ISLAMIC FINANCE

A SOLUTION TO THE CRISIS OR A CHOICE WITH

LIMITED SCOPE
By

Besarta Tafa
PhD. Ioannis Tampakoudis

A THESIS
Submitted to
SHLUP Instituti Kanadez i Teknologjis
CANADIAN INSTITUTE OF TECHNOLOGY
Faculty of Economy
Department of Business Administration

In partial fulfillment of the requirements for the degree of:

Master of Science in Business Administration

Submitted on July 13, 2015

Approved:
PhD. Ioannis Tampakoudis__________________
PhD. Arjan Kadareja_______________________

I understand that my thesis will become part of the collection of Canadian Institute of
Technology. My signature below authorizes release of my thesis to any reader upon request. I
also affirm that the work represented in this thesis is my own work.

Besarta Tafa _________

Title of thesis:
Islamic finance. A solution to the crisis or a choice with limited scope?
Abstract:

The current US financial crisis was a hard experience which affected

the entire world economy. Even nowadays, its effects are still being
felt. The purpose of this study is to give an explanation to the major
factors which caused it and to provide an alternative solution to this
problem. It is focused on the context of Islamic Banking and Finance,
demonstrating the healthy conditions of many Islamic banks during
the

crisis.

The thesis is divided into two parts; in the first part, the main causes
of the current US crisis of 2007-2008 are extensively analyzed. Then,
the principles and philosophy of the Islamic Finance, Islamic Financial
Products and Islamic Banking are presented. The second part
contains a comparison of the Balance Sheets between samples of
conventional banks with a corresponding sample of Islamic ones. The
analysis is done using financial ratios as well as descriptive statistics.
In general, the results show that the financial crisis begun due to
multiple factors, mainly as a result of the subprime loans and the
hiding of the complex risky assets especially by Anglo-Saxon
financiers. Indeed, The Economist stated they claimed to have
found a way to banish risk when in fact they had simply lost track of
it. The Islamic Finance and Banking has been somehow immune to
these occurrences because of their special way of functioning.
As a conclusion, it could be argued that applying the Islamic
principles might have prevented such a crisis. It can really be a
robust solution for recent and futures economic turmoil arising from
the burst of the crises.

Keywords:

financial crisis, Islamic Banking, Islamic Finance, financial ratios, descriptive

statistics, subprime loans, Islamic principles,
2

Table of Contents

INTRODUCTORY OBSERVATIONS AND THE THESIS OBJECTIVES...................................5

CHAPTER1: ISLAMIC FINANCE FRAMEWORK.............................................................6
1.1. WHAT IS ISLAMIC FINANCE?................................................................................6
1.2. ISLAMIC FINANCIAL PRODUCTS...........................................................................7
CHAPTER 2: EMPIRICAL ANALYSIS...........................................................................16
2.1. DATA AND METHODOLOGY................................................................................16
2.1.1. ISLAMIC BANKS..............................................................................................17
2.1.2. CONVENTIONAL BANKS..................................................................................24
2.2. ANALYSIS AND RESULTS....................................................................................34
2.2.1. TIER 1 CAPITAL RATIO...................................................................................36
2.2.2. TOTAL CAPITAL RATIO...................................................................................37
2.2.3. LOANS TO DEPOSITS RATIO............................................................................38
2.2.4. ROA...............................................................................................................39
2.2.5. ROE................................................................................................................40
2.2.6. EFFICIENCY RATIO..........................................................................................41
2.2.7. NPL RATIO.....................................................................................................43
CONCLUSIONS...........................................................................................................44

List of acronyms
ROA
...Return On Assets
ROE..
.....................Return On Equity
NPL...........................................................................
....Non-performing loans
RHB
Bank......................................................................Rashid
Hussain Berhad Bank
CIMB.Commerce
International Merchant Bankers
HSBC..Hong Kong and
Shanghai Banking Corporation
RBS
...Royal Bank of Scotland
BNP Paribas.
Bank of Paris and the Netherlands
MUFG...............................................................Mitsubi
shi UFJ Financial Group
US.
United States
UK
.United Kingdom

List of figures
FIGURE
FIGURE
FIGURE
FIGURE
FIGURE

1- MUSHRAKAH CONTRACT.................................................................................7
2-MURABAHAH CONTRACT.................................................................................9
3-SALAM CONTRACT.......................................................................................11
4-ISTISNA CONTRACT......................................................................................13
5-IJARAH CONTRACT........................................................................................14

List of tables
TABLE 1-ISLAMIC BANKS TOTAL ASSETS ................................................................................................17
TABLE 2- BANK ALBILAD PERFORMANCE RATIO.....................................................................................18

TABLE 3- RHB ISLAMIC BANK PERFORMANCE RATIO .............................................................................19

TABLE 4- KUWAIT FINANCE HOUSE PERFORMANCE RATIOS...................................................................20
TABLE 5- MYBANK ISLAMIC MALAYSIA PERFORMANCE RATIOS............................................................21
TABLE 6- DUBAI ISLAMIC BANK PERFORMANCE RATIOS........................................................................22
TABLE 7- ABU DHABI ISLAMIC BANK PERFORMANCE RATIOS................................................................22
TABLE 8- QATAR ISLAMIC BANK PERFORMANCE RATIOS........................................................................23
TABLE 9- CIMB PERFORMANCE RATIOS..................................................................................................24
TABLE 10- CONVENTIONAL BANKS TOTAL ASSETS.................................................................................25
TABLE 11- JP MORGAN PERFORMANCE RATIOS.......................................................................................25
TABLE 12- BANK OF AMERICA PERFORMANCE RATIOS...........................................................................26
TABLE 13- CITIGROUP PERFORMANCE RATIOS.........................................................................................27
TABLE 14- HSBC HOLDINGS PERFORMANCE RATIOS..............................................................................28
TABLE 15- MITSUBISHI UFJ FINANCIAL GROUP PERFORMANCE RATIOS................................................29
TABLE 18- BNP PARIBAS PERFORMANCE RATIOS....................................................................................32
TABLE 19- BANCO SANTANDER PERFORMANCE RATIOS..........................................................................33
TABLE 20- DEUTSCHE BANK PERFORMANCE RATIOS..............................................................................33
TABLE 21- ISLAMIC BANKS PERFORMANCE RATIOS................................................................................34

List of graphs
GRAPH 1.TIER 1
CAPITAL
42
GRAPH 2.TOTAL CAPITAL...

.....43
GRAPH
3.LOAN/DEPOSITS
.44
GRAPH
4.ROA
...45
GRAPH
5.ROE
...46
GRAPH
6.EFFICIENCY
47
GRAPH
7.NPL
...48

Introductory observations and the thesis objectives

Recently, there is an ongoing increased interest for the notion of Islamic Finance. It is
a new concept in non-Islamic countries, but it is becoming widely accepted from the
market participants, especially in the financial market. Islamic Finance was introduced
in non-Islamic countries after the financial crisis of 2008. Apparently, the Islamic
finance was thought to be a choice for the problems that the financial crisis caused.
Many studies have been done about the Islamic Finance, showing interesting results
about it. Non-Islamic countries began to implement the Islamic Finance practices and
methodology. Nowadays, more and more countries are using it in parallel with
conventional finance. A special part of Islamic Finance is the Islamic Banking. It has a
different way of operating from conventional Banking. The bank products are in
compliance with the Islamic low (Shariah), differing from those of conventional
banks. They help their customers by financing their purchases or entering into different
investing contracts to make profits.
There is an extensive literature about the Islamic Finance in general and the Islamic
Banking in particular. Considering that it has been a trend recently in almost all the
countries, even in non-Islamic ones, many researchers have intended to further shed
light on the idea of Islamic Finance. According to Schoon (2009) the industry of the
Islamic Finance has been growing rapidly after the 2000s, while Siddiqui (2014)
asserts that Islamic Finance is an industry of trillion dollars with many financial
institution participating. Both authors suggest that it can be used as an alternative to
conventional Finance. Cosgrave (2014) provides evidence for the expansion of the
industry of Islamic Finance, revealing that its strong position in cash is the prevailing
factor for its growth. He highlights the fact that many investment funds have adopted
the Shriah compliance way of making business as their framework of an ethical
behavior.
As far as the banks' capital adequacy is concerned, the studies question the rationale
for Islamic banks to have restricted regulation for their capital requirements. Paldi
(2014) reveals that capital requirements should address the issue of liquidity risk for
Islamic banks. According to Ariss and Sarieddine (2007) Islamic Banks need less
capital requirements than conventional banks, since they act as agents on behalf of

their depositors who rely on the trustworthiness of the banks' investment decisions in
order to collect their money back.
The aim of the thesis is to explain the way the Islamic Banks operate and the types of
the available contracts. Also, there is a theoretical comparison between Islamic
Finance and conventional Finance, highlighting their similarities and differences as
well as their advantages and drawbacks. Subsequently, there is an empirical
comparison between Islamic and conventional Banks, forming two samples with the
largest (by asset size) and most representative financial institutions. The comparison
was done by using the banks performance ratios for conventional banks1, while for the
Islamic ones we retrieved data from their financial statements. Considering that the
banking industry is the main pillar of the economy we examine if the application of the
Islamic framework in the banking system of the non-Islamic countries could be a
source of stability.

