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Investigating similarities between Islamic and conventional banks in GCC countries: a dynamic time warping approach

Gassouma, Mohamed Sadok and Ben Hamed, Adel and El Montasser, Ghassen (2021): Investigating similarities between Islamic and conventional banks in GCC countries: a dynamic time warping approach. Forthcoming in: International Journal of Islamic and Middle Eastern Finance and Management

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This paper aims to study the similarities between Islamic and conventional banks in the Gulf Cooperation Council (GCC) countries by assigning them to different clusters. We perform such clustering by employing the k-means algorithm with dynamic time warping barycenter averaging. More specifically, the series of average efficiency scores are used in this clustering. In this regard, for each Islamic or conventional bank, we calculated its series of efficiency scores using the stochastic frontier production functions of Battese and Coelli (1995). Our empirical study covered 44 Islamic banks and 46 conventional banks in GCC countries during 2006-2015. The results show that Islamic and conventional banks are included in the same cluster for Qatar, Bahrain, and Oman. In contrast, Islamic and conventional banks do not share the same cluster for the Kingdom of Saudi Arabia, Kuwait, and the United Arab Emirates. This is due to setting the interest or profit rate below the social discount rate (a measure of an optimal profit rate for Islamic Banks). In this case, banks are incentivized to take more risks to compensate for interest/profit losses, which increases efficiency and allocates Islamic and conventional banks to different clusters. Accordingly, there is no absolute discrimination due to the initial status between Islamic and conventional banks. However, the overall banks, either Islamic or conventional, are discriminated through the distance of the banking applied interest/profit rate and the social discount rate.

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