Financial Characteristics of Banking Industry in the GCC Region: Islamic Vs. Conventional Banks

This study determines whether it is possible to distinguish between conventional and Islamic banks in the Gulf Cooperation Council (GCC) region on the basis of financial characteristics alone. Islamic banks operate under different principles, such as risk sharing and the prohibition of interest, yet both types of banks face similar competitive conditions. The combination of effects means it is unclear whether financial ratios will differ significantly between the two categories of banks. We examine 16 financial ratios commonly used in the banking industry and use logit, neural networks, and k-means nearest neighbors to determine whether researchers or regulators could use these ratios to distinguish between types of banks. Although the two categories of banks have similar financial ratios, the best nonlinear classification technique (k-means nearest neighbors) is able to correctly distinguish Islamic from conventional banks in out-of-sample tests at about an 87% success rate.