A comprehensive study of the critical impact of the global financial crisis in 2008 between Islamic and conventional banks

Abstract

Financial institutions worldwide were impacted by the subprime mortgage crisis. However, Islamic banks were less affected because they are based on Islamic banking principles, protecting them from unprecedented crises. To this end, this study aims to investigate whether Islamic banks perform better in global financial crises than conventional banks. In this context, the current study’s goal is to evaluate and compare the financial performance of Islamic banks in Saudi Arabia and Conventional banks in the United Kingdom from 2006 to 2012 to explore how their performance has been affected during the 2008 global financial crisis. By following the extant literature, this study used four performance measures, profitability, liquidity, efficiency, and shareholder equity for Islamic and conventional banks. First, the study used a t-test to estimate the differential impact of the crisis on the performance of both Islamic and conventional banks. Then, the dummy variable approach was used to conduct a robustness test. This study used STATA for data analysis. Overall, the analysis found no difference in profitability between banks. However, in terms of liquidity, efficiency and shareholder equity, a significant difference between Islamic and conventional banks was observed, demonstrating that Islamic banks outperform conventional banks. The findings of this study have important implications for bank regulators and governance in implementing regulatory policies for dual banking systems.