Journal of Islamic Business and Management
Are Islamic Banks Really Different from Conventional Banks? An Investigation using Classification Techniques
Abdul Rashid, Mamoona Riaz, Atiq-uz-Zaffar
Published Online: June 2018
This paper contributes to the empirical literature on Islamic ﬁnance by doing comparison of Islamic and conventional banks in Pakistan over the period 2005-2014. We apply both non-parametric and parametric classiﬁcation methods (neural network, linear discriminant analysis, and logistic regression) to investigate whether ﬁnancial ratios can be used to distinguish between Islamic and conventional banks. Univariate analysis reveals that Islamic banks are less proﬁtable, better capitalized, more liquid, and have low level of credit risk as compared to their conventional counterparts. We also ﬁnd that Islamic banks have more operating leverage in comparison to conventional banks. The results from classiﬁcation techniques show that the two types of banks may be distinguished in terms of insolvency risk, credit risk, eﬃciency, and operating leverage, but not in terms of liquidity and proﬁtability. More interestingly, we ﬁnd that the ﬁnancial crisis has a negative eﬀect on the proﬁtability of both Islamic and conventional banks. Lastly, the results show that the neural model obtained higher classiﬁcation accuracies as compared to other models used in the study.
Islamic Finance, Islamic Banking, Conventional Banking, Classification Techniques, Liquidity, Profitability.