Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
Comparison between Performance of Saudi Conventional
and Islamic Banks
Mohammed Alfify
The purpose of the study is to compare financial performance of Islamic and
conventional banks with a special focus on Saudi Arabia. The paper comparing
Islamic and conventional financial institutions with regard to their: (i) profitability;
and (ii) customer deposit.Data collected from all Saudi listedBanks (12 Banks joint
to Saudi Stock Market, 5 Islamic and 7 conventional). We found that, (1) even
though Islamic banks use interest free principle, they earned higher net income.(2)
sizeof customers deposits of Islamic banks is less than size of customers deposits
of conventional banks.
1. Introduction
Strong competition in banking industry, merger among banks, globalization,
liberalization, are significant factors to Saudi banks in particular Islamic banking
where is not a copy of conventional banking. It has its own way of doing business and
all operations are duly certified by Sharia experts ranging from Sharia advisor to
Sharia boards and finally Islamic Fiqh Academy (IFA).Islamic Banking is based on
Shari’ahLaws (lawful ) and prohibited (unlawful) (Halal and Haram).The main
difference of Islamic bank system with conventional banks is that Islamic banks are
using interest free principle and profit-sharing principle, while conventional bank is
based on the interest-based principle, (Ahmad & Haron, 2002) and
(DonsyahYudistira, 2003)
Today, Islamic banking is existing in over 70 countries with an asset base of
approximately $166 billion, now Islamic banks are playing an significant influence role
in their respective economies. Although most of Islamic Banks are working in MiddleEast countries, many global banks in developed countries have begun to valve the
massive demand of Islamic financial services andproducts (DonsyahYudistira, 2003).
Islamic Banks are facing a new challenges because of the recent trends of
financialglobalization and integration of universal financial markets which have put
Islamic banks in a highly competition with conventional banks.However ,Islamic
financial institutionsare rapidly gaining market shares in their domestic economies
because they have the flexibility of becoming shareholders and creditors of firms,
besides the advantage of providing investment-banking products(Aggarwal, R., and
T. Yousef , 2000) . Islamic banking assets in six core markets Qatar, Indonesia,
Saudi Arabia, Malaysia, UAE, Turkey on course to touch US$1.8t by 2019.Global
Islamic banking assets witnessed a compounded annual growth rate of around 17%
from 2009 to 2013.
Mohammed Alfify, Doctoral Student, Université de Bourgogne, malfify@yahoo.com
Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
As the conventional banks are established under the principles of capitalism and
transect business by charging interest, which is unacceptable (forbidden) in Islamic
law, so Muslims left with no choice except to establish their own financial institutions
under Islamic principles. The mile stone, in growth and popularity of Islamic Financial
Institutions (IFIs), was the Conference of Foreign Ministers of Muslim countries
(1973), where decision n of establishment of Islamic Development Bank (IDB)
wastaken place. Islamic finance has shown tremendous growth in last two decades.
In developing countries, the main component of the financial and economic system of
the banking sector poses as contribute effectively to sustainable development as a
result of the presence of a large area in the development of financial markets
especially in the Middle East and North Africa, which will dominate the savings and
investment world in less than one generation, where there will be half the world's
investments, with a total of 185 trillion dollars (according to the value of the dollar in
2010) in the developing world by the year 2013, compared to less than one-third
today (World Bank Group,2013).Islamic Banks in Saudi Arabia, Kuwait and Bahrain
represent more than 48.9%, 44.6% and 27.7% market share respectively. Positive
progress has been has made in Indonesia, Turkey and Pakistan, with 43.5%, 18.7%
and 22.0% CAGR respectively from 2009-2013. collective profits would touch
US$37b as the industrycontinues its double-digit annual growth. (Eernist& Young (
2015).
In Saudi Arabia as developing country, the banking sector is the largest component of
the financial system, where the number of exporting licenses for local and foreign
banks (23) license and accounts with assets ratio (98%) of financial system assets.
The Saudi government is represented by the Saudi Arabian Monetary Agency
(central bank) has developed strict rules to control the performance of the banking
sector has been largely successful in sparing Saudi banks effects of the global
financial crisis, (World Bank group,2013).
Moreover, conventional banks in Saudi Arabia have longer history and experience
than Islamic banks in doing banking business, however, such Islamic banks, , which
some of them started only a few years ago,could share conventional banks
dominating position in the financial sector. In addition, conventional banks are
providing Islamic products and services.Featuring the banking sector in Saudi Arabia,
the presence of elevated asset major Islamic banks reaching the market share of
Islamic banks in the Kingdom of Saudi Arabia (53%) in 2012 and was estimated at
245 billion dollars.( Eernist& Young,2014).
In Europe countries, conventionalinstitutions have dominating position in the banking
sector, however, there are domestic demand for Islamic Banking products and
services particularly in France , Ireland, United Kingdom, Germany and Luxembourg.
In France for example,There are presently six Shari’ah-compliant funds in France
with total assets under management of USD 147.2 million, which are split relatively
evenly between money market (47%) and equity (53%) assets (European Central
Bank, 2013).
Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
2. Literature Review
Almost half of the individuals surveyed who financial decision-making authority in the
Malaysian corporate sectors had believed that the Islamic banking system had a
good potential as an alternative to the conventional system, also highlights that the
most important factor perceived by corporate customers in selecting their banks is the
cost of the services and products. This means that Islamic bank products will not be
attractive to this market unless and until its costs are lower than those of the products
of the conventional banks, ((Ahmad & Haron, 2002).
Despite the Islamic banks inefficiency across 18 Islamic banks is small at just over 10
percent, which is considerable compared to many conventional counterparts. Both
Islamic andconventional banks are suffered from global financial crisis in 1998-1999,
however, Islamic banks are performed very well after the difficult periods because of
interdependence of Islamic banks to other financial system (DonsyahYudistira, 2003).
