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Financial Characteristics And Sustainability Of Islamic Banks: A
Comparative Analysis On Top Five Islamic Banking Countries
Name: Amin Jan
Matrix Id: G02849
Supervisor: Dr. Maran Marimuthu
Department: Management and Humanities
Course: M.PHIL in Management By Research
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INTRODUCTION
After the subprime crisis of (2007-2008) considering sustainability in no more optional.
In line of that, the global Alliance for banking on values GABV started operation in May 2011 with the motive to provide sustainable banking.
Banks performance is very vital for sustainable development in society due to its intermediary role (Jeucken, 1999 ;Brown, 2003)
Internal CAMELS rating techniques (Ravi Kumar, 2008) and external players FSB
100 financial crises in the last four decades (Chapra, 2008)
Financial crisis occur due to short term unstable strategies (Gore et-al 2009)
To avoid crisis businesses have to adopt long term strategies (Jeucken, 1999)
Lacking prudential regulations. Researchers filling the gap
Islamic and conventional are the two competitors in banking.
INTRODUCTION
IBs retain less than 1% of the total global banking assets (Beck, 2013 ;Isaac 2014)
large Islamic banks are financially unstable compared to large conventional banks (Cihak, 2010)
IBs in Europe exists as niche market (Cihak, 2010)
(CAGR 2006-2010 to 2008-2012) for major Islamic banking countries declined significantly (World Islamic bank competitiveness report 2011-2012 and 2013-2014)
The going concern concept (GAAP)
Financial characteristics to evaluate bankruptcy.
Bankruptcy used as a proxy for financial sustainability i.e. (bankrupt banks low sustainability, non-bankrupt banks high financial sustainability.
Source: World Islamic bank competitiveness report (2013-2014)
INTRODUCTION
Country Total IB share Total CB share
Bangladesh 12% 88%
Saudi Arabia 53% 47%
Malaysia 20% 80%
U.A.E 17% 83%
Kuwait 42.3% 57.7%
Qatar 24% 76%
Turkey 5.6% 94.4%
Bahrain 12.8% 87.2%
Indonesia 4.6% 95.4%
Pakistan 8.5% 91.5%
Average country
share
19.98% 80.02%
Table 1.1: Share of Islamic vs. conventional banks in
country total banking assets (2013-2014)
Country CAGR (2006-
2010)
CAGR (2008-
2012)
Decline
Saudi Arabia 19% 11% 8%
UAE 16% 14% 2%
Kuwait 22% 6% 16%
Qatar 39% 31% 8%
Bahrain 22% 2% 20%
Average 23.6% 12.8% 10.8%
Source: World Islamic bank competitiveness report (2011-
2012) and (2013-
Table 1.2: Cumulative asset growth rate of Islamic banks (2006-
2012)
20 % 80 %
11 %
INTRODUCTION
Economic sustainability of banksBroader concept which covers the micro, macro, and structural variables. Economic sustainability refers to the business ability of keeping its high earnings and maintaining business operations successfully in the long run. Economic sustainability checking in general deals with the following queries.
1: where is the business standing today?
2: where is the business going?
3: how is the business going to get there?
4: Evaluating and streamlining key policies i.e. profit, monetary value, leverage, liquidity, productivity etc.
INTRODUCTION
Why sustainability measurement is important?
Going concern concept (GAAP) Achieving the vision and mission.
How to measure sustainability?
Two sets (strong sustainability and weak sustainability) (Rennings, 1997)
Internationally recognized performance indicators (Keeble, 2003).
Literature ReviewAuthors & Year Topic Findings
(Said, 2013) (Smaoui et-al, 2011) (Yudistra ,2004) (Hassan et-al, 2003) (Zaman et-al, 2001)
Islamic bank’s performance on cross country basis
Favorable macro variable has positive relation on profitability
Large bank size has a significant positive relation to the firm’s profitability.
Higher cost to income ratio leads toward lower profitability.
The shorts term funding seems to have a positive relation with the profitability.
Size of the bank has negative impact on the profitability.
(Abduh ,2013) (Husain et-al, 2012) (Saleh et-al, 2006) (Sarker,1999) (Turn, 1996)
Islamic banks performance on the basis of difference in profitability determinants
Market concentration in banks specific factors
banks size in structural variable
And inflation in the macro variable has a positive impact on the Islamic bank’s profitability.
