Conservative Islamic banking better weathers financial storms

‘More stable and less risky’ operations key, says Memorial researcher

Feb. 15, 2016

Dr. Ashrafee Hossain, pictured near the banking sector of downtown St. John's, compares Western and Islamic banking during a global recession in his recent research.

Dr. Ashrafee Hossain compares Western and
Islamic banking during recessions.

Recent research at Memorial University has found that internationally, Islamic banks fared better than their secular counterparts during the global recession of 2007-08.

Dr. Ashrafee Hossain, an assistant professor of finance in the Faculty of Business Administration, is studying Islamic banking, a growing niche in the financial services sector. In his study, Is Islamic Banking Really Better?, conducted in the fall of 2015, Dr. Hossain compared the philosophy of Islamic banks to the operations of secular institutions and found Islamic banks out-performed their counterparts during the financial crisis and subsequent recovery phase.

“From our analysis of banks from both developed and emerging economies, we find that Islamic banks were better off than conventional banks on all of the performance indicators that we employed,” he said. “We observed that Islamic banks were more efficient and cost-effective machines.”

Dr. Hossain credits the “more stable and less risky operating edifice” of Islamic banking with its ability to weather this time of global financial difficulty.

Contrasting philosophies

Islamic banking systems only approve transactions backed by tangible assets, he says, which makes it less risky. The profit-loss sharing philosophy of Islamic banking, in which both the lender and the borrower have profit and loss responsibilities, ensures that “both parties are more conscious and cautious about the investment,” said Dr. Hossain. “The core idea of Islamic banking is to ensure that every financial transaction is just. It saves [people] from financial exploitation by devising a system that is not based on interest.”

pull-quote-hossainThis is in contrast to the core philosophy of secular banks, which is to be profitable.

Islamic banking has long been stereotyped as sharia banking, a religious connotation that makes it inappropriate for Western, secular banking. However, Dr. Hossain says the Islamic system is simply a more restrictive way of banking. Although modern products such as mortgages are offered, financial innovations are only possible if they meet precautionary criteria such as no interest, profit-loss sharing and asset-backed transactions, for example.

“This makes speculative products, like options and futures, impossible within the boundaries of Islamic banking. So innovation is encouraged in the Islamic system but it is restrained by certain conditions.”

Under-explored area

Dr. Hossain says this study, along with his ongoing research, can help the Western financial industry adopt the positive aspects of Islamic banking, which will make the industry more adverse to risk and reduce the probability of financial crisis in the future.

“It is an exciting area of corporate finance that is under-explored and I will be able to make great strides doing research in this area,” he said. “Most importantly, I think my research will make a difference.”

Dr. Hossain has a doctor of philosophy in finance from Concordia University, where he graduated with the Joe Kelly Graduate Award for Outstanding Thesis. His research interests focus on corporate governance, financial institutions, financial regulations, mergers and acquisitions and corporate social responsibly.

He is working on this project with Basit Baig, a student in Memorial’s master of business administration (MBA) program.

Mekaela Gulliver