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\title{Are Islamic Banks Immune from Global Financial Crisis: Evidences from 16-Cross-Country Islamic Banks}
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             \author[1]{Abdus  Samad}

             \affil[1]{  Utah Valley University}

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\date{\small \em Received: 14 December 2012 Accepted: 4 January 2013 Published: 15 January 2013}

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\begin{abstract}
        


This paper empirically investigates whether the cross-country Islamic banks? financial performances are immune by the global financial crisis (GFC). Banks? financial performancesâ??"the pre GFC and the GFC periodâ??"are measured by return on assets (ROA). The comparison of mean and the median return on return on asset (ROA) show that Islamic banks? ROA prior to GFC were 0.031 and 0.012 respectively and they were 0.01 and 0.12 respectively during the GFC.  The significance of the parametric mean test,- t-test, and non-parametric median test,- Kruska-Wallis, and Mann-Whitney demonstrates a significant difference between the mean and the median performance of Islamic bank during the pre GFC and the GFC periods. This difference suggests that Islamic banks? financial performance is not immune from the GFC.

\end{abstract}


\keywords{islamic bank, financial performance, global financial crisis.}

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\let\tabcellsep& 	 	 		 
\section[{Introduction}]{Introduction}\par
uring the global financial crisis of 2009-2010, financial institutions, banks in particular, were seriously impacted. In the U.S. about 140 banks failed in 2009 and 157 banks were wiped out in 2010 (Time, January 2012). Such a large-scale bank failure had not happened in the financial history of the United States since the Great Depression. These statistics relate to conventional (interest-based) banks and show that the profitability of banks was seriously impacted by the GFC.\par
The mode of operation of interest based (conventional) banks is different than that of interest free (Islamic banks). The distinguishing feature of Islamic banks is the profit and losing sharing where asymmetric information that results adverse selection and moral hazard is significantly reduced. Whether the reduction of moral hazard and adverse selection has had positive impact on Islamic banks financial performance needs to be empirically examined.\par
While conventional banks faced serious problems during the GFC, \hyperref[b0]{Apps (2008)} claimed that Islamic banks (IB) are stable and continuing to perform well and therefore, should be considered as an alternative option. Citing a report from Moody's and RBS, Paul Koster, Chief Executive of DFSA, said the Islamic finance industry is set to grow from \$700bn in 2000(Dh2,571bn) to \$4trn by 2013 and despite the crisis, Islamic banking is still projected to grow by 15-20 percent annually \hyperref[b8]{(Koster, 2009)}.\par
Since there are no empirical investigations that show the performance of Islamic banks has been unhurt by the global financial crisis, this paper is an attempt to fill this gap. If Apps (2008)'s and Koster (2009)'s claims are right, it would mean that there are no differences in Islamic bank performances during the pre-GFC and the GFC periods. This paper tests the hypothesis that Islamic bank performances are stable during both the pre-GFC and the GFC periods.\par
Exploring empirical evidence as to whether Islamic banks' performances remain stable resulting from the GFC is an important contribution of this paper in the banking literature.\par
This paper is organized as follows: Section II discusses the main operational differences of Islamic banks from conventional banks that provide theoretical underpinning for protecting the Islamic banks from external shocks like the GFC. A brief survey of literature is outlined in Section III. Section IV describes data and methodology. Empirical results and conclusions are provided in Section V. 
\section[{II. Operational Differences between Islamic Banks and Conventional Banks}]{II. Operational Differences between Islamic Banks and Conventional Banks}\par
Islamic banks operate on some basic principles, quite different from conventional banks. The most important features that distinguish Islamic banks from conventional banks and provide the theoretical underpinning for Islamic banks' stability and protection from shocks are the following: Under this equity type contract, 'Musharakah' (partnership), both parties provide capital. Profits and losses are shared (PLS) by contracting parties. Risk and rewards are shared by both contracting parties (Dar and Presley, 2003, Usmani, 2002). The key element is that both parties-banks and entrepreneurs-provide capital and share profits. Profits of the projects are shared by prearranged agreement, not necessarily in proportion to capital. The return of investor (bank) is, thus, not guaranteed and fixed. In case of losses, both parties share in proportion to capital.\par
