DO ISLAMIC WINDOWS OUTPERFORM FULL-FLEDGED ISLAMIC BANKS? EMPIRICAL INSIGHTS FROM A FIVE-COUNTRY PANEL

Abstract

Islamic finance has moved from the periphery to a recognisable component of the international financial system over the past two decades. Recent industry data (ICD-LSEG, 2023) point to 336 fully licensed Islamic banks and 274 Islamic windows operating within conventional institutions worldwide, with the latter category expanding roughly twice as fast as the former during the preceding ten-year period. For Uzbekistan, where Law LRU-1126 took effect on 17 June 2026 and established the legal foundation for Islamic banking activity, the natural policy question is whether the window model - Shariah-compliant divisions embedded within conventional banks - delivers stronger financial performance than fully separate Islamic banks. This article addresses that question empirically.
A balanced quarterly panel comprising 394 observations across ten cross-sectional units was constructed from the IFSB Prudential and Structural Islamic Financial Indicators database. The sample covers Indonesia, Malaysia, Oman, Pakistan and Saudi Arabia over 2014Q1–2023Q4, jurisdictions selected for the coexistence of both organisational forms and consistent reporting throughout the period. Four dimensions of bank performance were examined: operational efficiency (cost-to-income ratio, CIR), profitability (net profit margin, NPM),asset productivity (return on assets, ROA) and asset quality (non-performing financing, NPF). Estimation was carried out in EViews Student Version using pooled ordinary least squares with country fixed effects (Indonesia serving as the baseline) and Huber-White heteroskedasticity-consistent standard errors. Cross-section fixed effects could not be applied because the window indicator is time-invariant within each cross-sectional unit and would be absorbed by perfect collinearity.