The Microeconomic aspects of Islamic financial sector: An overview of literature

Abstract

The functional aspects of asset-backed banking (Islamic banking) have been a debate from last two decade ever since the world experienced credit crunch in 2009. This paper aims to highlight the operational aspects of Islamic financial industry and shed light on how this system is different from conventional counterparts. Based on literature we summarized that Islamic banking have major differences from the essence of underlying contracts. Furthermore, on microeconomic side, Islamic banks benefitted from better efficiency and greater output compared to conventional banks. Furthermore, the operational model of Shariah-based financial sector spur real economic activities, which help the economy to grow. Also, there is still a room to analyze the contribution of this sector in promoting social justice and poverty alleviation.

Keywords: Islamic banking, Asset-based banking, financial markets, microeconomics

Introduction

The US subprime mortgage crises have shed light on importance of Islamic banking and finance around the globe. The demand of Islamic financial products was significantly higher in the regions with the Muslim majority. However, practically, the final product or the output of Islamic financial institutions looks almost similar but there is a significant difference in underlying contracts and business model. To differentiate Islamic and conventional banks, the primary difference is based on the concept of ‘Justice’, which is attained by the process of risk sharing. Although social finance was not a new concept, but Islamic finance paved their way to grow exponentially not only in Islamic countries but also in countries with Non-Muslim majority. Briefly, the concept of ‘risk transfer’ using ‘debt-based’ financial products are replaced by ‘asset-based’ products that operate on ‘risk sharing’ concept under Islamic banking system (Hasan & Dridi, 2011). On the other hand, it is imperative to note that the founder of modern economy – Adam Smith – was not an economist but the professor of Moral philosophy. He emphasized the moral and ethical aspects of economic activities with deep concerns of fulfilment of personal interest at societal cost (Smith, 2010). Furthermore, categorizing the difference among the business models among Islamic and conventional banks is a sensitive matter. For instance, Beck, Demirgüç-Kunt, and Merrouche (2010) argued that Islamic banks operate using asset-based contracts on both sides of balance sheet, which operate on profit- and loss- sharing (risk-sharing) basis. The authors further posited that Islamic banking models rarely related to conventional banking business (i.e., interest-based products), rather they are engaged in asset-based contracts.

Review of Literature:

Islamic finance and its contribution in Economic activity:

Islamic banking is defined as the banking business based on rules of Shariah (conjunctions based on Islamic law) without involving in any kind of usurious transactions. Many authors including Ayub (2007) and Usmani (1998) asserted that Islamic banks are more related to an economic entity that work on real economic activity on risk-sharing basis. It is imperative to note that the role of Islamic banks is the same as the conventional counterpart, which allow them to channelize the funds from surplus ends to borrower’s end. Therefore, the role financial intermediation is played by the Islamic banks but the manner through which Islamic banks operate to channelize the funds is way different from the conventional banking sector. According to Iqbal (2011), Islamic banks are involved in real economic activity and undertake into the risk and reward associated with every contract that are not linked to any predetermined fixed rate of return (e.g. fixed interest on debts). Also, Hanif (2014) provided the base of two key features of Islamic financial contracts, which are absent in interest-based financing. Firstly, the transactions of Islamic banks provide a strong linkage of financial sector and real economic output by taking active part in the risk and reward of the associated contract. Secondly, the operation of Mudaraba where capital is transferred to the skilled persons to start business activity. This participatory mode provides the opportunity to skillful personnel, who lack in finances, to start and run business project. Therefore, Iqbal (2011) stressed the importance of Islamic banks as a trader, while the role financial intermediary is also being played by these banks. Hence, Islamic banks cannot be termed as financial intermediary merely but also the trading agent who stimulates the real economic output (Setiawan et al., 2021; Shamsudin, Salamon, Abu-Hussin, & Muhamad, 2015).

Additionally, Rafay and Farid (2017) posited that there is a bidirectional relationship between Islamic banking development and real economic output. Firstly, Islamic financial products trigger real economic output. However, a developed manufacturing sector helped Islamic finance industry to grow in the long run. Further, Islamic financial products have been proven reactive to manufacturing process, although conventional banks are also working but the response of Islamic product on manufacturing is significant. Moreover, Bougatef, Nakhli, and Mnari (2020) decomposed financing side of Islamic banks into two types i.e. PLS and non-PLS and capture the effect of Islamic financing on industrial production. The authors posited that the non-participatory contracts contribute to industrial production in the short- and long-run. Similarly, the effect Islamic banking on economic output has been research by many authors such as Abduh and Omar (2012), Furqani and Mulyany (2009), Lebdaoui and Wild (2016) and S. Kassim (2016) and showed that the development of Islamic finance is one of the key driver of economic growth and prosperity. Also, according to the theory of financial intermediation, an effective financial sector actively participates in economic growth of a country by channelizing the funds in productive and effective projects. In the same way, the essence of Islamic finance is closely related to the trading company as suggested by (Shamsudin et al., 2015), which promote the efficient use of funds from surplus to deficit side using asset-backed contracts. Importantly, the unique difference between Islamic and conventional banking merely rests with the underlying contracts.

