Comparative Analysis of Islamic and Conventional Banks in the UAE During the Financial Crisis

This study analyzes the performance of Islamic and conventional banking systems in the UAE during the financial crisis. The study compares the two banking sectors, in terms of; capital adequacy, profitability, liquidity and leverage. The purpose of this analysis is to determine which banking system has adequate performance and was more stable during the financial crisis.

Asian Economic and Financial Review, 2016, 6(6): 298-309
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† Corresponding author
DOI: 10.18488/journal.aefr/2016.6.6/102.6.298.309
ISSN(e): 2222-6737/ISSN(p): 2305-2147
© 2016 AESS Publications. All Rights Reserved
COMPARATIVE ANALYSIS OF ISLAMIC AND CONVENTIONAL BANKS IN THE
UAE DURING THE FINANCIAL CRISIS
Issam Tlemsani1† --- Huda Al Suwaidi2
1Department of Finance and Economics, Qatar University, Qatar
2Senior Internal Auditor, Abu Dhabi Securities Exchange
ABSTRACT
The discourses of Islamic and conventional finance differ according to the principles of Islamic finance there is no
separation of the spiritual and the secular. Islamic finance is explicitly concerned with spiritual values and social
justice, in contrast to conventional finance, which is based on the maximization of individual utility, welfare and
choice, as expressed for example in the shareholder value model. Islamic and conventional banks respond differently
to financial shocks. This study analyses the performance of Islamic and conventional banking systems in the UAE
during the financial crisis. The study was undertaken in two stages, first a comparative analysis one Islamic and one
conventional banks from 2007 until 2008. Secondly, a cross sectional analysis, between the Islamic (8 banks) and
conventional banking sector (43 banks) that operated in the UAE during the period 2007-2008 was undertaken.
© 2016 AESS Publications. All Rights Reserved.
Keywords: Islamic finance, Banks performance, Banking stability and risk management.
Contribution/ Originality
This study contributes in the existing literature and help to the understanding of Islamic finance principles and its
value as a solution to the current and any future financial crises. The findings of this research will be of interest to
conventional and Islamic financial practitioners, policy makers and academicians.
1. INTRODUCTION
The discourse of Islamic banking involves: (a) equity rather than debt, (b) financing in strict relation to assets
rather than leverage, (c) transparency and information sharing between investor and the manager, (d) diversification
of risk by risk sharing. In contrast, the discourse of conventional finance failed as a result of: (a) too much debt, (b)
overleveraging of assets and (c) excessive securitization and creation of new assets that were neither transparent nor
understood.
The focus of this research paper is to evaluate and compare the performance of Islamic and conventional banks
during 2007-2008 in the UAE. The study compares the two banking sectors, in terms of; capital adequacy,
profitability, liquidity and leverage. Analyzing different bank’s performances during the financial crisis allows for an
assessment of the bank’s capability to withstand shocks and depressions (stress test).
The banking industry in the UAE is well developed. The UAE Central Bank was established in 1973, in the early
stages it operated under the name UAE currency broad. In December the 10 th 1980, as per union law, The Central
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Bank was formed and was given broader authorities in terms of the monetary system and supervision of banks. The
rapid growth in the UAE’s economy is reflected also in the growth of The Central bank’s activities such as but not
limited to: credit, foreign assets, capital and shares. Figure 1: below illustrates the progress in different activates by
The Central Bank of the UAE from 1980 to 2007.
Figure-1. The Central Bank's activities
Source: Central Bank of the UAE Data 2008
UAE government established the first federal law regarding allowance for Islamic banks activities in 1985. Table
1: below demonstrates the coverage of the banking system in the UAE as of October 31st 2012.
Table-1. Banks in the UAE
Type of financial institutions in the UAE Headquarters in the UAE Number of branches in the UAE
UAE national banks 23 922
Gulf countries banks 6 1
Foreign banks 22 136
Business banks 4 -
Offices of international banks
and financial companies
113 -
Financing companies 25 23
Investment finance companies 23 25
Exchange companies 120 677
ATM machines 4346 -
Source: Central Bank of the UAE Data 2012
1.1. Islamic Financial System
One of the key differences between conventional and Islamic banking is the ban on Riba (usury); riba is any
return/addition/increase for the use/rent of money. Islamic financial institutions must “trade” in real assets or services.