Chapter 1: Islamic Finance framework

1.1. What is Islamic Finance?
Islamic finance is a way of making financial transactions, in compliance with the
Islamic Law (Sharia). It is based on five principles which are:
1 For conventional banks we used data from http://www.bankregdata.com/.
7

1.

Prohibition of interest. The interest or so called riba is prohibited by the

Islamic law. Therefore, all the transactions must exclude the interest in order to be in
compliance with Sharia. All the financial institution as well as other financial agents
give and take money with no interest included in any transaction. The legitimacy under
this principle is that the money itself must not generate money. It is believed that this
restriction will eventually bring a more efficient allocation of funds and a more
profitable use of them.

2.

Profit/Loss sharing principle. According to this principle, all the parties in a

contract/transaction must share the profits as well as the losses incurred by an
investment. This is done by a predetermined ratio, agreed by all parties. It is more fair
for all either if the investment results in profits or in losses and no injustice exists.

3.

Asset backed transaction principle. The transactions or contracts between

parties involved must be based on an underlying asset, which must be real and
tangible.

4.

Prohibition to support some sectors. It is not permissible to invest in sectors

like gambling, alcohol and pork. Entering in gambling is linked to the prohibition of
pure speculation.

5.

Prohibition of uncertainty. The principle of prohibition of uncertainty does not

mean that the investment must not be risky at all. In our world everything is risky and
we cannot eliminate it. The meaning is that it must not have uncertainty in the terms of
the contract.

1.2. Islamic Financial Products

Mudarabah
Mudarabah is an investment contract under which an entrepreneur manages the funds
of an investor who has no management right. The entrepreneur pledges to invest the
funds in a profitable investment, using his knowledge, time management and
expertise. If the investment results in profits, according to the Mudarabah contract
these profits are shared between the investor and the entrepreneur at a predetermined
ratio. If the investment results in losses, the only one who bears them is the investor,
since the entrepreneur had nothing to lose, except his time. This does not imply that
8

the entrepreneur can act recklessly, since the investor can monitor and control him. If
the losses resulted came as a consequence of the entrepreneur fraud r misconduct he
becomes personally responsible.
Musharakah
Musharakah creates a joint venture in which both parties provide investment capital,
entrepreneurial skills, and labor; both share the profit and/or loss of the activity
(Jamaldeen, 2012).
Figure 1: Mushrakah Contract

The only difference from Mudarabah is that all parties invest their money, as share
of the total investment, and also bear the losses resulted by the investment. As in the
Mudarabah contract there is not a fix rate of return for the investor, only part of
gains resulted from the investment. In this type of contract there are two or more
investors. All of them, put cash investment in the contract. They also manage the
investment, providing to the entrepreneur the appropriate skills in order to succeed to
his investment project. If there are profits, the two investors share them at a
predetermined ratio, while the same exists in the case of losses.

Musharakah vs. Interest Based Financing

1. In the Musharakah contract, the parties decide a ratio to share the profits, if any. On
the other hand, the interest based financing provides for the investor a fix rate of
return, which is the interest rate. Unlike the Musharakah, the interest based financing
enables income for the provider of capital, even though the investment results in
losses.
2. In Musharakah, apart from the profits, the parties share also the losses. As said
before, the profits are shared at a predetermined ratio, while the losses are set based on
the amount of the capital invested. On the other hand, in the interest based financing,
the investor does not bear any losses. He is separated from the investment.
3. According to the foregoing we can say that the Musharakah distributes the wealth
on an Egalitarian way, while the interest based financing can be unfair for both parties.
That is because, if the investment results in losses, is unjust for the entrepreneur to pay
the investor the fix rate of return, considering that the loss is not his fault. On the other
hand, if the investment results in huge profits, is unfair for the investor to take only the
fix rate and not to have the right to participate in the share of these profits.
Murabahah
Murabahah is a Cost-plus financing - a contract sale between the financier or bank
and its client for the sale of goods at a price which includes a profit margin agreed by
both parties. As a financing technique, it involves the financier or bank purchasing
goods required by the client. The goods are then sold to the client with a mark-up. 2

Figure 2: Murabahah Contract

2 http://www.islamic-banking.com/glossary_M.aspx

10

First, the Islamic Bank enters into a contract with a supplier/manufacturer. The bank
purchases the goods from the manufacturer, paying the agreed purchase price. Then,
the bank enters into a second contract with a customer. The bank sales the goods to the
customer and the ownership are transferred to him too. The sale price is higher than
the price the bank paid to the manufacturer. It is predetermined in agreement between
the bank and the customer, as the Purchase price plus a profit markup. The bank
must disclose to the buyer the total cost of the goods and the profit is going to make.
Murabahah vs. short term loan
1. The subject matter of the Murabahah contract is the tangible asset. This is in
compliance with the principle of the asset backed transaction. In the short term
loan the subject matter is the money lent or borrowed.
2. The compensation for the investor in the Mudarabah is the profit margin (the
difference between the sale price and the purchase price). In the short term
loan, what the investor takes apart from the principal is the interest.
3. The rollover is not permissible in the Murabahah contract, while in the short
term loan it is usually applicable. The reason why it is not permissible in the
Mudarabah is that it is a kind of interest, which is prohibited according to
Islamic low. Its use in the short term loan is a result of the customer default of
payment in time. So the lender extends the time for the borrower to pay,

11

meanwhile he charges a higher interest. In an attempt to solve the default

problem, this may lead to customer insolvency.
4. The Murabaha contract may require collateral but it is put after the goods are
purchased. In the short term loan the collateral is put at the beginning.
5. In the Murabahah the bank must be transparent regarding the costs and also the
profit margin it requires. In the short term loan no cost transparency is
required.
6. In the Murabahah the ownership of the goods is transferred to the customer the
time the purchase is made, as well as the liability of deferred payments. In the
short term loan the ownership of the money remains to the lender while the
borrower becomes liable of the principal and interest payments.
7. Risks involved in the short term loan are credit risk and interest risk. In the
Murabahah there is no interest risk while there is credit risk. Another risk is
that the customer may not buy the goods. There is also the commodity risk or
otherwise called market risk.

Salam
Salam is a forward financing transaction, where the financial institution pays in
advance for buying specified assets, which the seller will supply on a pre-agreed date.
What is given in exchange for the advance payment of the price should not in itself be
in the nature of money. For the payment in advance, the contracting parties stipulate a
future date for the supply of goods of specified quantity and quality. 3

3http://www. financialislam.com/salam.html
12

Figure 3: Salam Contract

Initially, the bank enters into a contract with the producer/manufacturer. The bank
makes a prepayment of the goods. The producer pledges to deliver the goods at a
specified time, at a specified quantity. Then the bank enters into a second contract with
the customer. The price the customer pays to the bank is P + profit margin. This is the
gain the bank makes from this type of contract. When the goods are produced, the
producer has to deliver them to the bank. At the same time the bank delivers the goods
to the final customer. The ownership is transferred to him too.
This type of contract is used in order to provide capital to the manufacturer, who needs
it. But it is necessary that the producer specifies in advance the time of the delivery as
well as the quantity and the quality of the products. This is a procedure in order to
protect the buyer, since this type of contract is an exception from the rule of asset
backed transaction.
Salam vs. forward contract

13

The Salam contract has similar features with the modern concept of the forward
contract. But they have some essential differences, since the Salam contract must be in
compliance with the Islamic low. More specifically:
1. In the Salam contract the payment is made in advance while the goods are
delivered in the future. In contrary, in the forward contract the payment and
also the delivery of goods is made in the future,
2. The purpose of the Salam is to provide capital to producer in order to facilitate
the production process. The purpose of the forward contract is hedging or
speculation from the change of prices in the market.
3. Forward contracts are subject to default risk while the Salam contract does not
face this type of risk since the payment is done at the beginning.
Benefits of Salam
1. To the institution. There are some benefits to the institution or the intermediary
which derive from the Salam contract. At first the intermediary takes a promise
from a third party to buy the goods. So, the final customer provides capital to
the intermediary. Furthermore, it can make gains from the difference in prices,
namely the profit mark-up. The number of contracts in which the intermediary
enters may be too big, so the profits it can make can be too high.
2. To the buyer. The information asymmetry makes it difficult for the investor to
decide which the best investment opportunity is or what the best think to buy
is. The intermediary, in this type of contract can make it easy for the investor to
choose. It has the ability to use the economies of scale and other tools to assess
the investment opportunities and, finally, to choose the most profitable ones.
3. To the seller. The seller of the goods has to produce theme before selling, but
sometimes it is difficult for the manufacturer to find the required capital. This
type of contract offers capital to the producer, providing liquidity. Moreover, he
doesnt need to borrow funds, take a loan or issue a security, which above all
require interest to be paid. Even though there is still the risk that the costs may

14

increase in the future, he can lock on the minimum price for the goods to be
sold, so he can hedge his position.
Istisna
Istisna is a contract of sale of specified goods that can be sold before the manufactured
products come into existence; an order to manufacture (for purchase) allowing the
buyer to pay the price progressively in accordance with the progress of a job or project
or against delivery in stages.4 This second type of forward sale contract allows an
Islamic financial institution to buy a project (on behalf of the buyer) that is under
construction and will be completed and delivered on a future date.
Figure 4: Istisna Contract

Firstly, the bank enters into a contract with a buyer. They agree that the latter will pay
price P for the goods that will be purchased. Then the bank enters into a second
contract with the producer. Since the bank provides immediate capital to the producer,
a discount is made to the bank. So the bank has to pay P margin. The difference
between the price the bank receives from the buyer and the price it pays to the
producer makes the profit for the bank. When the goods are produced or the project is
finished, they are delivered from the manufacturer to the bank. Then the bank delivers
them to the final customer. The ownership is transferred to the customer too.