Islamic banking Model and underlying contracts:

In Islamic banking, there are several different contracts that are employed to offer both asset and liability products. Some of the contracts are participatory based, some of them operate on sale-based contracts, while there are few contracts which are based on rental agreement. In other words, the products of Islamic banks are backed by real asset-based transactions that help to generate economic value in real terms. However, the contracts used in Islamic banks are divided into three main types by Lewis and Algaoud (2001) and Ayub (2007), which includes Trustee contracts (Mudharaba), participatory/equity contracts (Musharakah), and debt-based/sale-based contracts for different products.

Mudarabah/trustee contracts are widely used in banking sector around the globe. It refers to a contract where two parties form a partnership in such a way that one party (Rab-ul-Mal) share the capital while the other party (Mudarib) invest his time and skills to do the business (Ayub, 2007; Usmani, 1998). It is one of the purest forms of Islamic contract which rooted back from the advent of Islam. The financial capital and entrepreneur skill share the risk and reward associated with the business, both the parties get can get benefit or suffer loss during the entire business cycle (Iqbal, 2011). The profit-sharing ratio is decided at the start of the contract, while in case of loss the Rab-ul-Mal will bear the loss completely and Mudarib will forgo his profit share and loss of efforts. Mudarabah is commonly used in liability products in Islamic banks where depositors provide capital while Islamic bank act as a Mudarib (Ayub, 2007; Usmani, 1998).

Participatory contracts are based on Musharakah in which Islamic banks create partnership with its customers and share the risk/profit arising from the business. The agreement should have a pre-agreed profit-sharing ratios and other related conditions relating to the partnership. However, the loss is shared based on the ratio of capital provided (Hanif, 2014). Islamic banks use this contract in several products such as running finance, house finance, import and export transactions (Ayub, 2007; Usmani, 1998).

Sale-based contracts which is referred as debt-based contracts by Lewis and Algaoud (2001), are the contracts widely used by Islamic banks operated on the bases of sale of asset/commodity. Importantly, the vast range of financing products in Islamic banks are offered on debt-based contracts where Islamic bank purchase and sell the asset on defer payment basis (Anwar, 2003). Debt-based contracts includes but not limited to Murabaha (sale of goods with disclosed profit), Salam (sale of commodity on advance payment), Istisna (order to manufacture sale contract), and Ijarah (rental agreement by transferring the usufruct of an asset) (Ayub, 2007; Usmani, 1998). Moreover, these contracts are also referred as non-PLS contracts by Bougatef et al. (2020), but Islamic banks ensure the presence of underlying asset in all financing product. Additionally, in a recent study of Bougatef et al. (2020), the industrial output proved to be significantly affected by these financing contracts in long and short run. The study implies that both participatory and non-participatory modes of Islamic financing stimulate financial intermediation, which contribute to produce real economic value in the end.

On the other hand, Levine (2002) asserted that an efficient and productive financial system accelerate many economic factors including the process of manufacturing (see (Bougatef et al., 2020; Shamsudin et al., 2015)), productivity and efficiency of financial sector, increased investment, poverty alleviation, and standard of living. This essay will how Islamic banking system is advantageous in speeding up microeconomic factor like productivity, efficiency, and poverty alleviation. Also, we try to shed light on literature on how this sector behaved in case of market failure/external shocks.

Productivity and efficiency of Islamic banks:

Literature showed numerous studies on Islamic and conventional banks and many of them suggested that Islamic banks proved to be stable, profitable, efficient, and better in mitigating in credit risk compared to conventional banks. Importantly, the modes of Islamic finance have intrinsic ability to make Islamic financial institution outperform the conventional counterpart. Also, Iqbal (2001) asserted that in terms of deposit, investment, equity, and total assets, Islamic banks emerged to be efficient comparing to conventional banks. Additionally, Samad and Hassan (2006) worked on credit risk, Samad (2004) studied the credit performance, and Hassan and Bashir (2003) indicated that Islamic banks have better asset quality with enhanced capital adequacy. In early stages of Islamic banking development, researcher tried to find the productivity and efficiency of Islamic banks with simple ratio analysis by considering the inputs (expenses) and outputs (income) in their studies. For instance, cost efficiency of Islamic banks was measured through cost-to-income ratio by Iqbal (2001) and operating expense-to-asset ratio by Metwally (1997), both the authors have drawn the same conclusion i.e. Islamic banks are cost-efficient comparing to interest-based banks. Similarly, the study of (Hamid, 1999) unearthed the fact of productivity of Islamic banks measured through ratio of income to expenditure (i.e. output/input). However, productivity analysis can be categorized in two type based on the data analysis tool i.e. Parametric and Non-parametric technique.

