IMF Survey: Islamic Banks: More Resilient to Crisis?
IMF News, October 4, 2010
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Bibliographic details
- Published: October 4, 2010
Overview
- A new IMF study compared the performance of Islamic banks and conventional banks during the recent financial crisis and finds that Islamic banks, on average, showed stronger resilience during the global financial crisis.
- The study is presented in “The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study,” by Jemma Dridi (Middle East and Central Asia Department) and Maher Hasan (Monetary and Capital Market Department).
Data and scope
- Bank-level data covering 2007−10 for about 120 Islamic banks and conventional banks.
- Countries studied: Bahrain, Jordan, Kuwait, Malaysia, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates.
- These countries host more than 80 percent of the industry (excluding Iran).
- Key variables assessed: changes in profitability, bank lending, bank assets, and external bank ratings.
Key findings
- Pre-crisis (2005–07) profitability of Islamic banks was higher than that of conventional banks.
- Average profitability for 2008–09 was similar between Islamic and conventional banks, indicating better cumulative profitability for Islamic banks and suggesting higher pre-crisis profitability was not driven by greater risk taking.
- In 2008:
- Factors that helped contain the adverse impact on Islamic bank profitability included smaller investment portfolios, lower leverage, and adherence to Shariah principles that precluded financing or investing in toxic assets, derivatives, and conventional financial institution securities.
- In 2009:
- Weaknesses in risk management practices in some Islamic banks led to a larger decline in profitability compared to conventional banks.
- Causes included sectoral and name concentration (excess exposure to one sector or borrower) and, in some cases, exemptions from concentration limits.
- Size effects:
- Large Islamic banks fared better than small ones, possibly due to better diversification, economies of scale, and stronger reputation.
- Credit and asset growth:
- Islamic banks’ credit and asset growth during the crisis was at least twice as high as that of conventional banks.
- This growth is attributed to higher solvency and a larger share of lending to the consumer sector, which was less affected by the crisis in the countries studied.
- External assessments:
- External rating agencies’ reassessment of Islamic banks’ risk was generally found to be more favorable than—or similar to—that of conventional banks.
Challenges and policy recommendations
- Priorities for the industry going forward:
- building a well-functioning infrastructure for liquidity management;
- ensuring that the supervisory and legal infrastructure, including for bank resolution, remains relevant in the rapidly changing Islamic financial landscape;
- aligning reform efforts with the global financial regulatory reform agenda;
- harmonizing regulations and products to foster efficient and sustainable growth of the Islamic banking industry.
- Human capital:
- Islamic banks and supervisors will have to work together to develop needed human capital, since expertise in Islamic finance has not kept pace with the industry’s growth.
- Regulatory neutrality:
- The experience highlights the importance of having a neutral regulatory framework for both Islamic and conventional banks, for example with respect to concentration limits.
Implications
- Islamic finance is one of the fastest growing segments of the global financial industry and in some countries has become systemically important or “too big to be ignored.”
- It is estimated that the size of the Islamic banking industry at the global level was close to $820 billion at end-2008.
- Given the robust growth and relative resilience observed during the crisis, Islamic banks will likely take a growing market share in the future, implying greater supervisory responsibility and the need for harmonized, robust regulatory and supervisory frameworks.
- Industry development might be achieved through establishing large, well-managed Islamic banks that can compete with existing banks.
IMF Survey online, October 4, 2010 — “IMF Survey: Islamic Banks: More Resilient to Crisis?”