Open Access

The growth of Islamic banking is evident from its presence in over 60 countries and the establishment of Islamic branches by major conventional banks. Despite its small share in global financial assets, there is extensive literature examining the performance of Islamic banks. Some researchers claim that Islamic finance is imitating conventional banks and it has therefore become necessary to understand the business model of Islamic banks. This bachelor thesis reviews theoretical and empirical literature to identify differences between Islamic and conventional banks. The objective is to examine the stability of Islamic banking by comparing performance indicators on capitalization, stability, profitability and efficiency. The results indicate that competitive pressure leads Islamic banks to deviate from their principles which promote profit and loss sharing (PLS). The preference for PLS lies within the fact that profit is earned on actual performance. Deposits in Islamic banking may also be structured according to PLS and it is observed that Islamic banks distribute profits even if they earned a loss to prevent withdrawal. Although Islamic banks tend to be better capitalized and more profitable than conventional banks, the data on their stability and liquidity are inconclusive. Data gathered on efficiency indicate that Islamic banks are more profit efficient while conventional banks are more cost efficient. Islamic banks seem to spend more on remuneration and training which positively impacts managerial competence. The limitation of this paper is that the reviewed empirical studies are based on different sample sets. In addition, Islamic banks might not pursue the same practice everywhere as Shariah law is based on interpretation. This leads to differences in what is considered Shariah-compliant and therefore reduces the comparison’s reliability.