Findings from Parametric Analysis:

The productivity and efficiency analysis of Islamic banks were studied with fairly sophisticated data analysis tools such as Stochastic Frontier Analysis (SFA) and Data Envelopment Analysis (DEA) in the early years of 21st century (Abdul-Majid, Saal, & Battisti, 2011; Al-Jarrah & Molyneux, 2006; Sufian, 2007). Al-Jarrah and Molyneux (2006) studied the cost and scale efficiency of Egyptian, Jordanian, Bahraini, and Saudi Arabian Islamic banks using Malmquist productivity index and SFA technique and compared it with investment banks. The authors measured efficiency by employing financial intermediation approach (Aly, Grabowski, Pasurka, & Rangan, 1990) by considering deposit, labor, and capital as inputs whereas total loan extended, earning assets, and other off-balance sheet items. The result suggested that Islamic banks were appeared to be more cost-efficient comparing to counterpart, which referred that cost of inputs of Islamic banks are relatively cheaper. Another study with similar results was conducted by Abdul-Majid et al. (2011) on Malaysian Islamic banks using SFA of the period of 1996-2002. The study used the generalized Malmquist productivity index, which was further decomposed into efficiency change, technical change, and scale efficiency change using stochastic frontier analysis. To calculate Malmquist index, the authors took cost of labor (labor expense/number of workers), cost of financial capital (income paid to depositors/total deposit), and cost of physical capital (capital expense/fixed assets) as input. Whereas total amount of loan extended to the customer and total earning assets were considered as output to calculate the Malmquist productivity index. However, the result suggested that by introducing Islamic banking, the commercial banks of Malaysia showed an average productivity of 2.68%. Furthermore, the full-fledged Islamic banks were proven as more productive due to rapid technical change, while the same is not true for conventional banks or Islamic windows. The results of the study were consistent with previous findings (El-Gamal & Inanoglu, 2004). However, El-Gamal and Inanoglu (2004) argued that asset-based financing stimulates the cost efficiency of Islamic banks, which is greatly dependent on high number of performing loans/credits.

Findings from Non-Parametric Analysis:

On the other hand, non-parametric technique has also been used in number of studies, which includes Hassan and Hussein (2003), Hassan (2005), Sufian (2006), and Ismail and Ab Rahim (2013). Using DEA of Sudanese Islamic banks, it has been observed that Islamic banks experienced 60% of technical efficiency (which is greatly related to managerial skills) and 37% of allocative efficiency (related to regulatory work) (Hassan & Hussein, 2003). Similarly, total factor productivity of local and foreign Islamic banks was studied by Sufian (2007) using DEA and Malmquist productivity index. The author considered multi-input/output method to analyze the productivity change of selected local and foreign Islamic banks in Malaysia. Total cost of deposit and cost of labor were taken as Inputs while loan extended to customer and investment securities purchased were considered as outputs. The author argued that foreign banks working in Malaysia showed a productivity and efficiency regress during the study period, while domestic banks seemed to operate in a relatively better operational level. Also, the author suggested that the regress in productivity index was mainly due to technical change compared to decline in efficiency (allocative) change. On the contrary, Hassan (2005) suggested a contrary results related to efficiency of Islamic banks using both parametric and non-parametric techniques. He studied world Islamic banking industry in comparison with conventional sector. The author argued that Islamic banks are only efficient in terms of profit as compared to conventional banks, whereas on average, Islamic banks are less efficient in based on the output parameters. The results suggested that inefficiency in Islamic banks are related to optimal allocation of resources rather than technical change.