Literature Review
Authors & Year Topic Findings
(Muda et-al, 2013)(Sufian, 2007)(Bashir (2003)
Islamic bank’s performance on the basis of foreign vs. domestic Islamic banks
Domestic Islamic banks performed better then foreign Islamic banks.
higher leverage and large loans to asset ratio has positive impact on Islamic bank’s profitability.
(Qureshi et-al,2012) (Hanif et-al ,2012)(Akhtar (2011) (Ansari et-al ,2011) (Hamid et-al, (2011)(Safiullah, 2010) (Samad , 2004)
Islamic banks performance on the basis of Islamic vs. conventional banks
Profitability and productivity of conventional banks is better than Islamic banks,
Liquidity and solvency Islamic banks performed better than that of conventional banks.
Literature Review
Selection of appropriate bankruptcy model
Earlier work on bankruptcy (Beaver, 1966) ,(Altman ,1968), (Deakin, 1972), (Altman, Haldeman, and Narayanan 1977),(Ohlson, 1980), (Altman, 2000)
Features selection is very important in bankruptcy. Majors features are correlation matrix, t-test, stepwise regression, factor analysis (FA) and principle component analysis (PCA), and neural network (Tsai ,2009)
Ratios are the best in bankruptcy prediction (Pompe et-al, 2005)
Altman model is the best in predicting bankruptcy (Mossman, 1998)
Literature Review
Why to choose Altman model for Islamic banks sustainability?
Altman model is the most famous bankruptcy model and is different from the
rest in a sense that instead of a single feature it provides the blend of all vital
ratios in a single line.
Can Altman model works on Islamic banks?
Altman model can be applied to Islamic banks due to universal applicability
of ratios.
Problem Statement
Identification of Research Gap
(Smaoui et-al, 2011), (Yudistra, 2004) (Hassan et-al, 2003) studied cross country
Islamic banks performance and found that, short term funding's and capital has
positive relation to profitability, while size of banks seems to have negative relation
with Islamic bank’s profitability.
(Abduh,2013), (Husain et-al, 2012) studied the difference in profitability
determinants of Islamic banks and found that, market concentration in banks
specific factors, banks size in structural variable, while Inflation in the macro
variable has a positive impact on the Islamic bank’s profitability
(Muda et-al, 2013) (Sufian, 2007) (Bashir ,2003) studied foreign vs. domestics
Islamic banks performance and found that foreign IBs are more profitable than
domestic IBs.
Problem Statement
(Qureshi et-al , 2012) (Hanif et-al, 2012) (Akhtar, 2011) (Ansari et-al, 2011) (Hamid et-al,
2011) (Safiullah, 2010) (Samad, 2004) studied Islamic vs. conventional banks performance
and found that ,conventional banks are more profitable and more capitalized, while Islamic
banks found better in liquidity and insolvency.
Islamic bank’s performance is studied from a variety of angles and in different contexts as
well, and even some of the studies reported Islamic banks more profitable. But only being
profitable does not guarantee sustainability in long Run (Husna, 2012)
However all the previous studies on IBs are concerned with its ongoing performances only,
sustainability checking is widely neglected in the literature (Klumpes, 2013)
Studies on IBs are limited to testing one or two factors only a holistic approach is missing, as
satisfactory performance in one tested factor can be surpassed by untested factor in shape of
detrimental distress in long run (Husna, 2012)
Problem Statement
Explanation of Research Gap
Sine forty years of Islamic banks operations, still its market share is not significant as
compared to conventional banks (Cihak, 2010)
Additionally the share of Islamic banks even in the major Muslim nations is around
20 % only, compared to 80 % of conventional bank’s (World Islamic bank
competitiveness report 2011-2012 – 2013-2014)Does it mean that Islamic bank can’t
progress?
The CAGR of major Muslim countries' Islamic banks is declining sine 2006 (World
Islamic bank competitiveness report 2011-2012 – 2013-2014). In line of that can
Islamic banks be soothsaid un-sustainable in long run?
To saturate that gap and these questions the sustainability of Islamic banks on a larger
scale has to be checked in order to report it financially sustainable in long run.
Research Questions, Research objectives, and Hypotheses
RQ 1:
What is the bankruptcy rate of top five Islamic banking countries?
