Comparison of Deposits between Conventional Banks and Islamic Banks: The Case of United Arab Emirates (UAE)

  1. Introduction

There are distinct differences between the Islamic and the conventional systems of banking, but the major difference is that Islamic banking largely relies on the sharia principle while the conventional banking system is based on interest rates. The sharia-based financial systems majorly encompass the sharing of profits and risks while the interest rate dependent conventional banks utilize the opportunity cost of money. The performance of the banking sector determines the escalation of an economy as it is the link between the investors and the financiers. Currently, the two banking systems have adopted a dual regulatory environment working relationship, with tight competition between them to attract new clients and fulfil their objectives and goals Zarrouk, Ben and Moualhi, 2016). The increased development of new financing methods and tools have escalated this, thereby creating long-term economic growth.

In the case of the United Arab Emirates (UAE), these two types of banks are jointly doing business together in an incredibly competitive market. According to Tabash and Anagreh (2017), the growth of the UAE economy was largely boosted by the performance of Islamic banks compared to conventional ones. This is largely due to their adequate cushion and countermeasure of the 2008 global financial crisis. The crisis partially affected them, and thus, they outclassed the non-Islamic banking institutions in performance.

In UAE, the government and the financial settings has given more support and attention to the Islamic banking systems. As the Emirates Diary (2015) highlights this is evident from the activities of the Dubai Emirates, which is on course to becoming a leading Islamic banking and financial institution in the globe. Emirates diary further highlights that there are a total of 45 banking institutions in UAE (both Islamic and Conventional), with 5 operating fully under the standards of Islamic finance, 18 have incorporated the Islamic financial tradition and systems and the other 22 are international banks.

  1. Study Aim

Understanding the financial performance of a banking system or institution plays a significant part in decision-making for the depositors in deciding the right place to deposit their savings. As such, this research study will offer a comparison of the profitability between the two banking systems, specifically in the United Arab Emirates. The study will analyze the depositing trend between conventional and Islamic banks during the period of 2017 – 2018. The study will aim to answer the question:

  1. Which system between Islamic and Conventional banks performed effectively during the studied period?
  2. Is there a significant difference between the depositing patterns between the two banking systems in UAE?
  3. Which systems is most preferred by customers for cash deposits, and why?
    1. Study Outline

The research study is divided into five (5) sections:

Section 1: Provides a brief introduction on the study topic and the most commonly observed significant differences between Islamic and conventional banks.

Section 2: This section of the study provides the research history and an inclusive literature review of the two banking systems, highlighting various key findings that differentiate the two systems. In addition, the section provides the difference between the current research and existing researches on the same topic in UAE.

Section 3 of the research highlights the available data for Islamic and conventional banks in United Arab Emirates, specifically on their depositing and customer preferences.  

Section 4 offers the data analysis and results of the study, providing ratio calculations, charts, graphs, and other relevant information to answer the research question.

Section 5 is the last part of the study and provides the research conclusion.

  1. Research Methods

The study uses annual data for a period of four years from 2015 through to 2018 in an annual frequency. First, the data used in the study are majorly retrieved from the Central Bank of UAE database, with the choice of the years based on data availability. Secondly, the study generally analyzes the two banking systems and is not based on specific Islamic and conventional banks. The study utilized a convenient sample of UAE bank consumers since it was not possible to use all the consumers in the study. Consequently, the banks could not release confidential data of their customers, and thus, the study could not classify them in groups for the purposes of research. It utilized quantitative self-made questionnaires, distributed either to the customers through the bank managers or independently distributed by the researcher.   

The research will measure the performance index of the two banking systems using financial ratios in order to identify that underlying factors of their deposits performance. The study will utilize statistical analysis as the main analysis instrument of the available data.

The common way of examining the performance of a bank or a financial system is by computing its ratios and making comparisons with the previous years in order to make interpretations. Furthermore, financial ratios are the commonly used performance indicators for financial institutions in various studies.    

  • Literature Review

Various studies have analyzed the performance ratios of the two banking systems and linked the results to the economic growth of a nation as it is important to the shareholders, managers, and investors, as well as a signal indicator to the depositors. According to Zarrouk et al., (2016) conventional and Islamic banking system distinctly utilize differing principles, experience, and regulations. Their financial intermediation strategies also differ, with Islamic banks combining investment banking operations and banking activities. Still the idea of Islamic banking is taking in multiple financial institutions around the globe creating interest to non-Muslim believers.