There are several reasons for the prohibition of riba such as Unjust; a contract based on interest involves injustice to
one of the parties, the lender or the borrower. Penalizing someone for default is unjust; a judge should decide the
amount of any compensation for a default, not the party to whom the debt is owed. Qur’an (2:279) “clearly states that
taking an amount in excess of the principal would be unjust”. And Implies Unlawful Appropriation of Other People’s
Property; Interest on money is regarded as representing an unjustified creation of instantaneous property rights. It is

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unjustified, because interest is a property right claimed outside the legitimate framework of recognized property
rights.
1.1.1. Non Riba (Usury) Finance
Islam has always emphasized the importance of risk sharing system which has a number of (competitive)
advantages over the system of based upon pre-determined interest rates. We can innumerate some standard properties
of riba finance according to Islamic finance scholars as follows:
Inefficiency
 Interest results in an inefficient allocation of resources since the investible funds go to the more creditworthy
borrowers rather than to more productive projects.
 Debt finance based on predetermined and guaranteed rates of return on money has unlinked capital movement
from the production processes it is supposed to finance.
Money verses real market
 Money creation in a system of debt finance is based on lending, which makes it prone to oversupply, as there is
no direct linkage between additional production and additional money supply.
Public sector
 Public sector borrowing, when it is not backed by tangible assets, raises a debt burden for future generations.
Islamic asset-backed financing does not constitute a debt burden as assets are available which can be liquidated
to repay the debts.
Price level
 Inflation will be minimal (under an Islamic finance system) as the money supply will be correlated to economic
activities.
Islamic finance encourages individuals to share business risks in return for reward with the understanding that the
level of the expected reward is related to the level of risk. What is condemned in Islamic banking is the notion of a
risk free reward or return which is in contrast to conventional banking principles. Islamic banking principles do
recognize the time value of money but provided that profits are earned through trade and not on lending money. The
distinguishing factors between Islamic from conventional banking are:
 Gharar (uncertainty): Any contract based on a future of uncertain event within Islamic banking is not generally
allowable this includes dealing in conventional derivatives and options.
 Maysir (gambling): Speculative mentality transactions creating towers of debt based on speculation.
 Halal business: Islamic (Sharia) law prohibits dealing in some products or activities e.g. pork, interest based
finance, debt, gambling, alcoholic liquor...etc.
2. LITERATURE REVIEW
Parashar (2010) compared selected conventional and Islamic banks on five performance parameters; capital
adequacy, efficiency, profitability, liquidity and leverage. Their analysis suggests that during the crisis Islamic
banking, were impacted more in terms of capital adequacy and leverage while conventional banking more in terms of
return on average assets and liquidity. For full year analysis the study found that Islamic banks performed better than
conventional banks for the period 2006-2009. The study suggests that Islamic banks did suffer during crisis in terms
of lowering of CAR, E/TA and ROAE.
Loghod (2008) compared the financial performance (profitability, liquidity and structure) of Islamic and
conventional banking from 2000 - 2005. The study found no significant differences in terms of profitability.

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However, the key differences found were; Islamic banks are less exposed to liquidity risk, and conventional banks
depended more on external liabilities than Islamic banks.
Zaki (2012) looked at the following two interrelated research issues: Identifying and explaining the determinants
the financial turmoil in the UAE’s financial markets and evaluating the impact of the UAE’s government bailouts on
the UAE’s economy in the short and long run. The findings were that the government saved the troubled banks
through bailouts and drawing down FXRES (Government economic activity). The timing of the increase in the ratio
of leverage risk measures of the banking system and reserve adequacy (liquidity risk) of the UAE’s economy is
consistent with the model’s prediction that the government’s bailouts and foreign reserve policy played a crucial role
in reducing the adverse reaction to the financial crisis in 2007 - 2008. These developments significantly contributed to
the positive expectations in the market. The result was survival of the banking sector with the confidence of market
participants intact.
Beck et al. (2010) observe that Islamic banking have lower overhead costs and cost-income ratio and higher
returns over asset but capital asset ratios is smaller. Islamic banks have higher fixed asset ratio and lower non-interest
earning asset ratio. Maintaining a high fixed asset ratio implies that the Islamic banks are managing their assets more
efficiently and profitably than conventional banks.
