Monetary Operations and Islamic Banking in The GCC: Challenges and Options

Abstract

The assessment provides evidence of market segmentation across Islamic and conventional banks in the Gulf Cooperation Council (GCC), leading to excess liquidity, and an uneven playing field for Islamic banks that might affect their growth. Liquidity management has been a long-standing concern in the global Islamic finance industry as there is a general lack of Shari’ah compliant instruments that can serve as high-quality short-term liquid assets. The degree of segmentation and bank behavior varies across countries depending on Shari’ah permissibility and the availability of Shari’ah-compliant instruments. A partial response would be to support efforts to build Islamic liquid interbank and money markets, which are crucial for monetary policy transmission through the Islamic financial system. This can be achieved, to a large extent, by deepening Islamic government securities and developing Shari’ah-compliant money market instruments.

Performance and productivity in Islamic and conventional banks: Evidence from the global financial crisis

“…There are various reasons for the observed ROA and ROE observed patterns. The larger variability in the ROA and ROE of Islamic banks compared to the conventional banks, also found elsewhere (see, for example, Olson and Zoubi 2016;Basu et al 2015), may be, in part, driven by the fact that the Islamic banking sector in the GCC is smaller and more heterogeneous than the conventional one, comprising both old/large and new/small banks. 21 There is therefore variability in the offered products, as well as in personnel expertise and knowhow.…”

“…In contrast, the almost flat ROA and ROE observed in conventional banks could be an indication of a profit-smoothing behaviour widely practised by these banks (Safieddine 2009;Elnahass et al 2014;Abdelsalam et al 2016). The persistence of a gap in profitability between the bank types is also evidenced in Basu et al (2015), which seems, however, to be narrowing over time (Olson and Zoubi, 2016). 22…”

“…The sample data for both the FRA and the Malmquist productivity analysis are derived for banks in the 6 GCC countries from Bankscope over the period 2006 to 2012. 14 The market share of Islamic banking in the GCC is over 25%, suggesting that Islamic banks have become systemically important (Basu et al 2015). Saudi Arabia, the UAE and Kuwait are considered to be three of the 'big 4' countries (along with Malaysia) in global Islamic finance (Ernst and Young 2013).…”

“…profit and loss sharing) that is known to underperform during prolonged periods of economic crises (Grassa 2012;Olson and Zoubi 2016). This is markedly evident in the dynamics of the non-performing loans (NPL) of the two banks, which -even similar on average -peak with a two-year delay in Islamic banks (in 2012 as opposed to 2010 of conventional banks) (Basu et al 2015). In contrast, the almost flat ROA and ROE observed in conventional banks could be an indication of a profit-smoothing behaviour widely practised by these banks (Safieddine 2009;Elnahass et al 2014;Abdelsalam et al 2016).…”

Capital and Liquidity Risks and Financial Stability: Pre, During and Post Financial Crisis Between Islamic and Conventional Banks in GCC Countries, in the Light of Oil Prices Decline

“…GCC countries are chosen because they have a dual banking system, and the presence of IBs in GCC countries became more prominent, with more than 25% market share out of all GCC Banks" total assets. For example, IBs in all Middle East and North Africa (MENA) countries have only 14% market share out of all total assets of MENA banks (Basu, Prasad, & Rodriguez, 2015). Given the prominence of Islamic banking presence in the GCC counties and operating in parallel with their conventional counterparts, it is therefore imperative to assess whether IBs are sound and more stable than CBs within the three periods or the opposite.…”