4 http://www.islamic-banking.com/glossary_I.aspx
15

This type of contract is like the Salam contract; however, the main difference here is
that the intermediary enters firstly into a contract with the buyer and then with the
producer. In the Istisna contract, the banks' profit derives from the producer's discount,
while in the Salam contract it comes from the final buyer.
Ijarah
Ijarah is a form of a leasing contract in which there is a transfer of ownership of an
asset for a specified period for an agreed price. Instead of lending money on interest,
Ijarah allows a financial institution to make profit by charging rentals for the use of the
asset.
There are three types of Ijarah:

a) Ijarah Thumma Bai - Lease Agreement incorporating sale of the leased asset at
the end of the lease period.
b) Ijarah Muntahiya Bil Tamleek - Lease Agreement with option to own the
leased asset at the end of the lease period.
c) Ijarah Wa Iqtina - Lease Agreement with option to acquire the leased asset at
the end of the lease period. Often, it is used in the context of home purchasing.

16

Figure 5: Ijarah Contract

The Islamic bank first buys the asset from the supplier. It pays the supplier the full
purchase price immediately. Then the bank enters into an Ijarah contract with the
buyer/customer. The bank enables the buyer the use of the asset. In exchange of the
asset used, the lessee pays the bank the rent. At the end of the contract the lessee must
give back the asset to the bank. There exists the possibility that the ownership can be
transferred to the lessee.

Ijarah vs. conventional leasing

Ijarah contract and convectional leasing have some similarities as well as some
differences. Regarding the ownership, it is to the lessor in the Ijarah contract as well as
in the conventional leasing. There exists also the possibility of ownership
transferability at the end of the contract in both. In fact, the Ijarah is a short term
17

contract while the conventional leasing is a longer term one. Finally, the value of the
Ijarah doesnt change but the value of the conventional leasing may change over time.
Sukuk
Sukuk is a financial certificate with similar characteristics to that of a conventional
bond, while the key difference lies on the assets backed. It represents a proportionate
beneficial ownership in the underlying tangible asset(s) of particular projects or
investment activity. Sukuk is similar to the traditional Western interest bearing bond,
which under the Sharia law is not permissible. The issuer of a Sukuk sells the
certificate to an investor, who then gives that back to the issuer for a predetermined
rental fee. The issuer also makes a contractual promise to buy back the bonds at a
future date at par value.
Advantages and disadvantages of Sukuk
There are some important advantages from the use of Sukuk to the financial system
and to the economy as well. Firstly, Sukuk promotes the share of risk between parties
who have their part into the investment. This enhances the due diligence and makes
the projects more profitable. Also, it helps the mobilization and investment of savings
by providing a very productive way of using them, stimulating growth and prosperity.
Based on the principle of asset backed transaction, Sukuk has an underlying asset. Its
existence creates a strong link between financial and productive flows, by making
profits in a real, tangible investment, and not making money from money. In addition,
the risks are related to the real project, rather than to the activities which do not have
any real economic benefits. This makes the financial system more stable and enhances
the entire economy. The project can have great real returns which can cover the risks
undertaken. As disadvantages we can mention that the Sukuk are not standardized and
there are complexities to structure them.
Sukuk vs. conventional bonds
Sukuk is the name of the Islamic bond. Since it has to be in compliance with the
Islamic law, they have differences from the conventional bonds.

18

1. In a Sukuk investors are partially owners of the asset or of the project in which
they invest. In a conventional bond, the investor does not own any part of the
asset or does not take any benefit of the project. He just provides capital to a
borrower, receiving eventually the face value and the coupon payments,
irrespectively of the results of the project that is financed.
2. The unit of issue of the Sukuk is the share of the asset, depending on the
amount each of the parties has invested on the assets or the project. In the
conventional bond the unit issue is the share of debt. So, they own just the part
of the money they have lent to the borrower.
3. The price of the issue in the Sukuk is set based on the market value of the asset
or of the project to be financed. In the conventional bond the price of the issue
is set by the lender based on the creditworthiness of the issuer.
4. The reward of the Sukuk is the share of profits, while there is also the risk of
sharing losses of the capital invested. The reward that the lender takes in the
conventional bond is the face value plus the coupons. The risk it faces is the
default risk as well as interest rate risk.
5. There are no costs in the conventional bond while in the Sukuk there are some
costs related to the assets.

Chapter 2: Empirical Analysis

2.1. Data and methodology
Considering that the nature of Islamic Banks and their way of operating is different
from the Conventional Banks, we tried to adjust the corresponding ratios, using the
most appropriate items in each case. The Tier1 Capital ratio and the Total Capital ratio
19

have been given from the bank itself in the financial statements. The ROA and ROE
are simply calculated as Net profit/Total assets and Net profit/Total Equity
respectively. Since in the Islamic Banks there are no loans, we used financing assets
and since there are no non-performing loans, impairment of financing assets is used.
Concerning the efficiency ratio, in some cases the total expenses were used since there
are no interest expenses, and where it has been disclosed operating expenses were used
as well.5

2.1.1. Islamic Banks

In our study eight Islamic Banks are taken into consideration. In terms of total assets,
the top three banks are Bank Albilad, RHB Islamic Bank and Kuwait Finance House.
In fact, they account for around 60% of the total assets of all the examined banks. The
remaining 40% is shared among the other five banks which are smaller regarding their
asset size. The weights help to better assess the ratios which will be analyzed and also
to understand the impact that the biggest banks have on each ratio.
Table 1: Islamic Banks total assets
Bank Name
Bank Albilad
RHB Islamic Bank
Kuwait Finance House
Mybank Islamic Malaysia
Dubai Islamic Bank
Abu Dhabi Islamic Bank
Qatar Islamic Bank
CIMB
Total

Tot. Assets($ Bill)

79
68
52.2
30.6
26
23.3
20.1
17.1
316.3

Weight
24.98%
21.50%
16.50%
9.67%
8.22%
7.37%
6.35%
5.41%
100.00%

The biggest Islamic Bank regarding the assets size is Bank Albilad which is located in
Saudi Arabia (Table 2).6
Loan/Deposit ratio = Financing net/Customers Deposits

5 Not all the Islamic banks financial statement use the same terms and for that reason we
analyze the calculations we have done for each bank in particular.
6 Source: Bank website; http://www.bankalbilad.com/

20

Efficiency ratio = Total operating expenses/Total operating income + Net

income from investing and financing assets.

NPL ratio = Impairment charge for financing net/Financing net
Tier 1 capital ratio for this bank has been declining during the crisis, and a slight
decline continued the years after the crisis. Even though, its high value before crisis
enabled it to keep relatively high values at an average of about 18 % in the coming
years, and also to recently increase. The total capital ratio shows almost the same
pattern. The difference is that the increase has started in 2011, indicating an increase in
the Tier 2, given that Tier 1 and Risky assets are the same.
Loan / Deposits ratio has fluctuations over years. This has to do with the
internal decisions of the bank to finance or to invest.
The trend of ROA and ROE shows a decline the year of the crisis and the year after,
and a recovery after that. This indicates that the crisis caused a fall in the returns and
then the returns from investments went up. Recently we observe high levels of these
ratios.
The efficiency ratio also has many fluctuations during the observed time frame,

indicating changes in using expenses to produce income.

NPL ratio shows fluctuation the years around the crisis, reflecting the
instability, while there is a decrease later which reflects the ability of this big
bank to manage the default risk.