The first element of a Musharakah contract is that both parties contribute capital investment, and profits are shared by pre-arranged agreement, not necessarily in proportion to their invested capital. In case of loss, both parties share in proportion to their capital contribution.\par
The second element of Musharakah contract is that both parties share and control the management of the investment. Thus, in financing investment under the 'Musharakah' contract, the Islamic bank exercises its right to examine investment records and to supervise the management of the enterprise.\par
The third element of the Musharakah is that liability is unlimited. "Therefore, each partner is fully liable for the actions and commitments of the other in financial matters"(Manian, Bexley and James, 2000, p. 26). 
\section[{b) Mudaraba' (Trust Financing)}]{b) Mudaraba' (Trust Financing)}\par
Under the Mudaraba contract, one party (the investor) provides capital (maal) for a project and the other party (the entrepreneur) provides labor to run the project. Profits and losses are shared by both parties.\par
Profit and Loss Sharing (PLS) is a key feature of Islamic banking (Abdel Karim, 2001); Samad, Gardner and Cook, 2005). In the case of profits, both the investor and entrepreneur share the reward of the project based on pre-agreed arrangements. In the case of failure, all financial loss is borne by the capitalist and the entrepreneur loses his labor (Iqbal and Molyneux, 2005: P.28). Risk is fairly distributed in IFIs. Investor (supplying capital) loses capital and entrepreneur (providing labor) loses his entire labor.\par
Under a Mudaraba contract, the two partiesthe financier (supplier of funds) and the entrepreneur (trustee of the venture) share profits according to the agreed-upon profit and loss sharing (PLS) ratio.\par
The first key element of a Mudaraba contract is that the return is not guaranteed to the lender. This principle is in direct contrast to conventional interestbased lending/ financing. In interest-based lending, a loan is not contingent upon a profit or loss outcome of the entrepreneur, and is normally secured by collateral. Thus, any losses must be borne by the debtor, not the lender.\par
The second key element of a Mudarabah contract concerns losses that may arise from the business venture. "The financier or investor is not liable for losses beyond the capital he has contributed, and the entrepreneur or trustee does not share in financial losses except for the loss of his time and efforts" (Maniam, Bexley and James, 2000, p.4).\par
The third element of a Mudaraba contract is that a financier (i.e. an Islamic bank) has no control over the management of the business venture undertaken by the entrepreneur or trustee. 
\section[{c) Murabaha(Cost Plus Profit Margin)}]{c) Murabaha(Cost Plus Profit Margin)}\par
Murabahais similar to conventional trade financing where the Islamic bank finances the purchase. A buyer of a product approaches the bank for financing the product. The bank buys the product at the market price and sells the product to the buyer (borrower) at a mark-up price. The mark-up price is the market price plus the cost of transaction., which represents the profit of the bank. Critiques of Islamic banks say the cost of transaction is exactly equal to the current interest rate. The interesting characteristic of Murabaha is that unlike conventional bank trade financing, the ownership and the title of the product remain in the hands of bank until payment is complete. It is a popular substitute for interest-based conventional trade financing (Josh, 1997). From an economic point of view, Murabahah financing and interest-based trade financing appear quite similar except in the contractual features. individual Muslims but also for Islamic Financial Institutions (IFIs). IFIs are considered instruments for therefore, obligated to pay "Zakah" from their profits to the poor. When Islamic banking was in the embryonic stage, it was expected that Islamic banks would be instruments for ensuring a "just and equitable" society not only by paying Zakah (the poor due) from their profits but also by financing small businesses, trades, and agriculture. The interests of small traders, businesses and agriculture should not be neglected while serving big businesses, corporation and industries. That is, laying an emphasis on microfinancing is one of the objectives of Islamic banks.\par
