*4.2.2.4 Country inflation*

Referring to **Table 13**, about the combined effect of inflation on the CBs' FP, we pointed out that all FP measures suffered a significant decline. As presented in **Table 14**, since the average inflation over the entire period was not stable, it dwindled between several peaks where positive inflation (9.52% in 2012, 8.56% in 2015, 7.09% in 2017, 7.35% in 2018, 8.46% in 2019, 9.48% in 2021, and 9.96% in 2022) was followed by deflation, and so on (7.26% in 2011, 8.12% in 2013, 6.73% in 2014, 6.22% in 2016, and 7.26% in 2020). However, following the Subprime crisis, we noticed two phenomena: a recessionary shock that resulted in a lasting opening of the output gap because of the unstable national inflation rates; followed by deflationary rates that led the CBs to seek historical inflation levels. The quick inflation variation in all the countries explained that whatever the region, the CBs' activities had unique consequences and that the conventional banking system is sensitive to inflation. When inflation increases, resource deposits and loan demand fall. Consequently, the CBs' benefits undergo a reduction, which is reflected in their efficiency and liquidity and, in the end, in their solvency. Moreover, since the deflation periods are limited, the inflation return filled new investments given the rise in commodity prices and investment costs (2012, 2015, 2017, 2019, 2021, and 2022). Our results underline the sharp deterioration of CBs' FP and justify the old conventional products' weaknesses.


**Table 13.**

*Summary of the close effects of inflation on the FP of conventional and Islamic banks.*

*How to Successfully Select the Best-Performing Bank Based on the Best Auditor's… DOI: http://dx.doi.org/10.5772/intechopen.113201*


**Table 14.**

*Evolution of the average inflation*

 *rate.* Therefore, relying on new unconventional instruments as a supplement to the practice of monetary policy to create new revenues that are primarily focused on price stability can be an efficient solution to maintaining FP continuity. As such, the obligation to reduce large variations in the interest rate is clear. Taking the broad view that prevailed before and following the Subprime crisis, inflation was the most important factor that triggered a huge rise in interest rates. In an unstable economic framework with significant financial shocks, it was necessary to plan FP growth according to inflation rates on relatively stable trajectories using the functions that would allow CBs to minimize the variances of inflation and maximize their FP.

Returning to **Table 14**, despite the price deflation between 2010 and 2011, this variable had an unfavorable effect on the IBs' FP. Like CBs, between 2010 and 2022, the obtained combined effect implies that the rise in inflation froze all measures of IBs' FP due to the sharp rise in prices by designing the investment costs, especially in 2012, 2015, 2017, 2019, 2021, and 2022. Indeed, we worked over a stable economic decade without a crisis, whereas inflation remains a variable that evolves dependently on the prices' variation on the markets of goods and services. Given the average rates, the period immediately after the Subprime financial crisis showed specific characteristics similar to those of the second half. This difference reflected rational and significant consequences in this situation. Therefore, we advocated the hypothesis of the transfer of difficulties between the financial market and other market types. Since Islamic finance forbids the practice of all kinds of interest, usury, and Riba, the IBs' activities are essentially based either on techniques practicing potential investment based on the principle of sharing of products and losses, such as Mucharaka and Mudaraba, or on the exchange of real products, such as Murabaha and Ijara. Anyway, the impact of inflation on these financial instruments had no great influence on their historical values. However, inflation has an indirect effect on the IBs' FP. Optimal arbitrage is now more in favor of IBs activity volume. Inflation results in a swelling of the value of exchangeable products and raw materials necessary for investments. In other words, it slows down the initiative and the speed of investment, which significantly deteriorates the IBs' profitability and liquidity and creates subsequent efficiency and solvency problems. Finally, the main distinction in the IBs' FP measures is accounted for by the higher activity variance, an original phenomenon of the great moderation in prices that happened in 2012, 2015, 2017, 2018, 2019, 2021, and 2022. This inflationary rise created volatility and instability in all IBs' FP indicators.