Viverita (2010) analyzed the performance of Islamic compared to conventional banks in Indonesia. Different
ratios were used and they found that the cost efficiency ratios were lower in Islamic than the conventional banks in
addition the revenue and profit efficiency ratios were higher in Islamic banking. Also the Islamic banks net interest
margin (NIM) have maximum of 0.182, while conventional banks have 0.097. Furthermore, the operating income to
average asset in conventional bank was 0.006 while in the Islamic bank the mean was 0.013. Islamic banking is
generating higher income from its asset, which is a positive indicator of revenue efficiency performance in Islamic
banks.
Mobeen et al. (2011) studied the top 10 Islamic and conventional banks performance during the financial crisis,
they found that the aggregate net profit for the conventional banks observed a drop while Islamic banks experienced
an increase in their net profit in the same period. Moreover, the leverage ratio (asset/equity) for conventional banks
increased from 16.6% in 2006 up to 18.2 in 2008, however, Islamic banks leverage ratio was 5.8 in 2006 boosted to
6.6 in 2008. The leverage ratio measures the firm’s long term solvency, the ability to meets its obligation, as the
leverage ratio is smaller it means that the firm is using less debt.
Rashwan (2010) assessed the performance of Islamic and conventional banks from 2007 to 2009 in terms of
return on asset and on equity, net loan to total asset and loan loss reserve to gross loan. They used data from 46
Islamic banks and found that Islamic outperformed conventional bank in 2007, but in 2008 there was no significant
difference between the two banking systems. However, conventional outperformed Islamic banks in 2009. they
summarized that although there was no significant difference in terms of performance in 2008, the financial crisis
impacted both banking systems, yet the impact on Islamic banks was limited to a decline in returns.
Toumi et al. (2008) studied the performance of Islamic and conventional banks in the period 2004 - 2009 in
terms of profitability, leverage ratios, return on asset/equity, net margin, dividend payout, total debt to common
equity, long term debt to common equity, total debt to total asset and the size of the bank asset they used a sample of
50 Islamic and 59 conventional banks from 18 countries. Their findings is that Islamic have lower debt to equity ratio
than conventional banks, 7.8 times and 11.48 times for Islamic and conventional banks respectively. Islamic banks
rely more on shareholder capital, unlike conventional banks which relies more on debt to structure the bank.
Moreover, in terms of profitability, they found that Islamic have higher ROA than conventional banks and lower debt
to asset ratio than conventional banks, in terms of long-term debt to common equity. The study found significant

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difference between Islamic and conventional banks; Islamic banks have lower debt to asset ratio than conventional
banks. The findings can be interpreted that Islamic banks have lower leverage than conventional banks.
3. RESEARCH METHODOLOGY
This research implemented a case study and cross sectional analysis on Islamic and conventional banks during
the years 2007 and 2008 in the UAE. The purpose of this analysis is to determine which banking system has adequate
performance and was more stable during the financial crisis in terms of capital adequacy, profit, liquidity, and
leverage. The case study analysis was executed on two chosen banks, Abu Dhabi Islamic Bank (ADIB) and Abu
Dhabi Commercial Bank (ADCB) for the period 2007 and 2008. There are several reasons for the choice of these two
banks, the study focus on local banks to measure accurately which of the two banks sectors, Islamic or conventional,
performed adequately. Secondly, the two banks are suitable for analysis in terms of asset size. Thirdly they both have
a large market share, and both banks have a wide coverage in the UAE, ADIB have 69 branches and ADCB has 48
branches in the UAE. Moreover, both banks were established in 1997, putting these two banks at relatively the same
phase in their business cycle.
A cross sectional analysis was conducted for the period 2007 - 2008. The purpose of this analysis is to observe
the performance of the whole population of the two systems, Islamic and conventional. Executing a cross sectional
analysis between Islamic and conventional banks provides a macro representation of the performance of the two
banking sectors in the UAE. Additionally, this is a pioneering research topic since all previous research papers
focused on the aggregate performance of Islamic banks in the GCC countries.
