Islamic Banks' Profitability in an Interest Rate Cycle

A couple of recent discussions in our Linkedin forum delved into the various risks faced by Islamic financial institutions and whether any of these would be specific and/or more concentrated due to the nature of their business model. Here is a short piece that - although outdated - provides a good starting point for exploring the issue further.

Islamic Banks' Profitability in an Interest Rate Cycle
Anouar Hassoune
International Journal of Islamic Financial Services (now IBF Review)
July - Sept 2002

Excerpts: "All in all, not only does Islamic banks’ profitability seem less volatile than that of conventional peers, but it is also higher on average, at least in the GCC region. These two elements are essential for assessing the soundness of Islamic banks’ financial profile and creditworthiness. Islamic banks thus seem less vulnerable to the cyclical nature of returns on assets and costs of liabilities."

"On the other hand, Islamic banks lose on the grounds of liquidity, assets and liabilities concentrations and operational efficiency what they tend to win in the field of profitability."

Islamic Banks' Profitability in an Interest Rate Cycle