Abstract:

This paper investigates the drivers of bank performance overtime, between Islamic and Conventional banks by using a dynamic panel approach. The study period covers ten consecutive years (2006-2015), we use ROAA (Return on average Asset), ROAE (return on average Equity), and NIM (Net Interest Margin), Sharpe ratio, Jensen and Treynor indices as measures of performance. We applied panel regression by using the technique of fixed effect estimation instead of random effect, then to address the issue of endogeneity and omitted values we applied two step system of GMM (Generalized Method of moment). Results suggest that bank performance is mainly driven by non-performing loan provision (NPLP), cost to income ratio as measure of bank efficiency, and size, net loan to total asset with NPLP and cost to income ratio being significant when using different performance measures. Within a dynamic panel framework NPLP has a negative impact on CBs performance whereas it affects positively IBs performance. This is consistent with  Beck et al. (2013) who suggest that IBs have higher asset quality than conventional banks. This study also contradicts the idea that IBs are less cost-efficient than CBs because the cost to income ratio as a measure of efficiency is more significant for IBs than CBs.