Forth, "Qard-hasan" is repeatedly emphasized in Hadith and Quran. The basic message of Islam is to support the needy and feed the poor. 'Spending out of what God has provided' has been frequently instructed in the Quran. The "Qard-al-hasan (benevolent) financing is a cornerstone of Islamic finance"  {\ref (Samad, Gardner, Cook, 2005)}. IFIs are expected to practice and enhance "Qard-hasan" in the society. 
\section[{III.}]{III.} 
\section[{Survey of Literature}]{Survey of Literature}\par
There are empirical researches. However, these researches did not deal with Islamic banks' financial performances during the pre GFC and the crisis period. Uppal and Mangla (2010) examined the experience of Islamic banks of two countries (Pakistan and Malaysia) with respect to global financial crisis (GFC) and found that Islamic banks of these countries "were not immune from the ravages of the GFC" (P.167). However, their study did not focus on the average efficiencies of Islamic banks but rather on relative ratios between two periods (pre GFC and during GFC).\par
Ashkari, \hyperref[b2]{Iqbal and Mirakhor (2009)} claimed that Islamic banks are viable and superior alternatives to conventional banks because of Islamic banks' unique product characteristics. However, they did not study the impact of GFC. \hyperref[b15]{Samad (2004}\hyperref[b14]{Samad ( , 1999) )} compared performance between interest-free Islamic banks and interest-based conventional banks of Bahrain and Malaysia with respect to profitability, liquidity risk and credit risk and they found a significant difference. \hyperref[b7]{Kazarian (1993)} compares Islamic banking with conventional banking in Egypt and found differences. Arif (1993) evaluated the performance of Bank Islam Malaysia during the first six years of its establishment and observed an improvement in performance.\par
Studies on the theoretical front include Chapra (1985), \hyperref[b16]{Siddiqi (1983)}, \hyperref[b18]{Zeneldin (1990)}, \hyperref[b5]{Kahf (1999)},  {\ref Khan and Mirakhor (1986)}, \hyperref[b4]{Iqbal and Mirakhor (1999)}, and Mannan (1998). They discussed the institutional issues of Islamic bank operation, including Arabic concepts and principles of finance that are subject to interpretation.  {\ref Maniam, Baxely, and James (2000)} analyzed the perception of Islamic financing in the U.S., along with a discussion of the problems of applying Islamic financing tools.\par
Samad, Gardner, and Cook (2005) focused on identifying the relative importance of Islamic financial products by examining the balance sheet of two Islamic banks, Bank Islam Malaysia and Islamic Bank of Bahrain. They ? Askari and Mirakhor (2009), \hyperref[b3]{Bacha (1995)} and \hyperref[b16]{Siddiqi (1983)} dealt with institutional and product issues of Islamic banks. Askari and Mirakhor argued that a profit and loss sharing contract, being equity based, is better than a conventional equity contract.\par
There are studies (Aggarwal and Yousef (2000), Metwally (1997), Kuran (200\$), and  {\ref Bacha (2004)} that are critical of Islamic banks with regards to risk associated with Islamic banking.\par
Apps' (2009) study is not an empirical study. It is rather a descriptive study with statistical references.\par
The survey of literature clearly shows that there is no cross-country Islamic banks' efficiency studies dealing with the GFC impact. Finding answer to the GFC impact on Islamic banks is a major contribution of this paper.\par
IV. 
\section[{Data and Methodology a) Data}]{Data and Methodology a) Data}\par
Data for bank performance measure, ROA, are obtained from bank annual reports. Each bank ROA is reported in Table \hyperref[tab_2]{1}. 
\section[{b) Methodology}]{b) Methodology}\par
The stability of Islamic bank performances between the pre-GFC and the GFC periods is tested by a test of hypothesis. Whether the global financial crisis during 2009-2010 has had an impact on Islamic bank performances is tested by parametric, i.e., t-test and ANOVA and non-parametric, i.e., Mann-Whiteney/Krus kal-Wallis K test tests.\par
The null hypothesis for t-test is tested against the alternative hypothesis as: Null hypothesis, H 0: µ ROApGFC = µ ROAGFC : There is no difference in ROA between the pre GFC and the GFC period. Alternative hypothesis, H a : µ ROAPGFC ? µ ROAGFC : There is a difference in efficiency between the pre GFC and the GFC period.\par
On the other hand, the non-parametric test, median test, is tested as: Null hypothesis, H 0 : Med ROApGFC = Med ROAGFC : There is no difference in median ROA between the pre-GFC and the GFC periods. Alternative hypothesis, H a : med ROAPGFC ? Med ROAGFC . There is a difference in median ROA between the pre GFC and the GFC periods.\par
