The spread is the difference between the interest rate on deposits and the interest rate on loans in commercial banks. Whereas, the spread in Islamic banks is the difference between income on Islamic financing/ investment transactions and the expense on customer deposits.
There is no such study that compare the average spread. What is the significance of this study?
Saeed Al-Muharrami wants to say the comparaison of Interest margin, Net interest income or profit margin between Islamic and conventionnal banks. I think that this type of study doesn't exist for the islamic bank. The research about market power and bank efficieny are related to idea proposed by Saeed Al-Muharrami.
Thank you Abdul Ghafar for your comments. We know that one of guiding principles of Islamic finance is their emphasis on the rejection of usurious and unfair financing conditions. Therefore, how close Islamic banks from this guiding principles, in term of the spread, compare to commercial banks?
Well, you can simply compare the investment pattern and the related income of Islamic banks. Our experience shows that Islamic banks are more concentrated on mark-up based murabaha financing instead of pure profit and loss sharing Musharaka or mudaraba, ijara based investmentc. It is seen from data of many Islamic banks that more than half of their assets are channeled to markup based projects. You can check the paper of Suzuki Yasushi on Islamic bank rents. In terms of spread, Islamic banks claim higher spread margin on an average even in the GCC region than conventional banks which Suzuki (2014) entitles as "Islamic bank rents".
You could consult the link below. Although it is an study for a reduced geogrphical area, it could be useful for you.
http://www.academia.edu/10913946/Comparative_Analysis_of_Profit_Rate_of_Islamic_Banks_on_Investment_ROI_and_Fixed_Rate_of_Interest_on_Loan_of_Conventional_Banks_in_Bangladesh
Although it is more of a tangent topic, you could look into sin stock research. Sin stocks are stocks of unethical companies (alcohol, gambling, drugs, etc), which are also prohibited under islamic finance. The consensous at the moment seem to be that socially responsible investing (SRI) underperforms unrestricted investing in the U.S. and Europe. A good first read is the seminal paper by Hong & Kacperczyk:
http://pages.stern.nyu.edu/~sternfin/mkacperc/public_html/sin.pdf
the spread does not move together, because the received income is very much influenced by the same monetary policy (overnight rate plus spread)(for both Islamic and conventional), while on the liabilities side it depends on the contract. For example mudarabah contract may allow you to share the profit with an Islamic bank. Hence, the spread may move on the same direction. More importantly, the study should also look at the results of current practices (maqasid sharia), rather than the spread. Which the conventional banks fails to address.
Thank you Markus for directing me to read about sin stocks. Thanks for link for the paper.
Thanks abdul Ghafar for sharing your knowledge. If commercial and Islamic banks are under the same monetary policy, then it would make more sense to compare the spread between them.
This is a paper that was published in one of the leading journals on banking comparing Islamic versus conventional banking. I am sure you'll find it useful and its references could lead you to additional research that has been done on the matter
http://www.sciencedirect.com/science/article/pii/S0378426612002920
Thank you Bader for sharing your views and for sending the link of the paper.
HI!
Try this link. Perhaps it can lead you to the answers to your questions:
http://www.erf.org.eg/CMS/uploads/pdf/1185358321_finance4.pdf
Thank you Salina for your participation and for sending the link.
The spread between the lending rate and the interest on deposit in conventional banks can be represented in the Mudareb share in Islamic banks. The investment accounts in Islamic banks are usually under Mudaraba contract (profit-sharing) in which the Islamic bank is the Mudareb (manager) and the investment account holders are RabElmal (investors). The realized profits from investing the funds are distributed between the two parties in accordance with predetermined ratio to be agreed upon from inception.
Thank you Farid for your illustration. May I illustrate further the types of interest income on loans and interest income on customer deposits and their equivalency in Islamic banking at the following attached file.
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