In the case of Malaysia, Adnan & Ramlan (2015) notes that the profitability ratio is higher in Islamic banks compared to conventional banks. They further highlighted that ROA and ROE are significant profitability determinant factors for Islamic banks while ROE is for conventional banks. On their part, Tarmizi and Wasiuzzaman (2017) notes the inverse proportionality of asset and capital quality to profitability as well as the effects of liquidity and operational efficiency to the two-banking system.

Examining the performance of both conventional and Islamic banks in Malaysia, Kamaruddin & Mohammed (2013) highlighted that Islamic banks are more profitable than conventional banks. Zahid later stressed this with Hussein, and Azizuddin (2016) explaining the model of Islamic banking accommodates a broad spectrum of products and offering. The three agreed that this would explain the current interest in Islamic products.

Another study sought to examine the practicability of the two systems in the Arab League, noted that the 2008 fiscal crisis had minimal impact on the Islamic banks compared to conventional banks in the Arab league. As Siraj and Pillai (2012) further explain similarly, the study highlighted that Islamic banks are financed through equity while their conventional peers acquire financing via borrowed funding. The proportion of the equity according to the study was 73.80% for Islamic banks and 55.12% for conventional banks. As such, the operating income grew much faster in Islamic banks compared to conventional banks. They utilized 6 Islamic and 6 conventional banks, valuating their operating expenses, operating income, assets, total equity, and profits as the dependent variables. And through the ANOVA test performed by the study, there was a distinguishable difference of the Islamic banks from their conventional peers in terms of Return on Equity (ROE) and Return on Assets (ROA).

Detailed analysis of the application has been done by other researchers who utilized the CAMEL framework to solve the challenges of quality in management, quality of assets, liquidity portions, capital adequacy, and earning ability of 5 Islamic and 5 conventional banks. In their study Jaffar and Manarvi (2011) highlighted that Islamic banks financed assets through equity while conventional ones through debt. It noted that this was the main reason for higher security levels in the Islamic banks. According to the research, conventional banks gained more profit from their assets compared to Islamic banks. Moreover, both banking systems experienced higher default hazards and obligations due to the utilization of higher loan to asset ratio. In comparison, there was a lower loan to asset ratio among Islamic banks compared to conventional ones. This indicated their higher liquidity status.

Similarly, another study that utilized the CAMEL framework to compare Islamic and conventional banks was the. Faizulayev (2011) measured their impacts of profitability through regression analysis and the ANOVA tests to measure the significance of the fact that these two systems are different based on management quality, quality of liquidity, earnings quality, asset quality, and capital adequacy. According to this study, Islamic banks are less liquid compared to their conventional peers since they are basically attentive to long-term investments. Furthermore, he noted that the moderating influence of the type of bank had a significant effect on the interpretation of a financial institution and system. 

Another studied that portrayed the performance difference between the two banking systems. Istaiteyeh (2015) utilized efficiency ratios, solvency and risk ratios, profitability ratios, and liquidity ratios for various banks between 2009 and 2013. According to the t-test results of the study, there existed no significant profitability difference between the systems, though there were statistical differences in current asset ratio, current ratio, and cash deposits ratio. This proved that the liquidity status of Islamic banks was higher than that of conventional banks. It further noted that the Islamic banks outperformed their conventional peers in debt payment since they were more solvent and less risky. 

Based on the literature above, many studies aim to highlight the performance and efficiency of both banks and various approaches have been utilized to determine these facts. Hence, with the difference between the Islamic and conventional banks becoming much clear and as there are few studies researching specifically on the deposit trend between the two banks, this paper attempts to examine the comparison in deposits between Islamic and conventional banks between 2015 and 2018.

  • Data Collection
    • Data

This study provides a general examination of the deposit performance of conventional and Islamic banks in the UAE banking industry for the period 2015 to 2018. The study derives the used data primarily from the Central Bank of UAE annual reports, offering an inclusive analysis of the existing performance trend of the Islamic and conventional banks. Consequently, data was also retrieved from the consumers via the distributed questionnaires, where, out of 900 questionnaires distributed, the study received 526 responses. 195 of the responses were excluded from the study due to incomplete data, with the remaining 331 (usable questionnaires) representing a response rate of 36.78%. This research distributed the questionnaires to the major Islamic and conventional banks in UAE; Abu Dhabi, Sharjah, and Dubai, with a response rate of 56.28% and 26.54% received from Islamic and conventional banks respectively.  