Financial ratio analysis has been executed to assess the performance of Abu Dhabi Islamic Bank (ADIB) and
Abu Dhabi Commercial Bank (ADCB). Balance sheet and income statement for both banks in year 2007 and 2008
have been obtained as a resource for the financial ratios analysis. The following ratios were observed return on asset
and on equity, asset utilization, profit margin, liquidity, debt to equity ratio and equity to net loan ratio. For the cross
sectional analysis, similar ratios where observed to determine which financial system performed better during 2007-
2008 in terms of capital adequacy, profitability and liquidity. Several ratios were added in the cross sectional analysis
including; tier one, nonperforming loan ratio, liquid asset to total asset, loan to total asset and loan to total deposit
ratio.
To measure Islamic and conventional banks’ performance during the financial crisis several financial ratios have
been used. These financial ratios are: capital adequacy ratio, profitability ratios, return on asset ratio (ROA), return on
equity ratio (ROE) & nonperforming loan ratio (NPL), liquidity ratio, the current ratio, liquid asset to total asset ratio,
loan to total asset ratio, loan to total deposit ratio (LTD), profit margin ratio (profitability), asset utilization ratio
(efficiency), leverage and insolvency ratios & debt to equity ratio.
There are various ways in which the liquidity, leverage and profitability of the banks can be studied. Using ratios
as financial performance indicators for banks is a commonly used tool in the financial studies. The common way of
measuring the financial performance of a bank is to calculate its ratios and compare it with the past to make
interpretations (Cornett et al., 2011) and Oberholzer and Westhuizen (2004). The following ratios will be used as a
framework for analyzing;
 Liquidity: Liquidity ratios measure the ability of the bank to meet the short term financial obligations. Most
commonly three ratios are used to measure the liquidity of the bank; loan to deposit ratio, cash & portfolio
investment to deposits and loan to total assets.
 Profitability: The earnings ratios or the overall profitability ratios indicate how efficient the concern is in
utilizing the assets. For the purpose of measuring; profitability return of assets, return on equity and earning per
share have been taken.

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4. FINDINGS
First in in terms of generating profit from asset, in 2007 Abu Dhabi commercial bank (ADCB) has a higher
percentage compared to Abu Dhabi Islamic bank, (ADIB) 1.96% and 1.7% respectively. There is a decrease in ROA
in 2008 for ADCB almost 0.919% and for ADIB 1.6%. This fact could be a result of the reliance of Islamic banks on
real assets as Sharia encourages owning real assets rather than derivatives. This can be interpreted as the financial
crisis impacting conventional banks more in terms of generating revenue from assets because there is a sharp decline
in ROA for ADCB in 2008. The findings for the analysis is different to Rashwan (2010) where the researcher
concluded that there is no difference in the return over asset between Islamic and conventional banks in 2008, the
financial crisis impacted on both Islamic and conventional banks. The observation in the UAE is different since
Islamic banks have higher ROA than conventional banks in 2008. In our case we notice a higher impact of the
financial crisis on Abu Dhabi commercial bank than Abu Dhabi Islamic bank in terms of profitability and ROA. The
findings are in line with Toumi et al. (2008) which they suggested the ROA for Islamic banks, is slightly higher than
conventional banks. The results also support (Sehrish et al., 2012) whose finding were identical regarding the
profitability of Islamic banks being higher compared to conventional banks between 2007 to 2008. From the ROA of
both banks it can be interpreted that Islamic banks reliance is on real assets, tangible rather than financial instruments,
which is why Islamic banks maintain a higher ROA than conventional banks. The conventional bank purchased
different types of assets such as financial derivatives, that is why they were adversely affected by the crisis.
Table-2. ROA for ADIB and ADCB
Banks ADIB ADCB
Years 2007 2008 2007 2008
ROA (%) 1.7 1.6 1.96 0.92
Source: ADIB & ADCB Balance Sheet 2007 - 2008
In terms of return on equity there is a remarkable increase in return on equity holdings of Islamic banks
compared to conventional banks. Significant increases in ROE during the financial crisis evidences the sustainability
of the Islamic banking system. From an investor perspective, investing in Islamic banks is safer and more certain in
terms of return. ADIB had ROE ratio 14.2% and 15.1% in 2007 and 2008 respectively. However, ADCB’s return
over equity was decreased compared to ADIB 18.2% and 8.53% in 2007 and 2008 receptivity. The increase in ROE
for Abu Dhabi Islamic Bank is a very significant indicator that can be interpreted that the Islamic banking
System provides adequate return for shareholders even in financial crisis compared to the conventional banking
system. The finding is in line with a (Toumi et al., 2008) which concluded that Islamic banks maintain a slightly
higher ROE relative to conventional banks during the financial crisis.