Table 2: Bank Albilad performance ratio

Tier 1 capital
Total capital
Loan/Deposi
t
ROA
ROE
Efficiency
NPL

2007
33%

2008
2009
2010
2011
2012
2013
23.25% 19.85% 16.58% 15.45% 13.67% 16.04%
24.19% 18.41% 17.43% 18.31% 18.52% 17.14%

48.78%
0.44%
2.33%
53.78%
1.05%

75.42%
0.78%
3.89%
51.59%
0.24%

80.27%
-1.43%
-8.27%
79.43%
2.75%
21

72.58%
0.44%
2.98%
58.40%
1.97%

59.81%
1.19%
9.65%
50.27%
1.83%

76.89%
3.16%
21.55%
45.35%
1.51%

80.44%
2.01%
14.29%
41.48%
0.75%

The second biggest bank is RHB Islamic Bank (Table 3) which is located in Malaysia.7
Loan/Deposit ratio = Financing and advances/Total deposits
Efficiency ratio = Total expenses / Total income
NPL ratio = Impaired financing and advances/Financing and advances
Even for this bank Tier 1 and the Total capital ratios show a decline during the crisis
and then there is an increase in the years coming until recently.
Loan / Deposit ratio also has many fluctuations during the period of observation. The
year of crisis the ratio was raised, showing a non-very strong liquidity position, but the
willingness of the bank to help the customers by financing them.
We observe a declining in the ROA and ROE values, reflecting the effect of the crisis,
mainly because the performance of the Islamic banks depends on other takeovers.
However, they managed to keep positive values for all the period, even in the year of
crisis.
The efficiency ratio has fluctuations too. We observe an increase of the ratio the year
of the crisis and the years close to it, reflecting the need of more expenses to generate
revenues. In any case, the values are not too much above the maximum optimal ratio
of 50%.
NPL ratio has been decreased the year of the crisis, related this with the
increase of lending from the bank.

Table 3: RHB Islamic Bank performance ratio

Tier 1 capital
Total capital
Loan/Deposi
t
ROA
ROE
Efficiency
NPL

2007
2008
2009
2010
2011
2012
2013
16.03% 12.07% 12.50% 12.23% 12.88% 13.97% 13.86%
17.89% 13.54% 13.78% 13.56% 13.93% 14.70% 14.42%
62.47%
1.97%
23.31%
40.28%
4.20%

65.03%
1.29%
14.46%
52.15%
3.30%

58.66%
0.84%
9.96%
63.46%
3.80%

72.53%
0.56%
7.18%
61.61%
6.95%

61.12%
0.90%
11.40%
53.06%
4.16%

Kuwait Finance House is located in Kuwait (Table 4).8

Loan/Deposit ratio = Receivables/Depositors accounts
7 Source: Bank website; http://www.rhb.com.my/

22

73.11%
0.65%
10.30%
47.71%
2.56%

72.41%
0.61%
8.95%
51.11%
2.34%

 Efficiency ratio = Total expenses / Total income

NPL ratio = Impairment receivables/Receivables
Tier 1 capital and Total capital ratios have a slightly decrease during the crisis, but the
effect of this was felt further the years after the crisis. However, the values are enough
high to classify them as well capitalized. Moreover, the values of Total capital do not
differ too much from those of Tier 1, meaning that the reserves for loan losses have not
been rising.
Loan/Deposit ratio indicates a weak liquidity position of this bank. Even
though there are fluctuations, the values are somewhat high.
We observe a decline in ROA and ROE during the crisis and some years after and a
recovery during the recent years.
The efficiency of the operations of the bank has been high one year before the crisis,
while it declines during crisis. But, we observe a non-good efficiency the years after
the crisis.
NPL ratio was raised during the crisis, unlike the other Islamic Banks. The reason for
that may be the decision of the bank not to extend the loans, as we can observe in the
declining of the Loan/Deposit ratio too.

Table 4: Kuwait Finance House performance ratios

2007

2008

2009

2010

2011

2012

2013

22.81%

21.73%

15.08%

14.15%

13.51%

13.57%

17.23%

Total capital
Loan/Deposi
t

23.00%

22.00%

15.21%

14.22%

13.73%

13.93%

17.44%

74.39%

72.29%

70.10%

72.50%

66.03%

70.83%

64.33%

ROA

3.70%

1.66%

0.64%

0.57%

0.28%

0.84%

0.92%

ROE

23.14%

10.95%

4.59%

4.48%

2.38%

7.52%

7.22%

Efficiency

30.53%

55.13%

64.84%

67.52%

78.04%

68.10%

67.19%

NPL

0.44%

3.21%

1.88%

2.05%

2.95%

2.77%

2.42%

Tier
capital

Mybank Islamic is also located in Malaysia (Table 5).9

8 Source: Bank website; http://www.kfh.com/

9 Source: Bank website; http://www.maybankislamic.com.my/

23

All the ratios of the bank are given.

What we observe here is an increase of the Tier 1 capital during the crisis, while there
is a slight decrease of the Total capital ratio. This may implicate an increase in the
reserves, but a decrease in loan loss reserves, higher than that.
Loan / Deposit ratio has been increased and it has a high value, showing a
weak liquidity position. However, this bank better represents the philosophy of
Islamic banks.
ROA and ROE show a decline during the crisis and the years close to it and an
increase in the recent years. Still the values remain positive. We could argue that the
efficiency has been moderate, although it has been fluctuated during the selected time
period.
Regarding NPL ratio, a decrease during crisis and some years after that is observed,
reflecting the increase of Loan/ Deposit ratio, i.e. the increase of outstanding loans.

Table 5: Mybank Islamic Malaysia performance ratios

Tier 1 capital
Total capital
Loan/Deposi
t
ROA
ROE
Efficiency
NPL

2007
2008
2009
2010
2011
2012
2013
10.30% 11.40% 10.80% 10.55% 11.35% 13.15% 13.06%
15.90% 15.80% 14.80% 14.15% 16.05% 17.00% 15.66%
76.30%
1.30%
17.60%
42.80%
3.00%

80.90%
1.10%
15.20%
44.20%
1.90%

87.40%
0.20%
3.10%
52.80%
1.60%

86.80%
1.20%
14.50%
49.80%
1.20%

87.80%
1.20%
15.20%
49.70%
1.86%

89.80%
1.20%
16.00%
48.60%
1.09%

Dubai Islamic Bank with location in Dubai (Table 6)10

Loan/Deposit ratio = Islamic financing assets/Customers deposits
Efficiency ratio = Total operating expenses/Total income
NPL ratio = Allowances for impairment/Islamic financing assets

10 Source: Bank website; http: http://www.dib.ae/

24

89.90%
1.20%
15.10%
47.80%
0.95%

In general, we observe an upward trend for Tier 1 capital and for Total capital ratios
which indicate an enhanced capital position. The only exception is observed in the
year of the crisis when the Tier 1 capital ratio has been growing, while Total Capital
ratio shows a decline. This implicates that the reserves have been growing, while loan
loss reserves have been declined.
Loan /deposit ratio has been in almost average values, except some high values

in 2010 and 2012. During the crisis an increase of the ratio is observed.
ROA and ROE stay in relatively high values, although during crisis and some

years after that a decrease is observed.

In the years around the crisis the efficiency of this bank has been too high. Even
though it has been increased, it is around 50 % which suggests a healthy financial
condition. In 2012 and 2013 we observe a decline of the ratio, implementing an
increased performance.
NPL ratio, as in the most of Islamic Banks has been declined during crisis, and after
that it has been growing.

Table 6: Dubai Islamic Bank performance ratios

2007
Tier
1
capital
Total capital
Loan/Deposi
t
ROA
ROE
Efficiency
NPL

2008

2009

2010

2011

2012

2013

10.80% 11.80% 12.20% 13.15% 13.60% 13.90% 18.20%

12.05% 11.35% 17.70% 18.45% 18.20% 17.40% 18.20%
45.97%
2.98%
23.56%
29.70%
3.49%

52.11%
2.03%
19.39%
35.00%
3.43%

51.56%
1.44%
13.50%
42.51%
5.57%

67.91%
0.90%
7.72%
47.73%
6.56%

61.60%
1.17%
10.38%
51.62%
7.72%

63.33%
1.25%
11.29%
51.04%
7.24%

60.11%
1.52%
10.51%
48.22%
3.98%

Abu Dhabi Islamic Bank is located in Abu Dhabi, United Arab Emirates (Table 7). 11
Loan/Deposit ratio = Murabaha and other Islamic financing/Depositors

accounts
Efficiency ratio = Operating expenses/Operating income
NPL ratio = Provision for impairment/ Murabaha and other Islamic financing

11 Source: Bank website; http://www.adib.ae/

25

Tier 1 capital and Total capital ratio for this bank are meaningless. They fluctuate since
2007, having no pattern thereafter. This indicates changes in the policies of the bank,
regarding the amount of reserves that must be kept.
Loan /Deposit ratio also has been fluctuating. This bank has the lowest values for this
ratio. This may be related to a high liquid position but more likely is that this bank
does not have the power to finance the customers like the other banks do.
ROE and ROA have high values, always positive ones. A huge decrease we observe
the year right after the crisis.
The efficiency has also been high, except the year right after the crisis.
NPL ratio has been increasing from 2011, while a decreased is observed recently.
Regarding these observation we can argue that this bank tried to keep a defensive
strategy, nevertheless, the crisis really affected it.