  • Data Analysis and Results
    • Analysis of the Descriptive Statistics

Table 1 below provides the descriptive statistical data for the deposits of the UAE banks while table two offers a breakdown of Islamic and conventional banks’ deposits and other financial data from 2015 to 2018. As can be observed in table 1 below, the UAE banking system experienced an increase of approximately 193 in the total customer bank deposits. This can be attributed to the increase in non-resident and resident deposits witnessed in 2018 compared to the previous years, thereby, boosting the country’s banking system liquidity.

For the Islamic and conventional banks, it can be observed that the Islamic banks experienced high deposits growth in 2017 while the conventional banks experienced a similar growth in 2018. Based on the previous studies, the private sector deposits growth has always been high in Islamic banks compared to conventional ones. The observable trend since 2015 to 2018 indicates that conventional banks are gradually improving in private sector deposits than the Islamic banks. However, the Islamic banks are experiencing a steady high increase in non-resident deposits compared to their conventional peers.

To further understand the deposits difference of the two banking systems, this study computes the Loan-to-deposit ratio.

Conventional banks

LDR = Loan/Deposit

= 1284/1355

= 94.76%

Islamic banks

LDR = Loan/Deposit

= 355/402

= 88.31%

From the LDR calculations, Islamic banks are more suited to cover their loan losses and customer withdrawals compared to their conventional peers. Other ratios computed to highlight the significant differences between conventional and Islamic banks are presented in table 4 below. It is evident that conventional banks have better capital while Islamic banks are more liquid.

UAE Banks Deposits
Bank Deposits1,7571,6281,564
Resident Deposits1,5431,4371,365
Government Sector291213188
Non-resident Deposits214193200
Private Sector1,0101,002982

Table 1: UAE Banks Deposit Data (values in AED billion).

  Conventional and Islamic bank deposits
Conventional banksIslamic banks
Bank Deposits1,3551,2451,2141,139402383349332
Resident Deposits1,1641,0651,024975379372339326
Government Sector22816014310763534451
Non-resident Deposits1921801901652213107
Private Sector760751738709250251243215
Total Assets2,2962,1452,1062,016551584507465
Gross credit1,2841,2271,2401,180355375336307
Domestic credit1,1661,1241,1361,088331346319295

Table 2: Descriptive Statistics Analysis for Deposits in Conventional and Islamic Banks in the UAE (values in AED billion)

Financial Soundness
 Islamic banksconventional banks
Liquid assets Ratio17.10%16.90%20.10%19.70%17.60%16.10%17.80%16.70%
Capital Adequacy15.70%17.20%16.50%17.40%19%19.40%18.60%17.70%

Table 3: Financial soundness of Islamic and conventional banks in UAE

The study also used questionnaires to determine the most preferred banking system in the UAE. Contrary to the results above (indicating conventional banks to be performing better than Islamic banks in deposits), approximately 65% of the respondents preferred Islamic banks. This can be explained by the fact that from the above data provided, Islamic banks are performing better than conventional banks in resident deposits.

There is a huge contrast between these results and results of other studies, for instance, Zahid, Hussein & Azizuddin (2016) and Mohammed & Kamaruddin (2013), who highlight major performance differences between the two systems. Nevertheless, it is in consistency with the Akhtar et al., (2011) and Ansari & Rehman (2011).

  • Conclusion

The study analyzed the deposits performance of Islamic and conventional banks in the UAE. It utilized the available data from CBUAE and an open questionnaire to determine the most preferred banking system, incorporating ratio analysis to authenticate the results and findings of the study. The results of the study indicate that non-residents and the private sector prefer conventional banks while residents and the governmental sectors opt for Islamic banks. Consequently, there is a notable difference in capital adequacy and LSRR ratios, where conventional banks outperform their Islamic peers. However, the Islamic banks are more liquid. The results derived from this study are of high significance to the UAE policymakers as it can be applied to improve the efficiency and performance of banking systems and in turn improve the country’s economy for the long-term.


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