Productivity and efficiency of Islamic banks compared to conventional or Islamic windows have been a debatable issue since the early stages of Islamic finance development. However, many researchers incorporated peripheral interventions and tried to find which banking system outperformed in response to those intrusions. Such as Alsharif, Nassir, Kamarudin, and Zariyawati (2019) investigated the effect of Basel III regulations on Islamic and conventional banks of GCC region using non-parametric technique to calculate Malmquist productivity index of both banking systems. Authors were of the view that overall productivity index of both banking systems were affected badly but both banking groups experienced a positive efficiency change, which was due to technical change in conventional banks while Islamic banks were appeared to be scale efficient. Furthermore, the results showed the size of Islamic banking operations were optimal during the period under study. Similarly, Saleh, Moradi-Motlagh, and Zeitun (2020) took global financial crisis in to consideration and examined the productivity change of Islamic and conventional banks of GCC region. Using innovative non-parametric technique, authors argued that credit crisis of 2008 have affected total factor productivity of both banking systems in the region of GCC, but the tendency of Islamic banks to recover its productivity was remarkable. Further, it can be said that Islamic banks’ productivity was least affected by the global financial crisis 2008. Additionally, recent literature is enriched with many studies confirming that Islamic banks found to be scale efficient but less technical efficient (Shawtari, Salem, & Bakhit, 2018), more productive due to efficiency change (Kamarudin, Hue, Sufian, & Anwar, 2017), maintain a higher level of social efficiency compared to financial aspects (Usman, Andriyani, & Pambuko, 2019), and full-fledged Islamic banks are found to be more productive and efficient compare to Islamic banking windows and conventional banks (Sardar, Azeem, Hassan, & Bakhsh, 2013).

Based on the literature, measuring productivity and efficiency of Islamic and conventional banks greatly dependent on Malmquist productivity index. Studies suggested that Islamic banks due their operational differences have better productivity change as compare to conventional counterparts. Furthermore, the asset-based financing products of Islamic banks are found to be cost effective due to lower NPLs compared to interest-based banks (El-Gamal & Inanoglu, 2004). On the other hand, financial institutions working on Islamic teaching experienced a better recovery period in terms of productivity change after credit crisis 2008 (Saleh et al., 2020). To conclude this discussion, contributing towards real economic output, industrial production, and large-scale manufacturing index, Islamic banks are examined to be higher in productivity and efficiency compared to conventional banks.

Islamic Finance, Poverty alleviation and Social well-being:

Building a value-based intermediation structure of Islamic banking is not radically possible within the capitalistic economy. However, Islamic finance is periodically contributing towards economy with an incremental market share so that they can achieve the goal of value-based intermediation (VBI). VBI refers that Islamic bank not only emphasize on compliance of Shariah principles, but also contribute to economy, social well-being, and poverty alleviation (i.e. integral part of objectives of Shariah and Islamic finance). Notably, the application of Islamic finance can be seen in three different type of financial institutions, which includes commercial banks, non-banking financial institutions, and microfinance companies (Hanesti, Herianingrum, & Sukmana, 2017). However, a holistic approach to society welfare can be seen in the advancement of Islamic banking in microfinance area, which is serving the community with the motive of social well-being (Farrar & Uddin, 2020).
Since the success of Gremeen bank in Bangladesh and the win of Nobel prize of Muhammad Yunus, Microfinance is evident as a solution to provide pervaded economic development and poverty alleviation. In support of this, Farrar and Uddin (2020) argued that an effective and properly managed Islamic microfinance sector, which operate purposively on social-economic wellbeing, can generate a great impact on individual’s and societal economic development. Furthermore, authors asserted that the use of Islamic banking in microfinance directly contribute toward alleviating poverty and raising standard of living. Importantly, Islamic finance has two key motives i.e. the commercial-orientation and non-commercial objective. Such as, Hanesti et al. (2017) suggested that Islamic microfinance work under two key objectives the first objective is closely related to conventional finance (as suggested in capitalistic economy), while the second motive is non-commercial oriented. The authors further opined that non-commercial objective of Islamic financial development is fulfilled by gratuitous contribution in terms of Zakat (obligatory annual charitable contribution) and Waqf (voluntary contribution). However, it is further elaborated that the concept of Islamic Microfinance is based on mutual help where it deemed necessary to support the poor to be part of society and for overall well-being.

Islamic finance uses multiple modes of ethical finance which are widely used and practiced by Islamic microfinance institutions. the use of ethical schemes and instruments are in-lined with the objectives of Shariah and Islamic economics (i.e., economic prosperity and social wellbeing of society). For instance, Islamic microfinance institutions offer Qard ul Hassan (interest-free loan) to the needy and poor people to provide them with small capital needs, machinery and equipment using Murbahah (sale with disclosed profit on defer installments), leased assets using Ijaraha to enable poor/moderately poor entrepreneurs to start their business (A. R. A. Rahman, 2010). Contrary to that Obaidullah (2008) examined the difference between Islamic and conventional Microfinance institutions and their role in poverty alleviation. He asserted that although the objective of microfinance in conventional and Islamic systems are similar to each other, which is based on the social objective (i.e., to make poor entrepreneurs able to take part in economic activities), but the process through which Islamic finance provides financial help to the needy ones are miles different from conventional counterparts. Further, Obaidullah (2008) emphasized that Islamic finance provide Zakat (which is not meant to be returned) to extremely poor entrepreneurs, while if someone has the capacity return the Interest-free loans are sanctioned to provide capital to do start and run their businesses. Whereas conventional microfinance is purely functioned on interest-based debt transactions where micro-entrepreneurs are obliged to return the money along with interest.

