UNRAVELING RISK AND RETURN IN ISLAMIC BANKING: DOES THE PERCEIVED HIGH RETURN EXIST?

Abstract

Using mixed qualitative and quantitative methods, this study analyzes the risk and return results of Islamic banks versus their conventional counterparts in Malaysia in order to evaluate arguments that adherence to shariah based banking principles minimizes risk exposure. Using comparative data from eight Malaysian banks, our empirical investigation provides limited support to theoretical arguments that the Islamic banks minimize risk. Our results show that there is no statistically significant difference in returns and risk between Islamic and conventional banks.  We interpret these results as providing support for theories of convergence between conventional finance and Islamic finance.  Further, we argue that policy makers thus need to take into account conventional models of systemic and structural risk when regulating burgeoning Islamic financial markets.

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