Islamic vs. Conventional Banking in Financial Intermediation: What Does the Case of Egypt Show?

Abstract

The financial crisis of 2007/2008 illustrated that Islamic banking model is worth to be considered. Many studies have shown that during and after the crisis, Islamic banks were more resilience than conventional banks. In Egypt both types of banks exist which provides a good opportunity to investigate these both models of banking. The purpose of this paper is to examine to what extent are Islamic banks different from conventional banks? In addition to data analysis for the performance and the operations of the two types of banks, I calculated a new index called Intermediation for Development Index (IFDI) introduced by Massoud (forthcoming). The paper concludes that while in theory, Islamic banking provides a plausible alternative for conventional banking, in practice it fails to do so. This failure can be attributed to two factors. First, the high level of operational and liquidity risks that exist in a pure Islamic banking. Second, Islamic banks have failed to provide a wide range of brand new facilities to their customers. Instead, what they are doing is providing the appropriate Islamic terminology for de facto conventional financial operations and products. The calculation of IFDI for a number of Islamic & conventional banks in Egypt shows that both Islamic banks in the sample preformed less than conventional banks, except for Bank of Alexandria. Thus, for Islamic banking to provide an attractive alternative for conventional banking: (1) Islamic banks should take some measures that make them close to the theory of Islamic banking in banks’ operations & facilities, not just providing Islamic terminology for the existing conventional banking products. (2) Islamic banking experts have to find out solutions for the difficulties that face Islamic banks that implement the pure Islamic banking model. Examples of such difficulties are: operational & liquidity risks, the competitiveness, and the level of expertise in the Islamic banking industry.