -3.11 24.35
08-10 -28.12 -29.26 3.16 -3.37
23.7
7 13.58 10.91
95-10 -0.71 -1.51 -0.34
12.9
1
20.3
7 -0.95 16.97
Conventional Banking
95-99 13.87 8.76 1.55 7.04
14.2
3 -6.90 8.49
00-07 4.63 7.11 -2.05
23.4
2
24.7
2 -3.42 25.90
08-10 -26.20 -28.83 1.99 -1.24
23.9
7 13.58 10.33
95-10 -0.20 -0.89 -0.30
13.6
4
21.6
9 -1.21 17.85
Islamic Banking
95-99 13.08 -11.02 0.68
11.4
5 3.73 -8.66 -0.66
00-07 16.26 16.05 -3.16
35.6
9
12.9
4 -4.77 20.37
08-10 -36.36 -31.59 7.38 -4.56
21.2
3 13.71 13.92
95-10 2.30 -2.73 -0.11
17.3
8
11.9
8 -2.42 13.11
VI. CONDITIONAL AND UNCONDITIONAL GAP BETWEEN
BANKING SYSTEMS
This section presents the performance gap between IBs and
CBs before and after the financial crisis using compensating
differential framework. We assess, first, the unconditional
performance gap between Islamic and conventional banking
systems. The unconditional performance gap is calculated as
the difference of performance indicators between the two
banking systems. A t-test is performed to assess the validity of
the test at the statistical level. The results are presented in
Table IV. Based on the six profitability indicators, we cannot
confirm the findings of previous studies that CBs did perform
better than IBs in the UAE before and after the crisis.
However, this gap is positive but statistically not significant
for the ROAE and the NIAA. When we consider all the period
1995-2010, CBs seem performing better that IBs in the UAE
since the gap is positive and statistically significant.
Regarding the operating cost, the unconditional
productivity difference shows that IBs have the higher cost to
income ratio but higher growth of its asset. These results are
confirmed overtime.
The gaps estimated in Table IV have an important bias in
the sense that they do not take into consideration the
heterogeneous characteristics of the banks in terms of
portfolio, loans, exposure, risk taking, etc. To resolve this
bias, we estimated the conditional difference in profitability
and productivity indicators.

TABLE IV
PERFORMANCE ANALYSIS, UNCONDITIONAL CBS-IBS DIFFERENCE
1995-2010 1995-07 2008-10
Profitability indicators
ROAA CB 2.685333 2.95588 1.644769
IB 1.831515 2.545714 0.5816667
CB-IB 0.8538182* 0.4101658 1.063103
SE (0.4923101) (0.5501904) (1.058361)
ROAE CB 18.30829 18.52116 17.48954
IB 2.958182 2.31881 4.077083
CB-IB 15.3501*** 16.20235*** 13.41246
SE (4.171419) (4.920251) (8.388598)
NIAA CB 3.196635 3.24412 3.014
IB 2.833651 2.684762 3.131429
CB-IB 0.3629841* 0.5593581 -0.1174285
SE (0.2320097) (0.2840709) (0.4020772)
NIG CB 0.9572391 0.3697266 3.089341
IB 0.5863796 0.848003 .1627988
CB-IB 0.3708595 -0.4782764 2.926542
SE (1.217124) (0.5600682) 4.016716
GLG CB 0.2821746 0.3321222 .1053109
IB 0.5288465 0.5480833 .4977012
CB-IB -0.2466719 -0.2159612 -0.392390***
SE (0.2600299) (0.3695123) (0.1462045)
Productivity indicators
CTIR CB 39.21958 38.97733 40.15453
IB 62.8879 60.13732 68.25809
CB-IB -23.66832*** -21.15999*** -28.10356***
SE (5.133864) (5.785445) (11.31038)
AssetG CB 0.1805081 0.2072808 0.0829173
IB 0.4624504 0.5481058 0.3196913
CB-IB -0.2819423*** -0.340825*** -0.236774***
SE (0.0447595) (0.053436) (0.0806891)
Note: The statistical significance of the two-sample t-test with equal variance on the equality of
means (* significant at 10%, ** significant at 5%, and *** significant at 1%). Standard errors of
the mean differences are in parentheses. Sample weights are applied.