Concerning the contribution of Islamic finance in microfinance sector, can be categorized in two aspects i.e. economic and social. In connection to this, widening financial-network to bring poor entrepreneurs in the access of financial resources would bring considerable change in their income level, standard of living, develop the assets, reduce economic weakness, and social and economic well-being of society (Obaidullah, 2008). However, element of social welfare and evidence of poverty alleviation has been empirically examined in Bangladesh by M. Rahman and Ahmad (2010) and recently in Pakistan by Shirazi (2012). The study (M. Rahman & Ahmad, 2010) revealed that Islamic bank Bangladesh had contributed to alleviate rural poverty by extending credit to poor farmers, which greatly shadowed impact in terms of increase in household income and enhanced employment. Whereas, it was evident that the growth income of poor borrowers is greater than the non-poor borrowers, which resulted in the improvement of Pakistan poverty alleviation fund that covers 3,000 families (Shirazi, 2012). Contrary to conventional microfinance, Islamic finance not only achieved the economic benefits, but social impact is miles greater than the commercial rewards (Akhter, Akhtar, & Jaffri, 2009; M. Rahman & Ahmad, 2010; Shirazi, 2012).

In overall, from literature it can be concluded that Islamic finance has a considerable impact on social aspects which includes socio-economic well-being, increase in income of underprivileged consumers, distribution and redistribution of income, increased employment, active involvement of the deprived masses in economic activities, and most importantly reduction of poverty curve (Riwajanti, 2013).

Islamic Finance and Market Failure:

In economics, market failures are defined as the economic situation where unregulated market becomes inefficient due to lack of information and externalities (event that are external to the market) (Pindyck & Rubinfeld, 2013). Credit crisis is one of the examples of external shock which caused financial market failures and led many financial institutions to go bankrupt. However, during the financial crisis Islamic banks were proven to be intrinsically resilient to external shocks. According to Pappas, Ongena, Izzeldin, and Fuertes (2017), the theoretical aspect of Islamic banking model (i.e. described above) suggest that these institutions must be stable and less volatile in case of market distress. In addition to the element of asset-backed financing, Islamic banking strongly advocates ethical and charitable objectives, which is related to social well-being of society. Further, using survival analysis, authors concluded that conceptual difference in the operational models of Islamic and conventional banks is reflected in the risk profiles. The study further suggested, with higher leverage and greater margins Islamic bank have lower risk of failure.

Moreover, a recent research by Baber (2018) argued that the absence of five speculative elements in Islamic banking actually backed this sector to remain stable during the credit crunch period as compared to conventional financial sector. In addition, element of asset-backed finance, used of profit-sharing model, and sense of ethical investment served Islamic banks as an armor to absorb external shocks, whereas absence of speculative practices (buying and selling of debt, short term incentives, subprime mortgages, investing in toxic assets) were observed (Baber, 2018). However, Hassan and Kayed (2009) supported the opinion of famous economist Maurice Allias and opined that after the global financial crisis, the financial world desperately need a structural reform to develop a sophisticated monetary policy, which could have the ability to absorb external shocks. Based on the study, the authors further suggested two notions i.e. tax reforms and zero-percent interest in financial sector. Similar with this, several studies empirically examined the resilience of Islamic banks in response to macroeconomic shock. For instance, S. H. Kassim and Majid (2010) studied the behavior of Malaysian Islamic banks during the Asian financial crisis of 1997 and Global financial crisis of 2007. Using Vector Auto-Regression, the study explored that due to Interest-free nature, Islamic banking sector remained relatively immune to financial crisis under study.

Furthermore, there are several studies that provide empirical evidence of the theoretical concept of financial stability of Islamic banks (Čihák & Hesse, 2010; Parashar & Venkatesh, 2010; Siraj & Pillai, 2012). Similar evidence is supported by Bourkhis and Nabi (2013), Hasan and Dridi (2011), Beck et al. (2010), and Rajhi and Hassairi (2013). In view of the theorical background of Islamic banks and empirical evidence provided by researchers, Islamic financial sector proved to be efficient in mitigating market risk and comparatively more resilient to market externalities. Although, after the global crisis, Islamic financial sector gets to attract higher attention from all around the world but still this sector is in development stage, which is being refined by up to the mark research.

Summary:

Amidst global financial turmoil, Islamic banking and finance drew attention of the economies from all around the world. Although the popularity of Islamic finance was not limited to the countries with Muslim majority rather it was being consider as a realistic financial intermediation option with same function but less risk.