If the null hypothesis is rejected, this research would demonstrate that the GFC has had an impact on the difference of bank performances. The performance  \hyperref[tab_4]{2 and Table 3.} V.  \hyperref[tab_2]{1} shows that mean performance of Islamic banks decreased from 3 percent to 1 percentin the GFC period.  Table \hyperref[tab_3]{2} shows that the mean ROA during the pre-GFC and the GFC periods are 0.03 and 0.01 respectively. Test statics 2.12 for the t-test and ANOVA rejects the null hypothesis that : H 0 : µ ROApGFC = µ ROAGFC. That is, the mean ROA 0.03 and 0.01 during the pre-GFC period and GFC period respectively are significantly different. 
\section[{Empirical Results}]{Empirical Results}\par
Similarly, Table \hyperref[tab_4]{3} shows that the median ROA during the pre-GFC and the GFC periods are 0.021 and 0.012 respectively. Test statics 4.23 and 2.04 for Kruskal-Wallis and Wilcoxon/Man-Whitney respectively rejects the null hypothesis that : H 0 : Med ROApGFC = Med ROAGFC. That is, the mean ROA 0.03 and 0.01 during the pre GFC period and GFC period respectively are significantly different.\par
The rejection of the null hypothesis of the equality of mean and median performances rejects Apps (2008)'s claims that Islamic bank performances are stable and are immune from the global financial crisis. 
\section[{VI.}]{VI.} 
\section[{Conclusion}]{Conclusion}\par
Whether the global financial crisis had an impact on the performances Islamic banks is examined by a test of hypothesis. ROA measures bank performances. The test of null-hypothesis, H 0 : µ ROApGFC = µ ROAGFC is tested against the alternative hypothesis, H a : µ ROAPGFC ? µ ROAGFC .\par
The test of significance in both parametric and non-parametric tests, in Table \hyperref[tab_3]{2} and Table \hyperref[tab_4]{3}, shows that the equality of mean performance of Islamic banks during the pre-GFC and the GFC periods is rejected, suggesting that global financial crisis has had its impact on Islamic Bank performances. The rejection of the null hypothesis of the equality of mean and median performances refutes Apps (2008)'s claims that Islamic banks performances are stable and are immune from\begin{figure}[htbp]
\noindent\textbf{}\includegraphics[]{image-2.png}
\caption{\label{fig_0}}\end{figure}
  \begin{figure}[htbp]
\noindent\textbf{1} \par 
\begin{longtable}{P{0.08838495575221238\textwidth}P{0.15608407079646017\textwidth}P{0.06017699115044248\textwidth}P{0.11095132743362832\textwidth}P{0.04513274336283186\textwidth}P{0.19745575221238937\textwidth}P{0.06017699115044248\textwidth}P{0.1316371681415929\textwidth}}
\multicolumn{4}{l}{Pre GFC Period ROA}\tabcellsep \tabcellsep \multicolumn{2}{l}{GFC Period ROA}\tabcellsep \\
Bank*\tabcellsep ROA\tabcellsep Firm\tabcellsep ROA\tabcellsep Firm\tabcellsep ROA\tabcellsep Firm\tabcellsep ROA\\
1\tabcellsep 0.007\tabcellsep 15\tabcellsep 0.105\tabcellsep 10\tabcellsep 0.010\tabcellsep 15\tabcellsep 0.040\\
2\tabcellsep 0.052\tabcellsep 16\tabcellsep 0.048\tabcellsep 2\tabcellsep 0.010\tabcellsep 16\tabcellsep 0.015\\
3\tabcellsep 0.004\tabcellsep 17\tabcellsep 0.073\tabcellsep 3\tabcellsep 0.011\tabcellsep 17\tabcellsep -0.013\\
4\tabcellsep 0.022\tabcellsep 18\tabcellsep 0.062\tabcellsep 4\tabcellsep 0.021\tabcellsep 18\tabcellsep 0.041\\
5\tabcellsep 0.019\tabcellsep 19\tabcellsep 0.012\tabcellsep 5\tabcellsep 0.013\tabcellsep 19\tabcellsep 0.034\\
6\tabcellsep 0.023\tabcellsep 20\tabcellsep \tabcellsep 6\tabcellsep 0.033\tabcellsep 20\tabcellsep 0.022\\
7\tabcellsep \tabcellsep 21\tabcellsep 0.020\tabcellsep 7\tabcellsep 0.008\tabcellsep 21\tabcellsep 0.016\\
8\tabcellsep 0.020\tabcellsep 22\tabcellsep \tabcellsep 8\tabcellsep 0.010\tabcellsep 22\tabcellsep 0.006\\
9\tabcellsep 0.016\tabcellsep 23\tabcellsep 0.018\tabcellsep 9\tabcellsep 0.008\tabcellsep 23\tabcellsep 0.027\\
10\tabcellsep 0.027\tabcellsep 24\tabcellsep -0.058\tabcellsep 10\tabcellsep 0.012\tabcellsep 24\tabcellsep \\
11\tabcellsep 0.000\tabcellsep 25\tabcellsep 0.000\tabcellsep 11\tabcellsep -0.012\tabcellsep 25\tabcellsep -0.012\\
12\tabcellsep 0.072\tabcellsep 26\tabcellsep 0.039\tabcellsep 12\tabcellsep 0.031\tabcellsep 26\tabcellsep 0.030\\
13\tabcellsep 0.040\tabcellsep 27\tabcellsep 0.020\tabcellsep 13\tabcellsep 0.003\tabcellsep 27\tabcellsep 0.016\\
14\tabcellsep 0.073\tabcellsep 28\tabcellsep \tabcellsep 14\tabcellsep -0.013\tabcellsep 28\tabcellsep 0.016\\
\tabcellsep \multicolumn{2}{l}{Mean ROA= 0.030}\tabcellsep \tabcellsep \tabcellsep \multicolumn{3}{l}{Mean ROA = 0.014}\\
Table\tabcellsep \tabcellsep \tabcellsep \tabcellsep \tabcellsep \tabcellsep \tabcellsep \end{longtable} \par
 
