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
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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 20132014)
 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.
INTRODUCTION
Table 1.1: Share of Islamic vs. conventional banks in
Table 1.2: Cumulative asset growth rate of Islamic banks (2006-
country total banking assets (2013-2014)
2012)
Country
Total IB share
Total CB share
Country
CAGR (2006-
CAGR (2008-
Decline
2010)
2012)
Saudi Arabia
19%
11%
8%
UAE
16%
14%
2%
Kuwait
22%
6%
16%
Qatar
39%
31%
8%
Bangladesh
12%
88%
Saudi Arabia
53%
47%
Malaysia
20%
80%
U.A.E
17%
83%
Kuwait
42.3%
57.7%
Qatar
24%
76%
Bahrain
22%
2%
20%
Turkey
5.6%
94.4%
Average
23.6%
12.8%
10.8%
11 %
Bahrain
12.8%
87.2%
Source: World Islamic bank competitiveness report (2011-
Indonesia
4.6%
95.4%
2012) and (2013-
Pakistan
8.5%
91.5%
Average country
19.98%
80 %
share
20 %
80.02%
Source: World Islamic bank competitiveness report (2013-2014)
INTRODUCTION
 Economic sustainability of banks
Broader 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 Review
Authors & Year Topic
(Said, 2013)
(Smaoui et-al, 2011)
(Yudistra ,2004)
(Hassan et-al, 2003)
(Zaman et-al, 2001)
Islamic bank’s
performance on
cross country basis
Findings
 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
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.
(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,
 higher leverage and large loans to
asset ratio has positive impact on
Islamic bank’s profitability.
 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
Variable Explanation
X1: working capital / Total assets
Liquidity (Theory of bank liquidity ,(Acharya
et-al, 2012)
X2: Retained earnings/ Total assets
Cumulative profitability (Pecking order Theory ,
(Myers, 1984)
X3: EBIT / Total assets
Productivity (Modern portfolio Theory ,
(Markowitz,1952)
X4: Book value of Equity / Total liabilities
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%
Top five countries
collectively
possess 81% of
total IBS
Non-probability
Judgmental
sampling
Technique
Source: Global Islamic finance 2012: bridging economies introductory session and GIFF report.
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 Findings
S.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
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
0.71
Preliminary Findings
Bankruptcy profile of selected Islamic banks from 2009-2013 (Altman’s model)
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%
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%
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%
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%
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%
Bankrupt
18%
37%
21%
32%
31%
28%
Grey zone
45%
31%
47%
35%
44%
40%
U.A.E (6)
Saudi (2)
Iran (3)
Malaysia (12) Bankrupt
Over all (27)
ANOVA results
Country
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
0.20
0.000
0.000
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
Post Hoc (Scheffe) Test
Regression results for Islamic banks bankruptcy
Model
Unstandardized
Coefficients
B
Standardized
Coefficients
-.142
Std. Error
.068
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
.009
.004
.011
2.364
.020
.937
1.067
1(Constant)
Log T.A
Dependent Variable: Zcore
R2: 0.99
Adjusted R2: 0.98
Beta
Collinearity
Statistics
t
-2.106
Sig. Tolerance
.037
VIF
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