This essay aimed to review and analyze the existing literature concerning Islamic financial sector and its connection to the microeconomic factors within the industry. The theoretical and conceptual difference of the business model of Islamic banks greatly differentiated from Interest based banking system. However, the products offered under both the systems look similar but the essence and contracts through which products are offered differ greatly. In connection to this many authors terms Islamic banks as a trading company rather than a financial intermediary. However, the literature is enriched with enormous studies that showed how this function helped Islamic banks in stimulating industrial manufacturing process, which subsequently trigger the economic activities. Since theory of demand and supply is totally applicable on Islamic bank’s ability to participate in creating demand and supply of tangible goods.

On the other hand, it has been analyzed that due to lower rate of Non-performing assets and asset-backed products, Islamic banks are found to be more cost efficient and have a great productivity index comparing to the counterpart. However, due to minimum or limited venues, optimal utilization of resources has been found in the literature. Whereas it can be inferred that despite of having trouble with resource allocation, Islamic financial industry still has the ability to be efficient and productive compared to conventional banks. A unique trend of faster recovery of productivity change has also been observed during the financial crisis.

Importantly, the presence of Islamic finance at micro level played an important role in alleviating poverty and achieving the social objective of Islamic finance. Social well-being and ethical aspect of financial companies is greatly stressed by Islamic finance particularly in Islamic microfinance. In this connection, Islamic microfinance found to be effective in providing resources to the poor entrepreneurs on ethical financing (Zakat, Interest free loans, and funds on participatory modes). Last but not the least, literature showed that non-speculative nature of Islamic banks largely contributes towards absorbing external shock in case of market failures (as evident from Asian Crisis 1997 and Global credit crisis 2007). Based on the literature, asset-backed financial sector is found to be financially stable and resilient.

References:

Abduh, M., & Omar, M. A. (2012). Islamic banking and economic growth: the Indonesian experience. International Journal of Islamic and middle eastern finance and management, 5(1). doi:https://doi.org/10.1108/17538391211216811
Abdul-Majid, M. – Saal, D. S., & Battisti, G. (2011). The impact of Islamic banking on the cost efficiency and productivity change of Malaysian commercial banks. Applied Economics, 43(16), 2033-2054. doi:https://doi.org/10.1080/00036840902984381
Akhter, W. – Akhtar, N. & Jaffri, S. K. A. (2009). Islamic micro-finance and poverty alleviation: A case of Pakistan. Paper presented at the Proceeding of the 2nd CBRC, Lahore.
Al-Jarrah, I., & Molyneux, P. (2006). Cost efficiency, scale elasticity and scale economies in arab banking. Banks & bank systems, 1(3), 60-89. doi:https://dx.doi.org/10.2139/ssrn.3263331
Alsharif, M. – Nassir, A. M. – Kamarudin, F. & Zariyawati, M. (2019). The productivity of GCC Islamic and conventional banks after Basel III announcement. Journal of Islamic Accounting and Business Research. doi:https://doi.org/10.1108/JIABR-04-2017-0050
Aly, H. Y. – Grabowski, R. – Pasurka, C. & Rangan, N. (1990). Technical, scale, and allocative efficiencies in US banking: An empirical investigation. The review of economics and statistics, 72(2), 211-218. doi:https://doi.org/10.2307/2109710
Anwar, M. (2003). Islamicity of banking and modes of Islamic banking. Arab Law Quarterly, 18(1), 62-80.
Ayub, M. (2007). Understanding Islamic finance. Hoboken, NJ: John Wiley & Sons.
Baber, H. (2018). How crisis-proof is Islamic finance? Qualitative Research in Financial Markets. doi:https://doi.org/10.1108/QRFM-12-2017-0123
Beck, T. – Demirgüç-Kunt, A. & Merrouche, O. (2010). Islamic vs. conventional banking: Business model, efficiency and stability: The World Bank.
Bougatef, K. – Nakhli, M. S. & Mnari, O. (2020). The nexus between Islamic banking and industrial production. ISRA International Journal of Islamic Finance. doi:https://doi.org/10.1108/IJIF-05-2018-0052
Bourkhis, K. & Nabi, M. S. (2013). Islamic and conventional banks’ soundness during the 2007–2008 financial crisis. Review of Financial economics, 22(2), 68-77. doi:http://dx.doi.org/10.1016/j.rfe.2013.01.001
Čihák, M. & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2-3), 95-113. doi:https://doi.org/10.1007/s10693-010-0089-0
El-Gamal, M. & Inanoglu, H. (2004). Islamic banking in Turkey: boon or bane for the financial sector. Paper presented at the Proceedings of the Fifth Harvard University Forum on Islamic Finance.
Farrar, S. & Uddin, T. (2020). Building Islamic Ethics into Development: Exploring the Role and Limitations of “Islamic” Microfinance in Poverty Alleviation—An Indonesian Case Study. Law and Development Review, 13(2), 371-406. doi:https://doi.org/10.1515/ldr-2020-0047
Furqani, H. & Mulyany, R. (2009). Islamic banking and economic growth: Empirical evidence from Malaysia. Journal of Economic Cooperation & Development, 30(2), 59-74.
Hamid, M. A. (1999). Islamic Banking in Bangladesh: Expectations and Realities. Paper presented at the International Conference on Islamic Economics in the 21st Century, Kuala Lumpur; Malaysia.
Hanesti, E. M. – Herianingrum, S. & Sukmana, R. (2017). Islamic Financial Development as Efforts to Accelerate Economic Development and Poverty Alleviation. Paper presented at the 1st International Conference Postgraduate School Universitas Airlangga:” Implementation of Climate Change Agreement to Meet Sustainable Development Goals”(ICPSUAS 2017).
Hanif, M. (2014). Differences and similarities in Islamic and conventional banking. International Journal of Business and Social Sciences, 2(2).
Hasan, M. & Dridi, J. (2011). The effects of the global crisis on Islamic and conventional banks: A comparative study. Journal of International Commerce, Economics and Policy, 2(02), 163-200. doi:https://doi.org/10.1142/S1793993311000270
Hassan, M. K. (2005). The cost, profit and X-efficiency of Islamic banks. Paper presented at the 12th ERF Annual Conference, 19th-21st December, Egypt.
Hassan, M. K. & Bashir, A.-H. M. (2003). Determinants of Islamic banking profitability. Paper presented at the 10th ERF annual conference, Morocco.
Hassan, M. K. & Hussein, K. A. (2003). Static and dynamic efficiency in the Sudanese banking system. Review of Islamic Economics, 14(1), 5-48.
Hassan, M. K. & Kayed, R. N. (2009). The global financial crisis, risk management and social justice in Islamic finance. Risk Management and Social Justice in Islamic Finance, 1(1).
Iqbal, M. (2001). Islamic and conventional banking in the nineties: a comparative study. Islamic economic studies, 8(2).
Iqbal, M. (2011). Islamic banking: theory, practice and evaluation. Journal of Islamic Business and Management, 1(1), 95-126.
Ismail, F. & Ab Rahim, R. (2013). Productivity of Islamic and conventional banks of Malaysia: an empirical analysis. IUP Journal of Bank Management, 12(3), 7-19.
Kamarudin, F. – Hue, C. Z. – Sufian, F. & Anwar, N. A. M. (2017). Does productivity of Islamic banks endure progress or regress? Humanomics, 33(1), 84-118. doi:https://doi.org/10.1108/H-08-2016-0059
Kassim, S. (2016). Islamic finance and economic growth: The Malaysian experience. Global Finance Journal, 30, 66-76. doi:https://doi.org/10.1016/j.gfj.2015.11.007
Kassim, S. H. & Majid, M. S. A. (2010). Impact of financial shocks on Islamic banks. International Journal of Islamic and middle eastern finance and management, 3(4), 291-305. doi:https://doi.org/10.1108/17538391011093243