Table 7: Abu Dhabi Islamic Bank performance ratios

Tier 1 capital
Total capital
Loan/Deposit
ROA
ROE
Efficiency
NPL

2007
17.90%
16.73%
41.96%
1.75%
14.19%
23.24%
0.30%

2008
14.09%
11.84%
48.92%
1.66%
15.10%
44.27%
2.23%

2009
14.00%
17.04%
43.37%
0.12%
1.09%
69.81%
6.55%

2010
13.37%
15.95%
40.13%
1.36%
12.62%
49.78%
8.37%

2011
13.50%
17.39%
42.35%
1.55%
13.48%
52.66%
9.49%

2012
18.43%
21.42%
39.06%
1.40%
9.49%
54.00%
8.34%

2013
16.42%
16.86%
37.43%
1.41%
11.09%
54.36%
7.49%

Qatar Islamic Bank (Table 8)12

Loan/Deposit ratio = Due from financing activities/Customers accounts
Efficiency ratio = Net operating expenses/Net operating income
NPL ratio = Provisions for impairment of due from financing activities/ Due
from financing activities
This bank has the most strange but strong position of all the Islamic Banks.
12 Source: Bank website; http: http://www.qib.com.qa/

26

Tier 1 and Total capital ratios have been relatively high even though there is a slight
decrease in the year of the crisis. The most important evidence here is that their values
do not differ too much from each other, while often the difference is zero. This
implicates no reserves for loan losses for this bank.
The most interesting values are those of Loan/Deposit ratio. This ratio has too high
value, meaning that the bank has been too much exposed to liquidity risk. Those
values have been increased during the crisis and they reached the pick in 2014.
ROA and ROE present really high values, although the trend has been downward.
We can observe that the efficiency of this bank has been too high, although it has been
declining slightly during the crisis. This fact implies that the decision of the bank to
finance too many the customers has been a good one. QIB has the highest values for
these ratios.

Table 8: Qatar Islamic Bank performance ratios

Tier1 capital
Total capital
Loan/Deposi
t
ROA
ROE
Efficiency
NPL

2007
18.34%
18.76%
266.38
%
5.88%
27.12%
19.79%
0.01%

2008
16.35%
17.04%
370.12
%
4.90%
23.00%
18.05%
-0.25%

2009
17.33%
17.33%
337.32
%
3.37%
14.68%
25.30%
0.14%

2010
17.37%
17.37%
336.20
%
2.57%
14.63%
22.09%
0.17%

2011
18.58%
18.58%
321.74
%
2.09%
9.46%
31.96%
0.04%

2012
14.71%
15.41%
474.98
%
1.54%
8.63%
31.31%
0.44%

2013
15.67%
16.51%
378.03
%
1.71%
9.70%
32.49%
0.21%

CIMB Bank is located in Kuala Lumpur, Malaysia (Table 9).13

All the ratios are given.
Tier 1 and Total capital ratios for this bank increased during the crisis and in
the years before and after. Recently, we observe a slight decline but still the

values remain at satisfactory levels.

Loan/Deposit ratio presents relatively high values, like the other Islamic banks,

and with fluctuations during the examined period.

We also observe high values of ROE and ROA, with a decline during the crisis and
with the recovery in recent years.
13 Source: Bank website; http://www.cimb.com/

27

The efficiency remains around the average too, with its slight fluctuations.
Regarding NPL ratio we can say that the values are somewhat high and there is a
decline during and the year after the crisis.

Table 9: CIMB performance ratios

Tier 1capital
Total capital

2007
2008
2009
2010
2011
2012
2013
9.36% 10.75% 14.81% 14.47% 15.26% 12.40% 11.60%
12.46% 13.90% 15.06% 15.36% 17.59% 15.50% 12.90%

Loan/Deposit
ROA
ROE
Efficiency
NPL

75.59%
1.52%
20.05%
47.63%
7.25%

79.91%
0.93%
11.77%
52.81%
4.94%

79.49%
1.16%
14.88%
52.96%
4.98%

79.65%
1.30%
16.19%
55.68%
6.14%

82.84%
1.34%
16.40%
54.69%
5.11%

84.20%
1.37%
16.00%
56.40%
3.80%

88.40%
1.28%
15.50%
57.60%
3.20%

2.1.2. Conventional Banks

The top three banks by assets size constitute around 80% of the total assets of the
sample. These banks are JP Morgan Chase & Co, Bank of America and Citigroup.
Being such representative in the total amount, they will be the drivers of the ratios of
conventional banks performance.
Table 10: Conventional Banks total assets
Bank Name
JP Morgan Chase & Co
Bank Of America
Citigroup
HSBC Holdings
Mitsubishi UFJ Financial Group
Ally Bank

Tot. Assets ($ Bill)

2103
1457.9
1354.7
179.7
107
97.8
28

Weight
37.40%
25.93%
24.09%
3.20%
1.90%
1.74%

RBS Citizens
BNP Paribas
Banco Santander
Deutsche Bank

96
85
81.2
60.91
5623.21

Total

1.71%
1.51%
1.44%
1.08%
100.00%

JP Morgan Chase & Co is the biggest bank by assets size in US (Table 11).
Tier1 capital and Total capital ratios show moderate and not high values for this bank.
It is apparent an increase in the ratios during the crisis and some years after due to the
increase of the reserves as a protection to credit risk. Afterwards the values fluctuate
depending on the banks policy. There is a substantial difference between Tier 1 and
Total capital Ratios, meaning that the reserves for loan losses have been relatively high
and have been increased during the crisis.
Loan/Deposit ratio had high values before the crisis and then the values
declined. This is due to the reduction of the lending from banks being afraid of

a default.
ROA and ROE present acceptable values, falling in the period of the crisis, but
still remaining positive. This indicates strong position of this bank, even in the

crisis.
NPL ratio, unlike the Islamic banks shows an increase during the crisis but still the
values are not too high, so again pointing out the strong position of this bank.
The efficiency ratio of the bank has fluctuations. It has always been above 50%,
suggesting not a very strong efficiency.
Table 11: JP Morgan performance ratios

2007

2008

2009

2010

Tier 1 capital

8.13%

8.57%

9.40%

10.46% 9.69%

Total capital

11.25%

12.18% 13.03% 14.43% 13.43% 12.50% 13.08%

Loan/Deposits

70.09% 62.25% 64.75% 65.36% 55.55% 57.81% 54.49%

ROA

0.90%

0.75%

0.32%

1.04%

0.82%

ROE

9.61%

8.25%

3.64%

11.97%

10.28% 9.70%

13.19%

NPL

0.75%

1.32%

4.96%

5.23%

4.13%

2.59%

Efficiency

63.66% 62.93% 57.80% 59.88% 69.82% 74.33% 62.61%

29

2011

2012

2013

9.21%

10.16%

0.78%
3.09%

1.11%

Bank of America is focused in strategic connections for improved lives of its

customers (Table 12).
Tier 1 and Total capital ratios do not have high values, meaning that the bank is not
very well capitalized. We observe a slight decrease of the ratios in the crisis, but an
immediate increase in the years after, reflecting its impact in the long run. The values
between them differ significantly, meaning that the reserves for loan losses have been
too high.
Loan/Deposit ratio presents high values but it has a downward pattern. Unlike
Islamic banks, Conventional ones choose to reduce the amount of the loan
outstanding right after the crisis. This bank reflects it, even though the values
are high.
ROA and ROE show almost high values before the crisis. A huge decrease during the
crisis and some years after is observed. In the recent years we observe an upward trend
but the values are not too high, neither do they reach the value before the crisis.
NPL ratio increased during the crisis and the years before and after, and we observe a
slight decrease recently.
The efficiency ratio has average values. A slight increase is observed in the year of the
crisis and the year right after that. A really high value of the ratio is observed in 2011,
meaning a poor efficiency.

Table 12: Bank of America performance ratios

2007

2008

2009

2010

2011

2012

2013

Tier 1 capital

8.43%

7.90%

9.04%

10.25% 11.21% 12.88% 12.30%

Total capital
Loan/Deposit
s

10.91% 10.88% 12.56% 13.79% 14.73% 15.76% 14.17%

ROA

1.33%

0.65%

0.41%

0.36%

0.42%

1.02%

1.07%

ROE

15.05% 7.97%

4.17%

3.22%

3.46%

8.32%

8.69%

NPL

0.35%

4.92%

5.54%

4.53%

3.81%

3.23%

Efficiency

51.28% 49.93% 41.57% 63.89% 73.11% 62.89% 62.73%

85.52% 82.49% 72.21% 70.88% 68.58% 66.17% 70.57%

1.18%

30

Citigroup is a leading bank in US. Progress informed by the past, and inspired by the
future is its philosophy (Table 13). 14
Tier 1 has values slightly above the limit for the bank to be classified as well
capitalized. Bothe tier 1 and Total capital ratios have an upward trend due to
the increase of the reserves for being protected by the effects of the crisis. The
differences between them also are significant, indicating high and growing loan

loss reserves.
Loan/Deposit ratio has had really high values, suggesting that this bank used to
finance excessively their customers. But the trend is downward for long period

which means that the bank has shrunk the lending.

