Neoteric Performance Challenges for Islamic Banks: An Elucidation

Abstract

This paper aims to examine the challenges posed to the global banking environment with the advent of phenomenal growth in Islamic banking and the changing macroeconomic environment. The paper reviews different approaches to analyze the banking sector performance and the success or failure thereof. The paper also identifies the main factors affecting banking sector performance and their relative impact on the overall stability and resilience of banks. The approach of this paper is more judiciously diagnostic and synthesizing in nature. The paper covers significant studies undertaken in banking sector and synthesizes the nature of elements used to predict the predilection status of Islamic and conventional commercial banks. The findings suggest that return on equity (ROE) and weighted capital adequacy ratio (WCAR) are the most important bank-specific factors that may be used to analyze bank's performance. The findings also suggest that not only bank-specific but macroeconomic factors also play an important role in determining a bank's performance in an economy, though the effect is usually widespread. Amongst macroeconomic factors, GDP growth rate, inflation, and real interest rate are most common factors affecting bank performance. This research is different from other researches as it takes into consideration the methodological, aeon and acclimatization perspective. Most researches do not see Islamic banking as a challenge to conventional commercial banking and the banking sector in general. The paper not only reviews Islamic banking as a major element of change in the overall banking environment but also as a potential intimidator to the conventional banking stream.