\caption{\label{tab_2}Table 1 :}\end{figure}
 \begin{figure}[htbp]
\noindent\textbf{2} \par 
\begin{longtable}{P{0.19125\textwidth}P{0.13458333333333333\textwidth}P{0.17\textwidth}P{0.07083333333333333\textwidth}P{0.2125\textwidth}P{0.07083333333333333\textwidth}}
Variables\tabcellsep \multicolumn{2}{l}{Mean Method}\tabcellsep df\tabcellsep \multicolumn{2}{l}{Statistics Probability}\\
Pre GFC ROA\tabcellsep 0.03\tabcellsep t-test\tabcellsep 48\tabcellsep 2.15\tabcellsep 0.036\\
GFC ROA\tabcellsep 0.01\tabcellsep Anova F-statistics\tabcellsep (1,48)\tabcellsep 2.15\tabcellsep 0.037\end{longtable} \par
 
\caption{\label{tab_3}Table 2 :}\end{figure}
 \begin{figure}[htbp]
\noindent\textbf{3} \par 
\begin{longtable}{P{0.3721030042918455\textwidth}P{0.17510729613733905\textwidth}P{0.05472103004291845\textwidth}P{0.05472103004291845\textwidth}P{0.03648068669527897\textwidth}P{0.08025751072961373\textwidth}P{0.07660944206008584\textwidth}}
Variable\tabcellsep \multicolumn{4}{l}{Median Mean Rank Mean score Count}\\
Pre GFC ROA\tabcellsep 0.021\tabcellsep 29.91\tabcellsep 0.28\tabcellsep 28\\
GFC ROA\tabcellsep 0.012\tabcellsep 21.42\tabcellsep -0.26\tabcellsep 28\\
All\tabcellsep 0.018\tabcellsep 25.50\tabcellsep 0.0002\tabcellsep 56\\
Method of Test\tabcellsep \tabcellsep \tabcellsep \tabcellsep df\tabcellsep statistics\tabcellsep Probality\\
Kruskal-Wallis\tabcellsep \tabcellsep \tabcellsep \tabcellsep 1\tabcellsep 4.23\tabcellsep 0.03\\
Kruskal-Wallis (tie-adj)\tabcellsep \tabcellsep \tabcellsep \tabcellsep 1\tabcellsep 4.23\tabcellsep 0.03\\
Wilcoxon/Mann-Whitney\tabcellsep \tabcellsep \tabcellsep \tabcellsep \tabcellsep 2.04\tabcellsep 0.04\end{longtable} \par
 
\caption{\label{tab_4}Table 3 :}\end{figure}
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