Table-2.1. ROE for ADIB and ADCB
Banks ADIB ADCB
Years 2007 2008 2007 2008
ROE (%) 14.2 15.1 18.2 8.53
Source: ADIB & ADCB Balance Sheet 2007 - 2008
In terms of efficient asset utilization, the financial crisis has impacted both financial institutions. The asset
utilization of both banks decreased, for ADIB the asset utilization decreased from 6.5% to 5.9% in 2007 and 2008
respectively. On the other hand ADCB’s decreased from 3.5% to 2.9% in 2007 and 2008 respectively. Although the
financial crisis impacted both banks, Islamic banks have higher asset utilization percentage than conventional banks.
The findings of the analysis is different than the results produced by Sehrish et al. (2012) which determined that asset

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utilization for Islamic banks was lower than conventional banks during the financial crisis in Pakistan. In the UAE
asset utilization in Islamic banks during the financial crisis decreased but it was higher than conventional banks.
Table-2.2. Asset Utilization ratio for ADIB and ADCB
Banks ADIB ADCB
Years 2007 2008 2007 2008
AU (%) 6.53 5.94 3.5 2.99
Source: ADIB & ADCB Balance Sheet 2007 - 2008
ADCB in year 2007 had a higher liquidity ratio than Abu Dhabi Islamic Bank 34.5% and 9.27% respectively.
Yet, in 2008 Abu Dhabi Islamic Bank exceeded Abu Dhabi Commercial Bank with a high percentage of liquidity
10.14% and 6.20% respectively. There is a decrease in the liquidity ratio for Abu Dhabi Commercial Bank, yet Abu
Dhabi Islamic Bank’s liquidity ratio increased between 2007 and 2008. This finding demonstrates that Islamic banks
maintain an adequate level of liquidity compared to conventional banks during the financial crisis. This finding is in
line with Ika and Abdullah (2011) who conclude that there is a significant difference, Islamic have better liquidity
ratios than conventional banks. When the bank maintains high liquid asset, as a result it will have a high liquidity
ratio, so the bank can mitigate liquidity risks.
Table-2.3. Liquidity for ADIB and ADCB
Banks ADIB ADCB
Years 2007 2008 2007 2008
Liquidity (%) 9.27 10.14 34.5 6.2
Source: ADIB & ADCB Balance Sheet 2007 - 2008
In terms of leverage, the result of the analysis illustrates that Abu Dhabi Islamic Bank has a lower percentage of
total debt to equity compared to Abu Dhabi Commercial Bank which was 7.1% and 8.3% in 2007 respectively.
Moreover in 2008, although Abu Dhabi Islamic Bank increased its ratio to 8.0% Abu Dhabi Commercial Bank
decreased to 8.28%, Abu Dhabi Islamic Bank maintained a lower ratio during the financial crisis. The result of the
analysis is in accordance with previous research papers conducted by Toumi et al. (2008) that accomplish the same
result; Islamic banks have lower debt to equity ratio compared to conventional banks. This demonstrates that the
Islamic banking system is less risky compared to the conventional bank system. The low leverage ratio for Islamic
banking indicates that, an Islamic bank is better at absorbing shocks in financial crisis, implying that Islamic banks
are safer in the financial crisis.
Table-2.4. Debt to equity ratio for ADIB and ADCB
Banks ADIB ADCB
Years 2007 2008 2007 2008
Debt to equity ratio (%) 7.12 8.08 8.3 8.28
Source: ADIB & ADCB Financial Statement Sheet 2007 - 2008
4.1. Cross Sectional Analysis
Figure 2 below describes the total assets of Islamic and conventional bank percentage to the UAE’s GDP in
2007-2008. The graph shows the conventional banks total assets decreased from 109.7% to 106.3% in 2007-2008
respectively. On the other hand Islamic banks experienced an increase in its total asset from 18% to 19.7%. The
increase in Islamic banks total asset to the UAE GDP is slight but it is significant in the specified years since most
conventional banks experienced a decrease in their total asset to the UAE GPD.

