Measuring the performance of conventional and Islamic banks in MENA countries: Recommendations for Libya

Abstract

One of the obstacles to economic development in MENA countries is the low quality of institutions. A significant factor for the long-term development of Islamic finance is the relative performance of Islamic banks compared to conventional banks. Indeed, if Islamic banks suffer from a weaker performance than traditional banks, their development is likely to be limited. The objective of this article is to analyze the role of institutional quality in the development of Islamic finance. This study aims to examine the association between the performance indicators of conventional banks and Islamic banks, as well as their efficiency scores, in a panel of Middle East and North Africa (MENA) countries from 2000 to 2023. To do so, we will test how the cost efficiency gap between Islamic and conventional banks is influenced by institutional quality. As we have explained, this question is crucial for the future of Islamic finance, due to the significant implications that the discovery of a role for institutional quality in the performance of Islamic banks would have. Instead, it can be said that contemporary economic conditions have led to the renaissance, expansion, and growth of Islamic banking, which has proven its ability to withstand numerous financial crises, thanks to its specific approach to managing financial assets, which directs them towards real investment.