Competitive conditions in Islamic and conventional banking: A global perspective

Very interesting paper. Here’s the abstract:

I analyze the competitive conditions prevailing in Islamic and conventional global banking markets, and investigate the possible differences in profitability between these markets, using a sample of banks across 13 countries during 2000–2006. The results suggest that Islamic banks allocate a greater share of their assets to financing activities compared to conventional banks, and they are also better capitalized. Different computed measures of competition indicate that Islamic banking is less competitive compared to conventional banking. A second-stage analysis shows that profitability significantly increases with market power, but this does not warrant higher profitability levels for Islamic banks.

Now the higher capitalisation might well be due to the fact that regulators usually ask for a higher degree of capital from Islamic banks. But when you compare this result with this paper which i reviewed before, then one wonders if there is really that much of a difference?

Secondly, the author finds that the Islamic Banks are not really having higher returns for devoting their attention to the Islamic customer base. The author suggests that this is more due to future revenue expectations and the western banks are getting into this market because of the rise of religiosity and customer demand.

I am not getting a clear picture of the differences then, the products are in effect the same, the same institutions are in both areas, the pricing is basically the same, risks are different but that’s mainly because of higher capital regulatory requirements. Hmmm, a rose by any other name if a bit more expensive?