This paper empirically investigates the difference between Islamic and conventional banks in terms of business dynamics, cost structure, credit quality, and stability. It also examines the difference in the response of two types of banks during peak and trough phases of the business cycle. The analysis is carried out for a sample of 280 banks in 20 countries over the 1995-2014 period. The results reveal that Islamic banks are more involved in fee-based business, are less cost-efficient, have higher credit quality, and have higher capitalization than conventional banks. We also find that Islamic banks outperformed conventional banks with regard to their credit quality and stability indicators during the trough phase of the business cycle. The improved performance seems to be due to the differences in the provisioning strategies of the two types of banks, the non-aggressive lending profile of Islamic banks, and investment in real assets. Finally, based on the empirical findings, the paper also highlights potential lessons that conventional banks in Baltic States, which were severely hit by the 2007-2008 global financial crisis, can draw from Islamic banking principles.

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This research aims to study the impact that banking development attributed to Islamic banks is instigating on the economic growth and domestic investment in a dataset consisting of 20 countries having Islamic and conventional banks operating side by side over the period 1995 to 2014, using the "two-step system GMM" technique. Furthermore, it also inspects the difference in the impact that Islamic banking development is asserting on economic activity as compared to the impact attributed to conventional banking development using four measures of banking sector development namely, depth of financial intermediation, size of financial intermediation, credit to the private sector, and the ratio of assets of banks to the total banking assets. Our findings suggest that Islamic banks promote economic growth and domestic investment by increasing the depth and size of their intermediation, and by extending more credit to the private sector. Conventional banking development also stimulates economic growth and domestic investment by increasing its assets as a percentage of total banking assets. Islamic banking has a more meaningful impact on economic activity as its transactions are based on physical assets and linked to the real economy. Sharī'ah promotes social justice and equity and prohibits them from undertaking harmful products and activities.