Performance of Islamic and Conventional banks: The Impact of Basel III

Abstract

Purpose: To overcome the deficiencies of the Basel II and to respond the
great depression of 2008, Basel III is designed to lower the default risk
of banks. However, the unique business model and capital structure of
Islamic banks is ignored at this point. A common banking regulation for
two different types of banks may have a different impact on the profitability
and cost efficiency of these banking types. In this regard, we address the
question of the relative performance of both banking types in response to
Basel III standards.
Methodology: The study utilizes data of 79 banks, both Islamic and
conventional, for the period of 2005 to 2019 from 10 different countries.
For estimation, the study uses fixed-effect regression analysis.
Findings: We find a positive impact of Basel III regulations on profitability and cost efficiency of the Islamic banks and a negative impact
on conventional banks. The findings indicate that the favorable impact
of Basel III on Islamic banks reduces the performance gap between both
types of banks.
Originality/Significance: This is perhaps the first paper which empirically explores the impact of Basel III regulations on the comparative
performance of both types of banks.
Policy Implications: The declining profitability and cost efficiency of
conventional banks draw the attention of global and local banking regulators. Basel Committee on Banking Supervision (BCBS) and central banks
of the countries with dual banking models should address this negative
effect of the implementation of Basel III on conventional banks.
KAUJIE Classification: L12, L25
JEL Classification: G21, G32