This conditional performance difference can be obtained by
doing a regression of the indicator on a dummy variable
representing the conventional bank and a set of variables
representing the main characteristics of the banks. In so doing,
the conditional difference controls for observable
characteristics of banks. The coefficient of the dummy
variable represents the conditional performance difference
between IB and CB systems. Based on the literature, we
estimate the following equation (1) by period using Ordinary
Less Square (OLS) method:
S
i
=CB
i
+X
i
+
i
(1)
where S
i
is the value of a performance indicator, CB
i
is a
dummy variable for being a conventional bank or not, X
i
is
the set of individual bank characteristics (leverage, asset to
capital ratio, capital to asset ratio, equity loan to total gross
loan, etc.) and c
i
is the error term. The equation is estimated
for three periods: the period 1995-2007, (before the crisis),
2008-2010 (after the crisis) and the whole period 1995-2010.
For each period the data are pooled to obtain a cross- section
data set.
The conditional difference in performance for each banking
system was conducted for each variable. Table V reports the
estimated performance gap between IB and CB systems for
various model specifications. Various models are specified
and estimated using OLS. In model 1-3, we estimated the
conditional difference using the only the dummy variable CB,
and the size of the bank. In model 4-9, various models are
estimated using bank characteristics. The conditional
difference of bank performance remains large and in favor of
International Conference on Management, Economics and Social Sciences (ICMESS'2011) Bangkok Dec., 2011
633
the conventional banking. The conditional performance
difference is lower than IBs. For instance in Table V, model 7
-9 show that the conditional difference between the
conventional and Islamic banking for ROAA are 0.807; 0.459
and 0.887 respectively in the period 1995-2007; 2008-2010
and 1995-2010. The figures for the same period for the
unconditional difference were 0.41; 1.06 and 0.85 (see Table
IV). The magnitude of the difference varies between 10% and
50%. The conditional difference also shows an interesting
story. The performance gap between IBs and CBs is shrinking
after the crisis for all the performance indicators. Model 7-9
for indicator ROAA, NIAA, ROAE, GLG, CTIR and AssetG
are decreasing from the period 1995-2007 to the period 2008-
2010. Hence, even if in general, the performance of IBs is
lower than CBs, this difference is reducing since the crisis. A
following paper will assess the following reasons of these
various performances of the banking system.
VII. CONCLUSION
This paper is a first attempts to measure the value of the
performance difference of banking systems. In this paper, we
analyzed the profitability using unconditional and conditional
differentiation econometric regression. Using balance sheet
data for 37 banks of the UAE and a compensating differential
framework, we assess the performance gap between the
conventional and Islamic banking systems. Unconditional and
conditional performance differences show that, unlike other
GCC countries, the conventional banking in the UAE is
performing better than the Islamic one. However, after the
crisis, IBs seem to close the difference for most of these
performance indicators.
As for the future research direction, it will be very
interesting to provide an understanding and explanation of the
performance gap that exists between IBs and CBs.


TABLE V
CONDITIONAL GAP BETWEEN CBS AND IBS IN THE UAE
Panel 1 Panel 2 Panel 3
(1) (2) (3) (4) (5) (6) (7) (8) (9)

1995-2007 2008-2010 1995-2010 1995-2007 2008-2010 1995-2010 1995-2007 2008-2010 1995-2010
ROAA 0.259 1.148 0.722 0.564 0.294 0.558 0.807 0.459* 0.887*

(0.539) (1.079) (0.491) (0.763) (0.244) (0.438) (0.768) (0.247) (0.458)
ROAE 16.99*** 16.70** 16.63*** 2.146 2.077 2.964 3.944 2.673 5.327**
(4.900) (8.315) (4.144) (3.989) (2.166) (2.406) (4.142) (2.193) (2.558)
NIAA 0.462* -0.137 0.269 0.153 -0.347* -0.233 0.437 0.0166 0.102

(0.274) (0.410) (0.228) (0.335) (0.192) (0.157) (0.270) (0.218) (0.142)
NIG -0.465 1.986 0.162 0.283 -1.646* -0.976* 0.524 -1.018 -0.592

(0.566) (4.076) (1.230) (0.425) (0.915) (0.516) (0.412) (1.256) (0.561)
GLG -0.268 -0.360** -0.279 0.0836 -0.137 -0.0760 0.176 -0.347*** -0.110

(0.373) (0.149) (0.263) (0.180) (0.0876) (0.0770) (0.181) (0.0946) (0.0839)
CTIR -21.49*** -32.69*** -24.70*** -11.80** -13.68*** -12.37*** -14.34** -19.58*** -15.26***

(5.808) (11.06) (5.136) (5.488) (2.984) (2.647) (5.740) (3.219) (2.811)
AssetG -0.344*** -0.220*** -0.281*** -0.0484 -0.0788 -0.0332 0.0921 -0.182** 0.0249

(0.0539) (0.0820) (0.0453) (0.175) (0.0567) (0.0700) (0.162) (0.0670) (0.0757)
Notes: The above table reports the estimated performance gap between IB on CB systems. The gap reported is the coefficient of the dummy
variable CB obtained from the following regression: (Performance indicator)
t
= CB
t
X
t
v c. where PerIormance indicator is the
profitability or productivity indicator for each bank (the dependent variable), CB
t
is a dummy variable for being a conventional bank (CB) or
not (Islamic banking system is the comparison one), X
t
set of bank related characteristics variables; ci is the error term. Three panel oI
regession are defined depending of the vector (X
t
). Panel 1 uses only the size of the Bank as the X
t
vector. A bank is defined as large if its
asset value is great than the median asset values of all banks. Panel 2 uses the leverage, the investment-capital ratio, the equity-asset ratio, the
CAR and the bank size as dependent variables (X
t
). Finally, in addition to the dependent variable of panel 2, panel 3 used equity-loan ratio, the
banks deposit ratio and the customer deposit ratio as (X
t
). Robust standard errors are in parentheses; * significant at 10%; ** significant at
5%; *** significant at 1%.
International Conference on Management, Economics and Social Sciences (ICMESS'2011) Bangkok Dec., 2011
634
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