ROA and ROE had really high values before the crisis. A huge decrease is observed
the year of the crisis and even more in the year right after that, being in negative
values. Later on, the values increased but still have not reached the level before the
crisis.
An increase of the NPL ratio during the crisis is observed. In the recent years the ratio
presents again a decrease.
The efficiency has been almost in average values. A decrease in the efficiency is
observed during the crisis.

Table 13: Citigroup performance ratios

2007

2008

2009

2010

2011

2012

2013

Tier 1 capital

8.28%

9%

14.24% 14.08% 14.87% 15.26% 13.37%

Total capital
Loan/Deposit
s

12.37% 13.42% 16.74% 15.89% 16.67% 16.53% 15.47%

ROA

1.27%

-0.20%

-1.03%

0.82%

0.48%

0.84%

1.14%

ROE

16.06% -2.46%

-9.91%

7.53%

4.09%

7.14%

10.16%

NPL

0.62%

4.41%

4.19%

2.17%

1.89%

1.64%

Efficiency

55.42% 69.67% 68.98% 46.64% 58.64% 59.64% 54.45%

91.89% 86.68% 72.57% 72.08% 70.57% 60.36% 60.27%

1.96%

14 Source: Bank website; http://www.citigroup.com/

31

HSBC, placed in UK, London is among the biggest banks in the world (Table 14).
HSBC aims to be where the growth is, helping businesses to thrive and economies to
prosper and enabling people to realize their ambitions.15
Tier 1 capital ratio presents a slight decrease in the year of the crisis while Total capital
ratio increased. This means that may be the general reserves have been decreased but
the reserves for loan losses have been increased more. In general, the pattern is upward
implicating the increase of the reserves in order to keep a protective position.
Loan/Deposit ratio has had high values before the crisis and then it suffered a
decline, similar with all the conventional banks.
ROA and ROE had also high values before the crisis and they suffered a huge decrease
during the crisis and some years after. The values felt below zero for this bank too. We
can observe that the recovery is not in satisfactory figures.
NPL like in all conventional banks has been growing in the years around the
crisis, while a decrease is observed recently.
The efficiency has been satisfactory. A decrease is observed in the year of the crisis
and a high inefficiency is observed in 2013.

Table 14: HSBC Holdings performance ratios

2007

2008

2009

2010

2011

2012

2013

Tier 1 capital

8.69%

8.31%

9.27%

12.01% 14.13% 18.12% 14.50%

Total capital
Loan/Deposit
s

12.34% 13.03% 13.46% 16.62% 19.85% 24.23% 19.54%

ROA

1.32%

-0.18%

-0.41%

0.69%

0.36%

0.99%

0.40%

ROE

16.57% -2.43%

-4.32%

7.08%

3.59%

9.41%

3.86%

NPL

0.74%

3.38%

3.80%

3.20%

2.95%

2.14%

Efficiency

50.96% 69.59% 63.16% 55.90% 64.17% 51.68% 73.98%

78.79% 72.99% 76.06% 55.88% 49.70% 41.83% 51.67%

1.77%

MUFG located in Japan, Tokyo, is one of the largest banks (Table 15).16
Tier 1 and total capital ratios represent satisfactory values. A decrease in the ratios is
observed during the crisis, representing an increase in the risky assets. After that the
15 Source: Bank website; http://www.hsbc.com/
16 Source: Bank website; http://www.mufg.jp/
32

ratios have been increased due to the increase of the reserves in order to minimize the
consequences of the crisis.
Loan /Deposit ratio presents particularly high values. Unlike the other
conventional banks an increase in the ratio is observed in the year of the crisis,
while it fluctuates after the crisis.
ROA and ROE were in high levels and decreased immediately during the crisis. They
reached the negative values the year after the crisis. The recovery started later on but it
isnt a complete recovery yet.
NPL ratio has been growing in the years around the crisis and it has started to
decline recently.
The efficiency was not satisfactory during the examined period. However, we can
observe that the decision to extend the loans in 2008 was good, resulting in a higher
efficiency. The impact has been felt in the years coming, recording a high inefficiency
in 2013.
Table 15: Mitsubishi UFJ Financial Group performance ratios

2007

2008

2009

2010

2011

2012

2013%

Tier 1 capital

9.31%

8.70%

9.04%

11.63% 13.96% 12.61% 11.10%

Total capital
Loan/Deposit
s

11.33% 10.82%

ROA

1.11%

0.75%

-0.39%

0.65%

1.23%

0.79%

0.56%

ROE

11.58% 8.45%

-3.53%

5.58%

9.16%

6.38%

4.60%

NPL

0.10%

2.35%

3.33%

1.46%

1.06%

1%

Efficiency

64.99% 55.33%

72.75

73.53% 70.79% 75.30% 83.18%

11.31% 13.90% 16.04% 14.24% 13.18%

84.76% 100.91% 81.13% 70.03% 81.84% 81.66% 82.60%

0.56%

Ally bank is located in Detroit.17

Tier 1 capital and Total capital ratios show high values. It has been a decline in the
year of the crisis due to the increase of the risky assets. Then, we observe an increase
for a few years later and a fluctuated pattern recently. Their values do not differ to
much from each other, meaning that the loan loss reserves for this bank have not been
too high.

17 Source: Bank website; http://www.ally.com/

33

Loan/Deposit ratio shows too high values, with a downward trend during the

crisis and fluctuations in the years coming.

ROA and ROE have the same characteristics as all the other conventional banks. They
suffered a huge decrease especially in the year of the crisis and the year right after it.
NPL ratio has been growing during the crisis while in the coming years there are
fluctuations.
About the efficiency, it seems to have been modest, with a very huge decrease during
the crisis.
Table 16: Ally Bank performance ratios

2007

2008

2009

2010

2011

2012

2013

Tier1 capital

15.46%

14.89%

18.67%

20.25%

17.54%

16.82%

17.59%

Total capital
Loan/Deposit
s

15.91%
177.08
%

15.68%
142.23
%

19.94%
108.87
%

21.25%
127.39
%

18.76%
151.41
%

17.85%
149.79
%

18.42%
131.69
%

ROA

1.59%

-0.51%

0.85%

1.31%

1.25%

0.88%

ROE

14.25%

-4.64%

-1.92%
15.35%

6.03%

8.49%

8.15%

5.68%

NPL

0.99%

1.35%

2.91%

1.08%

0.60%

0.63%

0.58%

Efficiency

41.01%

83.82%

66%

50%

47.99%

48.64%

63.16%

Royal Bank of Scotland is the biggest British bank being located in Scotland (Table
17).
Tier 1 and Total capital ratios presented good values. A decrease is observed in the
year of the crisis for both of them due to the increase of the risk weighted assets. After
that, the values have been increased because of the increase in the reserves. The
differences between them are in average values, representing the amount of loan loss
reserves.
Loan/Deposit ratio has been too high and it was growing in the year of the
crisis. After the crisis the pattern suggests a decline.
ROE and ROA had no high values. A decrease is observed during the crisis, reaching
negative values in 2008 and 2009. A really bad situation for this bank is observed even
in 2013.
NPL ratio has had the same pattern as the other conventional banks.
The efficiency has been at an average level, while a huge inefficiency is
recorded in 2013.

