Academic papers

Failure risk in Islamic and conventional banks

By Vasileios Pappas, Steven Ongena, Marwan Izzeldin and Ana-Maria Fuertes
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Abstract

Are Islamic banks inherently more stable than conventional banks? This paper addresses this question by comparing estimates of (un)conditional hazard rates for the two types of banks. For this purpose, we employ duration models that take into account not only the occurrence of failure but also the time-to-failure or lifetime for a cross-section of 421 banks in 20 countries during the period from 1995 to 2010. We find that Islamic banks have a significantly lower risk of failure than their conventional peers both unconditionally and conditionally on time-varying bank characteristics, market structure and macroeconomic conditions. The enhanced survival rates of Islamic banks are more strongly tied than those of conventional peers to their own liquidity position, leverage, banking sector concentration and macroeconomic conditions such as inflation. Supervisors that design and implement early warning systems of bank failure should recognize the distinct risk profiles of the two bank types.

* A previous version of the paper was circulated under the title 'A Survival Analysis of Islamic Bank Failure Risk'.

The paper has been presented at:

  • 4th International IFABS Conference on the 19th of June 2012 in Valencia, Spain
  • BMRC-QASS Conference on the 24th of May in Brunel University, London
  • NWDTC Conference on the 11th of May in Manchester University

A comparison of performance of Islamic and conventional banks 2004 to 2009

By Jill Johnes, Marwan Izzeldin and Vasileios Pappas
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Abstract

We compare, using data envelopment analysis (DEA), the performance of Islamic and conventional banks prior to, during and immediately after the 2008 financial crisis (2004-2009). There is no significant difference in mean efficiency between conventional and Islamic banks when efficiency is measured relative to a common frontier. A meta-frontier analysis (MFA), new to the banking context, however, reveals some fundamental differences between the two bank categories. In particular, the efficiency frontier for Islamic banks typically lies inside the frontier for conventional banks, suggesting that the Islamic banking system is less efficient than the conventional one. Managers of Islamic banks, however, make up for this as mean efficiency in Islamic banks is higher than in conventional banks when efficiency is measured relative to their own bank type frontier. A second-stage analysis demonstrates that the differences between the two banking systems remain even after the banking environment and bank-level characteristics have been taken into account. Our findings will be useful to both policy-makers and managers.

The paper has been presented at:

  • Second Workshop on Islamic Finance on the 17th of March 2010 in EM Strasbourg Business School
  • Durham University at the Al Qasimi Building on the 17th of May 2010
  • Princess Sumaya University for Technology (PSUT), Amman, Jordan on the 19th of May 2010

Identifying changes in mean, seasonality, persistence and volatility for G7 and Euro area inflation

By Erdenebat Bataa, Denise R Osborn, Marianne Sensier, Dick van Dijk

Abstract

This paper proposes a new iterative decomposition that tests and accounts for multiple structural breaks in the mean, seasonality, dynamics and conditional volatility of an observed time series. Each component is considered separately within each iteration, which results in greater flexibility in the number and dates of breaks, compared with procedures based on a joint test for the stability of coefficients and volatility. When applied to monthly CPI inflation in G7 countries and the Euro area (aggregate), we uncover mean and seasonality breaks for all countries and, even allowing for these, changes in persistence are generally also indicated. Further, volatility reductions are widespread in the early to mid 1980s, with some countries exhibiting increases from 1999 onwards. A robustness analysis indicates that iteration provides more evidence of persistence breaks and generally fewer volatility breaks compared with the usual approach that sequentially examines mean, persistence and volatility changes for inflation, while application of linear seasonal adjustment also reduces evidence of persistence breaks.

Changes in international business cycle affiliations

By Erdenebat Bataa, Denise R Osborn, Marianne Sensier, Dick van Dijk

Abstract

We investigate changes in international business cycle affiliations using an iterative procedure for detecting system-wide structural breaks. We analyse GDP growth rates in two systems, one with the US, Euro-area, UK and Canada and the other for the Euro-area countries of France, Germany and Italy. We discover that international dynamic interactions change in both the mid-1980s and early 1990s, with such changes being particularly important for studying influences on the aggregate Euro-area. However, contemporaneous (conditional) correlations between these Euro-area countries increase in 1984 and 1998, with a large increase in correlations also evident across the international system during the 1990s.

Reports

Annual economic review of the GCC countries 2008-2009

Issue 1, February 2010
Efficiency of Islamic and conventional banks in the GCC
By Jill Johnes, Marwan Izzeldin and Vasileios Pappas

Issue 2, March 2010
The Gulf currency: lessons from the Euro
By John Whittaker

Issue 3, May 2010
Impacts of oil shocks: implications for GCC economies
By Erdenebat Bataa

Issue 4, July 2010
Determinants of banking fragility: comparing Islamic and conventional banks - an application of survival analysis
By Vasileios Pappas

Issue 5, October 2010
Taxation in the GCC region
By Martin Harrison

Issue 6, August 2011
The outlook for Islamic REITs as an investment vehicle
By Momna Saeed