The three step filtering models in assessing and comparing the performance of Islamic and conventional banks in KSA

Abstract

Islamic banks are considered as an alternative for conventional banks in the banking industry, their performance would be different from each other. This difference is important for investors in making their investment or hedging decisions. The purpose of this study is to investigate and assess the performance of the Islamic and conventional banks in the Kingdom of Saudi Arabia during the post-Financial US Crisis period. Using a series of ratios called by us “CAPLERS”, which is an extension of CAMELS (implemented in the literature), we examine the performance of Saudi Islamic banks versus the conventional ones. To perform such a comparison, we use seven-year annual data from 2010 through 2016 and 12 banks where 4 are Islamic and 8 conventional. The empirical framework involves three sequential steps. The first step consists in filtering the ratios based on their correlation with each other. The second specifies the ratios, which contributes to the performance with respect to Tobin Q method. The third step consists of implementing Logit regression model to figure out the performance of Islamic banks compared to conventional ones. Our results show that Saudi Islamic banks exhibit higher performance than conventional ones in terms Efficiency, Capital Adequacy, Asset quality and liquidity.