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Figure-2. Total assets of Islamic and conventional Banks to the UAE's GDP
Source: Central Bank of the UAE Data 2007 - 2008
Figure 3 illustrates the market share for Islamic and conventional banks in the UAE during 2007-2008. As the
graphs shows, conventional banks have more market share in the UAE than Islamic banks but during the period under
study Islamic banks experienced an increase in their market share from 14.2 to 15.7 billion, conventional banks
market share decreased from 85.8 to 84.3 billion. There was a very small in increase the market share of Islamic
banks in the UAE, but compared to conventional banks it is a positive indication of Islamic banks resilience in
shocks.
Figure-3. Market share of Islamic and convention banks in the UAE
Source: Central Bank of the UAE Data 2007 - 2008
4.2. Profitability
In the cross sectional analysis, the return on assets for Islamic and conventional banks were both impacted by the
financial crisis. ROA for Islamic and conventional bank was 2.2% and 2.0% in year 2007 respectively. The following
year both banks ROAs have decreased to 1.4% and 1.9%, Islamic and conventional bank respectively. Moreover in
terms of return on equity, both banking systems in the UAE experienced a decrease, for Islamic it decreased from
18% to 12.5%. Conventional bank also had a decrease in return on equity from 21.7% to 18.2%. This finding is not in
line with the previous research project done by Viverita (2010) which finds that Islamic banks have higher ROA and
ROE than conventional banks in the year 2007 and 2008.

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In terms of nonperforming loans, both banks had an increase in their ratios but conventional bank have a higher
number of nonperforming loans than Islamic banks. It increased from 18.8 to 20.8 billion UAE dirhams for
conventional banks, while for Islamic banks it increased from 2.1 to 4.6 billion UAE dirhams. This is a significant
finding, as according to Hanif et al. (2012) findings a high nonperforming loan ratio is a major contributor to liquidity
risk.
The result shows that Islamic banks execute good credit analysis, low nonperforming loans ratio explains that
Islamic banks were more conservative in expanding their capacity in lending. The low NPLs ratio indicates that
Islamic banks restrict their lending activities, which as a result mitigating the liquidity risk.
4.3. Liquidity
In terms of liquid asset/total asset ratio, Islamic banks maintained higher ratios than conventional bank during the
two years. In 2007 Islamic banks liquid asset to total deposit were 22.7% and for conventional banks it was 11.3%.
The following year there was a decrease in both banks liquid asset/total asset ratio, which suggest that the financial
crisis impacted on both sectors, yet Islamic banks maintained a higher ratio than conventional banks, 17.3% and 4.1%
respectively. The analysis demonstrates the solid structure of assets in Islamic banks, since it maintains a higher
liquid asset to total asset ratio. Maintaining a high liquid asset to total asset ratio implies that Islamic banks are safer
in terms of liquidity, which leads the Islamic bank to avoid the main problems that spread in financial crisis, which is
illiquidity.
In terms of loan to total asset, Islamic banks have a higher ratio in 2007, 62.2 and conventional banks had 56.8.
In 2008 Islamic and convectional banks increased their ratio 66.7 and 68.4 respectively. The result indicates that
Islamic banks in 2007 were relying more on loans to generate profit income (Murabaha and Musharaka) than
conventional banks. However, in 2008, the conventional banks experienced a steeper increase in the ratio of loan to
total asset, which indicates that conventional banks were relying more on loans to generate income. As the bank
maintains lower loan to total assets, it means the bank is diversifying its asset portfolio. The finding is not in line with
results accomplish by Fayed (2013) who concluded that conventional banks outperformed Islamic banks between the
year 2008 to 2010 in terms of loan to total asset in Egypt.
Loan to deposit ratio shows an increase for both banks between 2007 and 2008, from 87.0 to 90.5 for Islamic
banks. Conventional banks achieved a higher loan to deposit ratio it was 98.6 and 110.7 respectively in the two years.