RQ 2:
Are there any significant differences among the top five Islamic banking countries
with regard to bankruptcy?
Objective 1:
To perform a comparative analysis among the top five Islamic banking countries on
bankruptcy
Hypothesis 1
H1: Top five Islamic banking countries do differ on bankruptcy.
Research Questions, Research objectives, and Hypotheses
RQ 3:
Do the top five Islamic banking countries differ on financial performance
indicators?
Objective 2:
To perform a comparative analysis among the top five Islamic banking
countries with regard to performance indicators.
Hypothesis 2:
H1: Top five Islamic countries do differ on performance indicators.
Research Questions, Research objectives, and Hypotheses
RQ 4:
Which performance indicators have significant impact on bankruptcy profile?
Objective 3:
To examine the individual performance indicators those have significant impact on
bankruptcy profile of Islamic banks.
Hypothesis 3
H3: H1 Performance indicators are significantly correlated with bankruptcy exposure.
H3a: H1 liquidity is significantly correlated with bankruptcy exposure.
H3b: H1 Profitability is significantly correlated with bankruptcy exposure.
H3c: H1 Productivity is significantly correlated with bankruptcy exposure.
H3d: H1 Insolvency is significantly correlated with bankruptcy exposure.
Novelty
Lens 1:
This study for the first time will diagnose the economic
sustainability of Islamic banks. This signifies that this study will
examine bankruptcy profile of the Islamic banks.
Lens 2:
This study will serve a launching pad in in the process of
developing an Islamic banking sustainability continuum model.
That is yet to be developed
Research model
Methodology
Model Used in this study:
In 1968, Altman applied 22 different ratios to 66 manufacturing firms. To the sample
of bankrupt and non bankrupt firm. Out of those 22 ratios, 5 ratios which caused the
higher variations reputedly were selected and were given high weightage overall
model was reported 95%.
If Public Firms Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + .999x5
If Private Firms Z = 0.717x1 + 0.847x2 + 3.107x3 + 0.420x4 + 0.998x5
If service Firms Z = 6.56x1 + 3.26x2 + 6.72x3 + 1.05x4
Z > 2.9 Safe Zone
Z < 1.21 Distress Zone
1.21< Z <2.9 Grey Zone
Methodology
X1: working capital / Total assets
X2: Retained earnings/ Total assets
X3: EBIT / Total assets
X4: Book value of Equity / Total liabilities
Variable Explanation
Liquidity (Theory of bank liquidity ,(Acharya et-al, 2012)
Cumulative profitability (Pecking order Theory , (Myers, 1984)
Productivity (Modern portfolio Theory , (Markowitz,1952)
Insolvency (Theory of banking crisis, Kobayashi, 2003; Deepening Insolvency Theory , Heaton, 2004)
Conceptual framework of Altman’s model
www.themegallery.com
Sampling method
Country Country share (Total:USD1.1 Trillion)
Iran 39.7%
Saudi Arabia 13.7 %
Malaysia 9.8 %
U.A.E 9.1 %
Kuwait 9.0 %
Qatar 4.1 %
Turkey 2.7 %
Bahrain 2.3 %
Indonesia 1.5 %
Egypt 1.3%
Sudan 1.1
Others 5.6%
Source: Global Islamic finance 2012: bridging economies introductory session and GIFF report.