34

Table 17: RBS Citizens performance ratios

2007

2008

2009

2010

2011

2012

8.68%
10.56
%

9.30%

10.06%

Total capital
Loan/Deposit
s

9.82%
10.58
%
88.22
%

122%

11.78%
108.02
%

12.54%
103.73
%

11.46%
12.92
%
96.50
%

11.89% 12.90%
13.47
%
14.48%
94.92
%
92.28%

ROA

0.83%

0.61%

-0.51%

-0.02%

0.40%

0.80%

-13.30%

ROE

3.93%

4.47%

-4.02%

-0.14%

2.54%

4.64%

-79.53%

NPL

0.55%
52.91
%

0.68%
51.44
%

1.69%

2.42%

64.52%

65.62%

2.16%
65.54
%

1.75%
63.01
%

1.96%
454.22
%

Tier 1 capital

Efficiency

2013

BNP Paribas is a French bank (Table 18).18

We can observe that the trend for Tier1 capital and for the Total capital ratios is the
same as all the Conventional banks. The values are almost at the same ranges.
Loan/Deposit ratio also presents too high values. It has been an increase of 10
percent in the year of crisis and then the pattern shows a decrease of the ratio,
suggesting a crump in the loans given from the bank.
ROA and ROE also have the same characteristics as those of the other Conventional
banks.
The same we can say even for the NPL ratio.
The efficiency has been in normal values, with a little decrease in the years after the
crisis.
Table 18: BNP Paribas performance ratios

2007

2008

2009

2010

2011

2012

2013

Tier 1 capital

10.83%

10.18%

10.45%

13.29%

14.79% 15.34% 15.32%

Total capital
Loan/Deposit
s

11.77%

11.33%

11.72%

14.65%

16.06% 16.61% 16.59%

ROA

1.09%

104.37% 114.16% 110.94% 104.86% 93.74% 90.68% 90.55%

0.49%

-0.46%

18 Source: Bank website; http://www.bnpparibas.com/

35

0.48%

0.92%

1.05%

0.99%

ROE

6.79%

3.26%

-3.15%

2.81%

5.03%

5.88%

5.50%

NPL

0.58%

1.29%

2.78%

3.12%

2.78%

1.33%

1.06%

Efficiency

51.60%

52.41%

60.24%

60.68%

54.78% 53.52% 58.64%

Banco Santander is the largest bank in Eurozone (Table 19).19

Tier1 and Total capital ratios indicate a strong capital position which has been growing
during the time. However, the reserves for loan losses has been increased during the
period of the crisis, as derived from the differences between the two ratios.
Loan/Deposit ratio presents high values and the pattern is similar with the other
banks.
ROA and ROE do not show high values. There is a decline during the crisis, which has
been felt more in 2009 when the values have been negative.
NPL ratio had the same characteristics and pattern as the other banks.
The efficiency has not been too high, although a slight increase is observed in the year
of the crisis. The effect of the crisis has been felt one year after when the efficiency
has significantly dropped.
Table 19: Banco Santander performance ratios

2007

2008

2009

2010

2011

2012

Tier 1 capital

8%

8.02%

9.16%

10.15%

14.20%

13.22%

Total capital
Loan/Deposit
s

10.51%
114.55
%

11.39%
117.58
%

12.55%
106.45
%

13.16%
114.30
%

16.43%
104.64
%

15.24%
105.46
%

2013
14.13
%
16.02
%
97.90
%

ROA

0.82%

0.65%

-0.63%

0.36%

0.56%

0.64%

0.56%

ROE

6.72%

6.40%

-5.97%

2.95%

3.54%

4.16%

3.48%

NPL

0.71%

1.15%

3.32%

4.23%

3.06%

2.36%

Efficiency

61.09%

59.02%

82.92%

60.35%

59.15%

66.85%

2.18%
66.75
%

Deutsche Bank with location in Frankfurt is a global bank.20

19 Source: Bank website; http://www.santander.com/

20 Source: Bank website; www.db.com
36

From the figures of Tier 1 and Total capital ratios we can conclude that this bank was
very well capitalized. Even though a decrease of the ratio is observed during the crisis,
it fluctuates thereafter.
Loan/Deposit ratio has moderate values, which indicates that the bank choose
to follow a tight policy regarding the loans given to the costumers. We observe

a big decrease during the crisis and then there are fluctuations.
ROA and ROE had low values going near zero during the crisis, but they

reached their negative values in 2012.

NPL ratio has been fluctuating but in the year of the crisis it records an increase

and the highest value.

Also the efficiency has been worsening during the crisis, recording the highest value.
In the years after the crisis it fluctuates in acceptable levels.
Table 20: Deutsche Bank performance ratios

2007

2008

2009

2010

2011

2012

2013

Tier 1 capital

34.69% 27.72%

35.11% 39.20% 39.62% 29.21% 30.15%

Total capital
Loan/Deposit
s

35.88% 28.30%

35.78% 40.10% 40.03% 29.58% 30.47%

83.68% 56.02%

74.99% 60.73% 47.42% 64.50% 53.17%

ROA

1.85%

0.03%

1.76%

1.64%

0.99%

-0.54%

0.75%

ROE

8.15%

0.16%

8.47%

7.96%

4.75%

-2.74%

4.74%

NPL

2.16%

4.38%

2.56%

4.13%

2.16%

1.44%

0.92%

Efficiency

66.15% 113.24% 44.10% 55.21% 53.08% 48.29% 52.75%

2.2. Analysis and results

Using the individual performance ratios of each bank and the weight each of them has
regarding the total assets, we have the results for Islamic Banks and Conventional
Banks in Tables 21 and 22 respectively.
Table 21: Islamic Banks performance ratios

2007

2008

2009

Tier 1capital

20.33%

16.72% 15.11% 14.08% 14.07% 14.03% 15.42%

Total capital

13.27%

17.75% 16.13% 15.61% 16.30% 16.55% 16.26%

37

2010

2011

2012

2013

Loan/Deposit

73.16%

88.30% 85.85% 88.29% 80.58% 98.12% 91.47%

ROA

2.10%

1.50%

0.35%

0.85%

1.07%

ROE

16.91%

12.16% 4.06%

7.80%

10.06% 13.43% 11.28%

Efficiency

39.26%

47.61% 62.40% 55.80% 54.76% 50.74% 50.21%

NPL
2.23%
2.18% 3.19% 3.94%
Table 22: Conventional Banks performance ratios

1.56%

1.31%

3.63%

2.93%

2.25%

2012

2013

2007

2008

2009

2010

2011

Tier 1 capital

8.77%

8.83%

10.91%

11.86%

12.19% 12.51% 12.17%

Total capital

11.80%

12.33% 14.10%

15.03% 15.26% 15.12% 14.55%

Loan/Deposits

83.38% 78.39% 72.16%

71.18% 66.42% 64.03% 63.64%

ROA

1.14%

0.43%

-0.08%

0.76%

0.63%

0.86%

0.81%

ROE

12.72% 4.78%

-0.53%

7.73%

6.39%

8.27%

8.77%

NPL

0.62%

1.46%

4.54%

4.80%

3.53%

2.82%

2.39%

Efficiency

57.31%

61.75%

57.25%

57.76% 66.80% 65.77%

68.02%

In the following Graphs, we present comparatively the results for the two groups of
banks for i) Tier 1 and Total Capital ratios, ii) Loan/Deposit and Efficiency ratios, and
iii) ROA, ROE and NPL.

38

Tier 1 capital-Total capital

25.00%
20.00%
15.00%
10.00%
5.00%
0.00%

2007

2008

2009

2010

2011

2012

Tier 1capital Isalmic banks

Tier 1capital Conventional banks

Total capital Isalmic banks

Total capital Conventional banks

2013

Loan/Deposit-Efficiency ratio
120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%

2007

2008

2009

2010

2011

2012

Loan/Deposit Isalmic banks

Loan/Deposit Conventional banks

Efficiency Isalmic banks

Efficiency Conventional banks

2013

ROA-ROE-NPL
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%

2007

2008

2009

2010

2011

2012

2013

ROA Isalmic banks

ROA Conventional banks

ROE Isalmic banks

ROE Conventional banks

NPL Isalmic banks

NPL Conventional banks

39

2.2.1. Tier 1 Capital Ratio

Tier 1Capital Ratio=

Equity Capital+ Reserves

Risk weighted assets

This is a capital adequacy ratio which expresses the ability of the firm to cover its
risky assets with its equity capital and reserves. It is used to classify a firm as well
capitalized or not. The frontier values for this classification are 6%.
In fact, the Islamic banks show a declining ratio during the financial crisis in the order
of 3.61%, while the conventional banks present a slight increase of the ratio of 0.6%.
All the Islamic banks have had a small decrease of Tier 1 capital ratio, which might
have been caused by a decrease in reserves. On the other hand, the increase in the ratio
for the conventional Banks is due to the significant increase of the two leaders, namely
JP Morgan Chase & Co and Citigroup where their dominant position in the industry
enabled their further capital strengthening. The other banks have had a decrease in the
ratio.
From 2007 to 2012 the trend for the Islamic banks has been downward and then we
observe an increase for the next year (2013). For the conventional Banks the pattern is
exactly the opposite; there is an upward trend until 2012, followed by a subsequent
decrease for 2013. Apart from the leading conventional banks, the other six show a
decreasing trend the year of the crisis and a reversal one year after. An explanation for
this observation may lie on the increase of the risk weighted assets during the crisis
that caused a decrease in the ratio and an immediate response of capital injection that
was reflected in the subsequent improvement of the ratio.
Although the Islamic Banks have a decrease in these years, the ratio is in enough
higher levels compared to the Conventional Banks. This suggest a more efficient
coverage of their risky assets with adequate capital. The absence of the interest makes
the assets of the Islamic Banks less risky than those of the conventional Banks,
although in the crisis the credit risk increases for both of them.
40

25.00%
20.00%
15.00%
Islamic Banks
Conventional Banks

10.00%
5.00%
0.00%
2007 2008 2009 2010 2011 2012 2013

2.2.2. Total Capital Ratio

Total capital ratio=

Tier 1 capital +Tier 2 capital

Risk weighted assets

This ratio, apart from the Tier1 includes also Tier 2 which is composed by preferred
stock, subordinated debt and loan loss reserves. The most important element of the
formula is the loan loss reserves, which differ between banks, depending on their
policy. For the conventional Banks the trend of Total capital ratio is similar with that
of Tier 1. The increase of the reserves for possible loan losses causes the increase of
the ratio, considering that the banks act prudently in order to be protected from the
inability of borrowers to pay back their debts. As far as the Islamic banks are
concerned, the Total Capital ratio remains steadily at satisfactory levels and more
importantly it is higher from the conventional banks during the entire examined
period. There is a slight fluctuation of the ratio but this could be partly explained with
the changes on the policy of maintaining loan loss reserves.

