This paper was quite an interesting one. I quote the abstract:
How different are Islamic banks from conventional banks? Does the recent crisis justify a closer look at the Sharia-compliant business model for banking? When comparing conventional and Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large cross-country variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality.
Given the financial crisis, this new model has quite a lot of lessons for the modern Anglo Saxon world of banking. I've been keeping track of Islamic Finance for some time now and this has changed quite a lot since the early days.
The profit sharing element has quite an interesting behaviour as they end up being better capitalised with lower loan losses. In other words, they become a sort of private equity type of firm. Interesting, I wonder if these lessons will be learned by the regulators? Or force bad performing loans to be converted into equity like the CoCo’s? Not for the banks but for the firms to which the banks have lent to?