Purpose – The purpose of this paper is to examine the way Islamic financial institutions dealt with the recent financial problems in terms of risk management. Design/methodology/approach – In total, 27 Islamic banks and the same number of conventional banks selected from a wide range of countries around the world were analyzed. The capital ratios, based on the Basel Committee, are the primary tools used to analyze the riskiness of the Islamic and conventional banks. The focus on capital ratios is relevant in light of changes in banks' balance sheets due to significant write offs that caused a huge credit crunch in the western world. Capital ratios are considered as a reliable source in predicting potential bankruptcies. Findings – The paper shows that Islamic banks are maintaining better capital ratios than to their conventional counterparts. Originality/value – The paper presents a new approach to the comparative performance of Islamic and conventional banks in terms of risk management. The research design as well as the findings can be very useful to academicians and banking professionals alike.

The literature on corporate governance at corporations and conventional banks is extensive; however, it does not assign proper weight to Islamic finance institutions despite their growing importance in the global financial system. Important questions that are still unexplored to date include: What are the attributes of the corporate governance mechanisms at Islamic finance institutions? and How do their corporate governance attributes affect their performance and risk taking behavior? To answer these questions, we use an exhaustive sample of Islamic and non-Islamic banks in the Gulf Cooperation Council (GCC) region, in the years 2007 to 2009, i.e., around the global financial crisis of 2008 which represents a natural stress test. We assess the impact of the corporate governance characteristics ownership structure / concentration, board of directors' size, composition, and independence and the effectiveness of the legal system and investor protection of the country on a wide array of bank performance indicators, including profitability, efficiency, asset quality, and risk. We perform univariate and multivariate tests which control for many potentially confounding effects. Our results show that, during the 2008 global financial crisis, the return on assets and operating income-to-total assets were significantly higher at Islamic banks compared to non-Islamic banks in the GCC region by more than 1 and 2.5 percent, respectively. Islamic banks also exhibited a more prudent risk-management behavior and higher solvency than non-Islamic banks. Moreover, consistent with the notion of the importance of corporate governance, asset-productivity at Islamic banks is significantly increasing in family- and foreign-ownership and the effectiveness of the legal system and investor protection, and it is decreasing in board size and insiders. Furthermore, risk-taking behavior at Islamic banks is decreasing in government- and family-ownership and the investor-protection level in the home country. This study has important practical implications. Investors may consider including Islamic banks in their portfolios given their resilience to the financial crisis. Non-Islamic financial institutions may consider adopting some of the features of Islamic banking into their operating models. Policy makers can use our results for better policy formulation and regulation of their financial system.

Bond yields of Treasury and corporate bonds are observed in a listed exchange. This article reports the findings on the market yield behaviour of two types of debt securities in the same exchange, the sharia-compliant sukuk bonds and the normal conventional bonds. There are 17 exchanges where sukuk bonds are traded, and the outstanding value is estimated at US$ 1,200 billion. The average yields of sukuk Treasury bonds are significantly higher (premium) than that of conventional Treasury bonds. On the other hand, investors in the sukuk corporate bonds receive slightly lower returns (discount) of about 25 basis points in the case of long-term sukuk bonds. To the best of our knowledge, this is the first study to verify these differences using appropriate advanced econometric methods. These results have far-reaching implications for the market practices as well as for teaching of bond pricing behaviour since this new form of debt markets is growing at about 17 per cent a year. JEL Classification: F23, F31, G12