41

20.00%
18.00%
16.00%
14.00%
12.00%
Islamic Banks

10.00%

Conventional Banks

8.00%
6.00%
4.00%
2.00%
0.00%
2007 2008 2009 2010 2011 2012 2013

2.2.3. Loans to Deposits Ratio

Loan Deposit=

Total loans
Total deposits

This ratio displays how much liquid the bank is. A high value of the ratio implicates
that the bank doesnt have too much liquidity. On the other hand, low values of the
ratio may tell that the bank is not taking advantage of profitable investments.
Islamic Banks' deposits are different from Conventional banks. In particular, a deposit
in an Islamic bank can take two forms: the first form doesnt give any return i.e. it is
just safekeeping, while the other form is under Mudarabah or other types of Islamic
financial products, where the customer gives his money to the bank for investment
purposes. In the latter case the customer takes the profit generated from the
investment. The term loan on Islamic banks also differs from Conventional Banks,
since the former do not provide loans to their customers... They just finance the
customers' needs, receiving a profit mark-up in return.

42

The Loans to Deposits ratio shows minor fluctuations for the Islamic banks, reflecting
small changes of their investing and financing policies. The ratio remains in relative
high levels between 80% and 100%, indicating the banks inclination to provide
continuing and increasing assistance to their customers during and after the crisis.
Indeed, this fact confirms the context and substance of Islamic finance, although a
high ratio may cause liquidity difficulties.
The diminishing trend of the examined ratio for the conventional banks from 2008
onwards demonstrates their conservative strategy during the economic turmoil.
Although the customers deposits decreased inevitably, the banks became more
reluctant regarding their lending policy. Definitely, this fact made the effects of the
crisis more intense since the borrowers were unable to refinance their debts.

120.00%
100.00%
80.00%
Islamic Banks

60.00%

Conventional Banks
40.00%
20.00%
0.00%
2007 2008 2009 2010 2011 2012 2013

2.2.4. ROA

ROA=

Net income
Total assets

43

This ratio tells how efficiently the company uses its assets to generate profits. The
higher the value, the better. For Islamic Banks this means profitable investments while
for Conventional Banks this means profitable loans i.e. high returns from interest rates,
as their main asset are the loans.
The pattern of ROA is similar for the two samples, presenting a sharp deterioration
from 2007 to 2009 and a slow recovery thereafter. More importantly, the ratio becomes
negative for the conventional banks in 2009 while it remains in modest levels during
the entire examined period. Their vast dependence on interest income to generate
profits renders unstable the course of ROA the years after the crisis, being well below
1%. In contrast, the Islamic banks reveal enough higher ratios than the conventional
banks, denoting effective investing and financing activities for the former. As a result,
the ratio shows a dramatic evolution after the crisis, varying significantly higher than
1%.21
2.50%
2.00%
1.50%
Islamic Banks

1.00%

Conventional Banks

0.50%
0.00%
2007

2008

2009

2010

2011

2012

2013

-0.50%

2.2.5. ROE

21 A high impact on the Change of the ROA had one of the biggest banks, Citigroup with high
negative values in 2008-2009. It was -0.2% in 2008 and -1.03% in 2009.

44

ROE=

Net income
'
Shareholder s equity

This ratio indicates how profitable has been the operations of the banks, considering
the funds collected from their shareholders. The higher the ratio, the best. For Islamic
banks the ratio is related with the performance of the other institutions and companies,
since their main activity is the investment in different projects.
The pattern of ROE is similar with that of ROA, reflecting the negative effects of the
crisis. Although the course of the ratio for both the Islamic and the conventional banks
is similar, the magnitude of losses is significantly higher for the latter. More
specifically, conventional banks show a decrease of 8% from 2007 to 2008, they have
losses in 2009, while the ratio slightly exceeds the order of 8% in 2012 and 2013. In
contrast, the Islamic banks have ratios steadily above 4%, while their ROE is at least
2% higher than the conventional banks between 2011 2013. The last observation may
be attributable to the certain way Islamic Banks make business; their sources of
profitability derive from the effectiveness of other businesses and projects, while the
main source for conventional banks is through lending. 22
18.00%
16.00%
14.00%
12.00%
10.00%
Islamic Banks

8.00%

Conventional Banks

6.00%
4.00%
2.00%
0.00%
-2.00%

2007 2008 2009 2010 2011 2012 2013

22 Also in ROE Citigroup had a high impact in the total weighted average ratio. The values have been
-2.46% in 2008 and -9.91% in 2009.

45

2.2.6. Efficiency Ratio

Efficiency ratio=

Expenses
Revenues

This ratio indicates how efficient is the bank in generating revenues by expenses.
Since interest expenses are excluded, the focus is on the efficiency of the banks
operations. The lower the ratio, the better. This means that the bank spends less to gain
more revenues. Considering that the Islamic Banks do not have interest expenses, total
expenses or operating expenses are used instead.
Both the conventional and the Islamic Banks show increasing ratios from 2007 to
2009, suggesting an inefficient management of their operations. More expenses are
required in order to generate income, while the banks' ability to generate income
during the crisis is limited. This observation is confirmed by the decreasing pace of
ROA and ROE that described previously.
After 2009 the Islamic Banks show a decrease in the ratio indicating increased
efficiency of their operations, while the conventional banks fail to slow down their
inability to manage expenses and revenues effectively. Indeed, the former have enough
lower values of the ratio compared to the latter, meaning that they managed to achieve
higher income with lower costs. Therefore, the Islamic Banks have been more efficient
in their operations than the conventional and still continue to be.

46

80.00%
70.00%
60.00%
50.00%
Islamic Banks

40.00%

Conventional Banks

30.00%
20.00%
10.00%
0.00%
2007

2008

2009

2010

2011

47

2012

2013

2.2.7. NPL Ratio

NPL=

Non performingloans
Total loans

This ratio shows the non-performing loans as a percentage of total loans of the bank.
The lower the ratio, the better because this implicates that from the total amount of
loans, only few of them are not paid back. Since the Islamic banks do not provide
loans, non-performing loans do not exist as well. Alternatively, the impairment on
financing assets is used as an approximation to calculate the amount of money that has
not been turned back.
The ratio follows the same pattern for the Islamic and the conventional banks for all
the examined period. However, the latter shows a radical increase of the ratio during
the crisis, exceeding the order of 4%. For the Islamic banks the trend is upward but in
more decent levels and steadily below 4%.
After 2010 there is a decrease of the ratio for both groups of banks meaning that they
started to recuperate from the effects of the crisis. Moreover, the Islamic Banks show
slightly higher ratios due to their willingness to extend the loans to their customers
in order to facilitate their payments. Again this is done in line with the Sharia low and
the spirit of Islamic financing.
6.00%
5.00%
4.00%
Islamic Banks

3.00%

Conventional Banks
2.00%
1.00%
0.00%
2007

2008

2009

2010

2011

48

2012

2013

Conclusions
The Islamic Finance has had a boom all over the world, even in non-Islamic countries,
especially in the years after the financial crisis. This indicates that it could be an
alternative solution to the Conventional Finance. Other financial institutions
approached the Shariah Compliances rules as their ethical behavior. Islamic Finance
promotes equity basing in the Egalitarian distribution of wealth. It also promotes a
strong link between financial and productive flows and greater stability of the financial
system.
Islamic Banks have had a strong position in their capital. Their Capital Adequacy
Ratios suggest that they were protected by the risks of their assets. The high values of
the ratios were especially due to the low numbers of risky assets. Return on assets and
also on equity had high values, indicating that they have been efficient in using their
assets and the shareholders equity to produce income. Their efficiency was rest even
in their operations. Even though they couldnt avoid the crisis, they managed to keep
decent returns and to avoid the losses. Their way of making business is very different
from the Conventional Banks, making the terms Loans and Deposits to have
different meaning and different approach. In fact, this conduct of business led them to
greater returns and higher stability.
All in all, in case the economic and social aspects of the Islamic Finance are
considered, it could be argued that the Islamic Finance could be a great alternative to
the Conventional Finance, a new philosophy that policy makers and institutional
bodies should take very seriously into consideration.

49

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52