Non-probability Judgmental sampling Technique
Top five countries collectively possess 81% of total IBS
Methodology
Research design Type of study This study is a descriptive in nature, which will describe the sustainability profile of
Islamic banks in top five Islamic banking countries. Sources of data collection All the data related to this study is taken from the annual reports of representative banks
via their official web sites, data from 2009-2013 is used in this study. Statistical techniques• 1: ANOVA (Post hoc test)• 2: correlation • 3: Regression Software:• SPSS, E-view Unit of analysis Unit of analysis are the selected Islamic banks Bankruptcy = βo+ β1Liq+ β2prof+ β3prod+ β4insol+ β5size+ε
Preliminary FindingsS.N Kuwait 2009 2010 2011 2012 2013 Average
1 Al-Ahli Bank 0.13 0.19 0.19 0.22 0.21 0.19
2 Al-Rajhi Bank 2.17 1.85 1.67 -- -- 1.90
3 Boubyan Bank 1.17 2.65 2.44 2.06 1.84 2.03
4 KFH 1.23 1.02 0.91 0.91 1.17 1.053
U.A.E 2009 2010 2011 2012 2013 Average
5 Abu Dhabi Islamic Bank 1.48 1.68 1.62 1.75 1.37 1.58
6 Al-Hilal Bank 0.81 0.68 0.744 0.85 1.12 0.84
7 Attijari Al Islami 4.40 4.74 4.80 1.87 -- 3.95
8 Dubai Islamic Bank 1.30 1.33 1.07 1.06 2.01 1.35
9 Emirates Islamic Bank 1.54 1.24 1.49 0.99 1.27 1.31
10 Sharjah Islamic bank 2.16 2.11 2.00 1.97 1.70 1.99
Saudi Arabia 2009 2010 2011 2012 2013 Average
11 AL Baraka Investment and development Co 8.35 8.36 7.44 7.38 6.89 7.68
12 Al Jazeera Bank 1.39 1.28 1.30 1.09 1.05 1.22
Iran 2009 2010 2011 2012 2013 Average
13 Bank Maskan 0.63 1.12 0.87 0.24 0.71
14 Bank Saderat Iran 0.24 0.18 0.33 0.02 0.65 0.28
15 Karafarin Bank 2.17 5.07 1.95 1.51 1.21 2.38
Malaysia 2009 2010 2011 2012 2013 Average
16 Affin Islamic Bank Berhad 0.75 0.69 0.55 0.51 0.44 0.59
17 Al Rajhi Banking & Investment Corporation 0.69 0.54 0.40 0.33 -- 0.49
18 Alliance Islamic bank 0.93 0.87 0.76 0.69 0.65 0.78
19 Bank Muamalat 0.81 0.76 0.71 0.55 0.61 0.69
20 CIMB Bank 4.91 4.64 3.59 3.19 3.53 3.97
21 Hong Leong Islamic Bank 0.95 1.04 0.70 0.66 0.65 0.80
22 HSBC Ammnah 0.82 0.96 0.53 0.80 0.82 0.79
23 KFH Malaysia Berhad 1.83 1.18 0.96 0.67 1.19 1.17
24 Public Islamic Bank 0.61 0.72 0.55 0.62 0.53 0.61
25 RHB Islamic Bank 0.77 0.62 0.47 0.54 -- 0.60
26 Standard Chartered Saadiq BHD 0.84 1.17 0.89 0.50 0.003 0.68
27 Bank Islam 0.32 0.63 0.48 0.58 0.55 0.51
Preliminary Findings
Country Status 2009 2010 2011 2012 2013 Mean
Kuwait (4) Bankrupt 20.42% 14.50% 13.82% 19.56% 25.10% 18.68%
Grey zone 79.58% 85.50% 86.17% 80.44% 74.90% 81.32%
Non-bankrupt 0% 0% 0% 0% 0% 0%
U.A.E (6) Bankrupt 11.19% 5.98% 15.56% 25.46% 12.00% 14.04%
Grey zone 88.81% 55.61% 43.89% 32.56% 88.00% 61.77%
Non-bankrupt 0% 38.41% 40.55% 41.99% 0% 24.19%
Saudi (2) Bankrupt 0% 0% 0% 12.82% 13.22% 5.20%
Grey zone 14.26% 13.29% 14.89% 0% 0% 8.49
Non-bankrupt 85.73% 86.70% 85.10% 87.17% 86.77% 86.29%
Iran (3) Bankrupt 3.30% 100% 9.81% 37.23% 42.50% 38.57%
Grey zone 29.00% 0% 90.18% 62.76% 57.49% 47.88%
Non-bankrupt 67.68% 0% 0% 0% 0% 13.53%
Malaysia
(12)
Bankrupt 52.75% 66.53% 66.22% 67.04% 60.82% 62.67%
Grey zone 12.86% 0% 0% 0% 0% 2.57%
Non-bankrupt 34.38% 33.46% 33.77% 32.95% 39.17% 34.74%
Over all (27) Bankrupt 18% 37% 21% 32% 31% 28%
Grey zone 45% 31% 47% 35% 44% 40%
Non-bankrupt 38% 32% 32% 32% 25% 32%
Bankruptcy profile of selected Islamic banks from 2009-2013 (Altman’s model)
ANOVA resultsCountry Liquidity Profitability Productivity Insolvency Z-score
Kuwait 0.94 0.27 0.21 0.43 1.59