This finding suggests that both banks increased their lending activities, however, conventional banks maintain a
higher loan to deposit ratio (LTD). As the bank recorded a high LTD ratio it indicates that the bank is using more of
its deposits to lend which can expose it to liquidity risk. The fact that Islamic banks maintain lower LTD ratio, could
be interpreted as Islamic banks are less risky in terms of liquidity than conventional banks in the UAE during the
financial crisis.
5. CONCLUSION
The financial crisis has impacted the global banking system around the world, yet Islamic banking has been
displaying better performance. Particularly in the UAE, the performance of Islamic banks has shown competitive
enhancement compared to conventional banks in the period 2007-2008. The study finding reveals the following:
Firstly; on macro level analysis both banking sectors were impacted negatively by the crisis as evidenced by the
decrease in terms of ROA and ROE. This finding is supported by previous research by Rashwan (2010) that there is
no significant difference between Islamic and conventional banking in terms of ROA.
In terms of the cross sectional analysis, the market share and total asset of the Islamic banking industry maintains
a higher percentage compared to conventional banks. Secondly; the analysis reveals that Islamic banks preserve a

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higher percentage of liquidity than conventional banks in the UAE during the financial crisis. Thirdly; in terms of
non-performing loans, Islamic banks maintain a lower percentage than conventional banks, which can be translated as
a good quality, credit screening conducted by Islamic banks.
Overall, the effect of the financial crisis was limited on Islamic banks; Islamic banks were affected in terms of
ROA and ROE mostly. In terms of mitigating liquidity risk and insolvency, Islamic banks were outperforming
conventional banks as Islamic banks managed to have a high percentage of liquid asset. As a result the Islamic banks
were less likely to have liquidity problems and bankruptcy declarations, because they are not allowed practicing
banking activity that was directly linked with debt instruments.
The Islamic approach emanates from a foundation set of ethical principles. therefore discussion of Islamic
finance in connection with global financial practices introduces an ethical dimension that is welcome. Khan (1986)
believes that Islamic finance potentially has appeal for the mainstream as well as Muslim consumers because of its
ethical basis: "Islam teaches us that money should be channeled toward the 'real' economy, the production of real
goods and services and not the 'financial' economy such as hedge funds and derivatives," he argues, "It keeps us in
touch with the real economy and away from speculation and Islamic system of finance might create a more stable
world financial market "i.
The real roots of the financial crisis are in the attempt to construct a financial system, a materialist heaven, in
denial of limitation and mortality that are the realities of living in time and space. The promise was unbounded
exponential growth, extending infinitely to a paradise of consumption.
Would Islamic finance based on profit and loss sharing, if adopted universally, avoid such sequences of events?
The answer is probably: yes 1. The financial authorities in the USA and the UK are not forthcoming about how they
have computed stress tests, using the ratio TCE/TA (tangible common equity /tangible assets). A 4% ratio is
equivalent to 25 times leverage of assets (holding of business and other debt as a proportion of bank equity).
Immediate pre crisis levels of leverage were very often more than twice this level. Equity based system and profit/loss
sharing based on tangible assets would clearly more than meet this criterion, on reasonable assumptions about the
contribution of enterprise. Equity would provide the buffer against failure. Overoptimistic estimates of the value of
enterprise would be problematic though, and Islam has not developed bankruptcy laws, so failure could be diffused
and not confined to the original investment partners.
We could cite a number of Quranic messages: that God does not change the condition of a people until they
change their own inner selves” (Quran 13:11); Mankind was created as one nation, but they became divided because
of differences among them” (Quran 10:19). We are reminded of Al Fatiha and al-rrahmani al- rraheemi, most
Gracious, most Merciful. Illa an yashaa, if God so wills (Quran 18:24-25). Let’s see.
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financial sector is immense and destructive.

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Appendix
Conventional Banks
Year Profit (million) Profit Growth (%) Market Share Asset (%) to GDP
2007 20751 28.1 85.8 109.7
2008 23423 12.9 84.3 106.3
Islamic Banks
Year Profit (million) Profit Growth (%) Market Share Asset (%) to GDP
2007 3695 49.5 14.2 18
2008 3102 -16 15.7 19.7
i Mark Tran Monday May 27, 2002; Guardian. UK.
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