A Comparative Analysis of Optimal Performance in the Islamic and Conventional Banking Systems: Using a Jump-Diffusion Stochastic Process

Document Type : Research Paper

Authors
Hasan Kiaee 1
Hamid Abrishami 2
Hasan Sobhani 2
1 Ph.D. Candidate, Faculty of Economics, University of Tehran
2 Professor of Economics, Faculty of Economics, University of Tehran
10.30497/ies.2013.1511
Abstract
Considerable growth of Islamic banking industry during recent years makes it more interesting for researchers, to compare relative performance of Islamic banking system and its conventional counterpart. This paper, as a new approach, tries to compare optimal performance of these systems using stochastic optimal control. It is supposed that the loan mechanism, in both Islamic and conventional banking systems, follows the jump-diffusion stochastic process. Also, for the construction of the objective function in each model, the characteristics of Islamic and conventional banking systems are taken into account. Simulating stochastic differential equations, derived by solving the stochastic optimization problem in each system, enable us to compare the optimal performance of two banking systems. To create comparable situation, we assumed similar parameters for differential equations in both systems. According to the simulation results, the optimal performance of loans and deposits in Islamic banking are superior to ones in conventional banking system. Sensitivity analysis of the results to assumed parameter values show that the loan profit or interest rates are the most effective parameters, in such a way that, declining banking rates in each system could change the performance in favor of that system.
Keywords
islamic banking
Conventional Banking
optimal performance
stochastic optimization
jump-diffusion process
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Islamic Economics Studies Bi-quarterly Journal
Volume 6, Issue 1 - Serial Number 11
November 2014
Pages 107-131