According to Hanif (2011), Islamic financing is working within the Sharia law
following certain restrictions including following :First Islamic financial institutions
(IFIs) cannot provide finance for an activity which is prohibited by Sharia (Islamic law)
e.g. business of liquor, pork and pornography. Second IFIs cannot lend any amount
in cash for interest however need is fulfilled either through supply of required asset or
through profit and loss sharing.. Third under Islamic financial system when financing
is provided under profit and loss sharing although profit can be shared as per
agreement between the parties involved however loss must be shared according to
capital contribution/ownership.
Islamic and conventional banks are doing business in a same environment. However,
Islamic banks cannot claim interest on their balances with other banks, on mandatory
cash reserve maintained with central bank, cannot invest in government securities,
interest based bonds, cannot claim time value of money from defaulters, bear risks in
sale and lease transactions, can only invest in Sharia compliant securities and not in
all available equities and finally have to compete with conventional banks in deposit
servicing as well as in financingHanif (2011).
Hanif&Iqbal, (2010), categorized Islamic modes of financing objectively in two heads;
Sharia compliant products such as Murabaha (cost plus profit sale), Ijara (a rental
arrangement), Bai Salam (spot payment for future delivery), BaiMuajjal (sale on
deferred payment), Istasna (order to manufacture) and Diminishing Musharaka
(house financing) are all Sharia compliant products. and Sharia base transactions
such as Musharaka and (partnership in apital) and Mudaraba (partnership of capital
and skill).
Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
According to (Hassan, and Bashir) to compete in local and global deposit markets,
Islamic banks have to design and innovate Islamically acceptable instruments that
can cope with the continuous innovations in financial markets. In addition, Islamic
banks should find investment opportunities (for fund mobilization and utilization) that
offer competitive rates of return at acceptable degrees of risk.
According to (Hassan, and Bashir) Islamic Banks’ loan portfolio is heavily biased
towards short-term trade financing. As such, their loans are low risk and only
contribute modestly to the bank profits. Bank regulators may use this as an evidence
for prompt supervisory action. Second, the results also indicate the importance of
consumer and short-term funding, non-interest earning assets, and overhead in
promoting banks’ profits.
Eernist& Young ( 2015) analyzed the sentiment of over 2.2 million customers’ social
media posts on their banking experiences with Islamic Banks in Saudi Arabia,
Bahrain, Kuwait, UAE, Malaysia, Indonesia, Turkey, Qatar and Oman. The results
showed that customer satisfaction is mediocre for many Islamic banks.Furthermore,
when asked what they would do if an Islamic bank did not make sufficient profits to
make a distribution in any one year, 62% said they would keep their deposits within
the Islamic banking movement, while said they would withdraw their deposits.
3. The Methodology and Model
The data used in this study are cross-country bank-level data, compiled from income
statements and balance sheets oflisted Saudi Banks in the 2012-2014 period(12
Banks joint to Saudi Stock Market, 5 Islamic Banks and 7 conventional Banks). Table
1 givescomparison of net income, Table 2 presents comparison of customer deposit,
and Table3 shows comparison between net income & customer deposit.
4. The findings
Table 1 : Net Income (In $ thousands)
Year
2012
2013
2014
Total
Islamic Banks
4,981,000
5,485,000
5,812,000
16,278,000
Conventional Banks
4,421,000
5,315,000
6,204,000
15,940,000
Table 1 shows that listed IslamicBanks earned $16.2 billion which represented an
increase of 9%, and 6% respectively, while conventional Banks earned 15.9 billion at
the same period which represented an increase of 16% and 14% respectively. Both
could added about $ 32 billion to Banking sector in Saudi Arabia.
Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
Table 2 : customer deposit (In $ thousands)
Year
2012
2013
2014
Total
Islamic Banks
157,748,000
173,082,000
197,304,000
528,134,000
Conventional Banks
195,424,000
215,311,000
238,984,000
649,719,000
Table 2 shows that total customer deposit founded in Islamic Banks by year ended in
2014 was about 528 billion which represented an increase of 10%, and 15%
respectively, while conventional Bankshave about 650 billion at the same financial
period which represented an increase of 10%, and 11% respectively.
Table 2 :comparison between net income & customer deposit (In $ thousands)
Year
2012
2013
2014
Total
Islamic Banks
customer deposit
Net income
157,748,000
4,981,000
173,082,000
5,485,000
197,304,000
5,812,000
528,134,000
16,278,000
Conventional Banks
customer deposit
Net income
195,424,000
4,421,000
215,311,000
5,315,000
238,984,000
6,204,000
649,719,000
15,940,000
Moreover, as can be seen from table 3, in general, Islamic banks could generate net
income bigger than conventional banks although they do use interest free principle. In
contrast, although conventional banks have biggest size of customer deposit and use
interest principle, they generated less net income.
5. Summary and Conclusions
Saudi Arabia has a highly competitive between conventional and Islamic banks.
Islamic banks and conventional earned continuous increasesing in net income16,2
billion and 15,9 billion respectively during period of 2102-2014 . Moreover, Islamic
banks have earned higher income in spite of they use interest free principle.Size of
customers deposits with Islamic banks about 528 billion is less than size of
customers deposits with conventional banks649 billion. We suggest that Islamic
banks should focus on short-run and long-run investment in order to attract a new
customers, on the other hand, conventional banks should create a new short-run
investment opportunities and expand in opening Islamic windows to increase their net
income.
Proceedings of Annual Paris Economics, Finance and Business Conference
7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
ISBN: 978-1-925488-04-3
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7 - 8 April 2016, Espace Vocation Haussmann, Paris, France
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