U.A.E 1.16 0.05 0.17 0.38 1.76
Saudi 2.75 0.02 0.18 1.48 4.45
Iran 0.66 0.06 0.34 0.09 1.16
Malaysia 0.49 0.02 0.11 0.35 0.99
P-value 0.000 0.000 0.000 0.000
Post Hoc (Scheffe) Test
Kuwait - UAE N.S Sig** N.S N.S N.S
Kuwait – Saudi Sig** Sig** N.S Sig** Sig**
Kuwait – Iran N.S Sig** N.S N.S N.S
Kuwait – Malaysia N.S Sig** N.S N.S N.S
U.A.E – Kuwait N.S Sig** N.S N.S N.S
U.A.E – Saudi Sig** N.S N.S Sig** Sig**
U.A.E – Iran N.S N.S N.S N.S N.S
U.A.E – Malaysia Sig** N.S N.S N.S N.S
Saudi – Kuwait Sig** Sig** N.S Sig** Sig**
Saudi – U.A.E Sig** N.S N.S Sig** Sig**
Saudi – Iran Sig** N.S N.S Sig** Sig**
Saudi – Malaysia Sig** N.S N.S Sig** Sig**
Iran –Kuwait N.S Sig** N.S N.S N.S
Iran – U.A.E N.S N.S N.S N.S N.S
Iran – Saudi Sig** N.S N.S Sig** Sig**
Iran – Malaysia N.S N.S N.S N.S N.S
Malaysia – Kuwait N.S Sig** N.S N.S N.S
Malaysia – U.A.E Sig** N.S N.S N.S N.S
Malaysia- Saudi Sig** N.S N.S Sig** Sig**
Malaysia – Iran N.S N.S N.S N.S N.S
0.20
Regression results for Islamic banks bankruptcy
ModelUnstandardized
CoefficientsStandardized Coefficients
t Sig.
Collinearity Statistics
B Std. Error Beta Tolerance VIF1(Constant) -.142 .068
-2.106 .037
x1: Liquidity .980 .009 .549 103.539 .000 .671 1.491
x2: Profitability .038 .040 .005 .934 .352 .784 1.275
x3: Productivity 1.048 .022 .208 47.211 .000 .976 1.025
X4: Insolvency 1.055 .012 .531 91.316 .000 .559 1.789
Log T.A .009 .004 .011 2.364 .020 .937 1.067
Dependent Variable: Zcore
R2: 0.99
Adjusted R2: 0.98
Conclusion
As per objective no 1, Z-score results snapshot the bankruptcy rate of top five
Islamic banking countries' five year prior to bankruptcy, i.e. bankruptcy rate is
18.68% for Kuwait, 14.04% for U.A.E, 5.20% for Saudi Arabia, 38.57% for
Iran ,and that of 62.67% for Malaysian Islamic banks.
As per objective no 2, the results of ANOVA shows the comparison, that the top
five Islamic banking countries have a significant relation on performance
indicators like liquidity, profitability, and insolvency, but on the basis of
productivity top five Islamic countries bank’s does not have a significant
relation.
Conclusion
As per objective no 3, the result shows that all the performance indicators
i.e. liquidity, productivity, and insolvency are significantly correlated with
bankruptcy except profitability, hence this result has disapproved the
argument that only profitability is enough to avoid Islamic banks from
bankruptcy. The results are consistent with the findings of (Husna,2012)
Recommendations`
Selected 27 Islamic banks from five countries are lacking very much on
profitability and productivity, which is endorsing the fact of reducing the
CAGR of major Islamic banking countries. In order to stay competitor and
sustainable Islamic banks has to improve its profitability and productivity.
limitations
Limitation of the study
To evaluate sustainability of Islamic banks this study has selected only five countries, the
number of countries can be expanded to further diagnose Islamic bank’s sustainability.
Suggestions for further studies
As this study applied Altman model on predicting Islamic banking bankruptcy, and Altman
uses only micro factors. To further explore Islamic banking sustainability and bankruptcy a
separate bankruptcy continuum model needs to be developed, which is composed of micro,
macro, and Islamic bank’s structural variables. As Islamic bank do not have its own
separate sustainability checking model (Husna, 2012).
Thank You
And have a nice Day