Lebdaoui, H. & Wild, J. (2016). Islamic banking presence and economic growth in Southeast Asia. International Journal of Islamic and middle eastern finance and management, 9(4), 551-569. doi:https://doi.org/10.1108/IMEFM-03-2015-0037
Levine, R. (2002). Bank-based or market-based financial systems: which is better? Journal of financial intermediation, 11(4), 398-428. doi:https://doi.org/10.1006/jfin.2002.0341
Lewis, M. K. & Algaoud, L. M. (2001). Islamic banking. Northampton, MA: Edward Elgar Pub.
Metwally, M. M. (1997). Differences between the financial characteristics of interest‐free banks and conventional banks. European Business Review, 97(2), 92-98. doi:https://doi.org/10.1108/09555349710162607
Obaidullah, M. (2008). Introduction to Islamic microfinance. Mohammed Obaidullah, INTRODUCTION TO ISLAMIC MICROFINANCE, IBF Net Limited.
Pappas, V. – Ongena, S. – Izzeldin, M. & Fuertes, A.-M. (2017). A survival analysis of Islamic and conventional banks. Journal of Financial Services Research, 51(2), 221-256. doi:http://DOI.ORG/10.1007/s10693-016-0239-0
Parashar, S. P. & Venkatesh, J. (2010). How did Islamic banks do during global financial crisis? Banks and Bank systems, 5(4), 54-62.
Pindyck, R. S. & Rubinfeld, D. L. (2013). Microeconomics (Eighth ed.). NY: USA: Prentice Hall.
Rafay, A. & Farid, S. (2017). Dynamic relationship between islamic banking system and real economic activity: Evidence from Pakistan. Journal of King Abdulaziz University, Islamic Economics, 30(2), 97-116.
Rahman, A. R. A. (2010). Islamic microfinance: an ethical alternative to poverty alleviation. Humanomics, 26(4), 284-295. doi:https://doi.org/10.1108/08288661011090884
Rahman, M. & Ahmad, F. (2010). Impact of microfinance of IBBL on the rural poor’s livelihood in Bangladesh: an empirical study. International Journal of Islamic and middle eastern finance and management, 3(2), 168-190. doi:https://doi.org/10.1108/17538391011054390
Rajhi, W. & Hassairi, S. A. (2013). Islamic banks and financial stability: a comparative empirical analysis between MENA and southeast Asian countries. Région et développement, 37(1), 1-31.
Riwajanti, N. I. (2013). Islamic microfinance as an alternative for poverty alleviation: A survey. Afro Eurasian Studies, 2(1-2), 254-271.
Saleh, A. S. – Moradi-Motlagh, A. & Zeitun, R. (2020). What are the drivers of inefficiency in the Gulf Cooperation Council banking industry? A comparison between conventional and Islamic banks. Pacific-Basin Finance Journal, 60, 101266. doi:https://doi.org/10.1016/j.pacfin.2020.101266
Samad, A. (2004). Performance of Interest-free Islamic banks vis-à-vis Interest-based Conventional Banks of Bahrain. International Journal of Economics, Management and Accounting, 12(2).
Samad, A. & Hassan, M. K. (2006). The performance of Malaysian Islamic bank during 1984–1997: An exploratory study. International journal of Islamic financial services, 1(3). doi:https://dx.doi.org/10.2139/ssrn.3263331
Sardar, A. – Azeem, M. M. – Hassan, S. & Bakhsh, K. (2013). Comparison of efficiency between pure islamic banks and islamic bank windows and role of islamic banking in agriculture sector. Pak. J. Agri. Sci, 50(1), 155-161.
Setiawan, B. – Saleem, A. – Nathan, R. J. – Zeman, Z. – Magda, R. & Barczi, J. (2021). Financial market development and economic growth: Evidence from asean and cee region. Polish Journal of Management Studies, 23(2), 481. doi:https://doi.org/10.17512/pjms.2021.23.2.29
Shamsudin, M. Y. – Salamon, H. – Abu-Hussin, M. F. & Muhamad, N. H. N. (2015). Islamic Banking and Finance: Traders not Mere Financial Intermediary. Mediterranean Journal of Social Sciences, 6(3), 181-181.
Shawtari, F. A. – Salem, M. A. & Bakhit, I. (2018). Decomposition of efficiency using DEA window analysis. Benchmarking: An International Journal. doi:https://doi.org/10.1108/BIJ-12-2016-0183
Shirazi, N. S. (2012). Targeting and socio-economic impact of microfinance: A case study of Pakistan. Islamic economic studies, 130(608), 1-56.
Siraj, K. & Pillai, P. S. (2012). Comparative study on performance of Islamic banks and conventional banks in GCC region. Journal of Applied Finance and Banking, 2(3), 123.
Smith, A. (2010). The theory of moral sentiments: Penguin.
Sufian, F. (2006). Size and returns to scale of the Islamic banking industry in Malaysia: foreign versus domestic banks. International Journal of Economics, Management and Accounting, 14(2).
Sufian, F. (2007). Total Factor Productivity Change of the Malaysian Islamic Banking Sector: An Empirical Study. Journal of Islamic Economics, Banking and Finance, 5(1), 73-88.
Usman, N. – Andriyani, L. & Pambuko, Z. B. (2019). Productivity of Islamic Banks in Indonesia: Social Funds versus Financial Funds. The Journal of Asian Finance, Economics and Business (JAFEB), 6(3), 115-122. doi:https://doi:10.13106/jafeb.2019.vol6.no3.115
Usmani, M. T. (1998). An introduction to Islamic finance (Vol. Karachi, Pakistan.): Maktab Ma’riful Quran.

Adil Saleem
Doctoral School of Economic and Regional Sciences, Hungarian University of Agriculture and Life Sciences. Adil.saleem927@gmail.com

Dr. Judit Bárczi
associate professor, Hungarian University of Agriculture and Life Science, barczi.judit@uni-mate.hu,

Dr. Judit Sági
associate professor, Budapest University of Economics, sagi.judit@uni-bge.hu