Conventional versus Islamic
Dr. N E
The current paper relates financial analysis of commercial and Islamic banks in UAE. The aim of this paper is to evaluate financial performance of commercial and Islamic banks in UAE and make appropriate conclusions regarding comparative advantages and disadvantages of the two groups of the banks. The evaluation between commercial and Islamic banks was carried out with the help of financial analysis. Analysis of financial ratios was used as the main technique of financial analysis in this paper. There were four groups of financial ratios analyzed, namely: liquidity ratios, solvency ratios, profitability ratios, and leverage ratios. Analysis of financial ratios includes two years - 2010 and 2011. The appropriate recommendations were developed based on the results of financial performance evaluation. An in-depth research was carried out in order to find out whether commercial banks are performing better than Islamic financial institutions. The results of the current research can be implemented for analysis of banking industry in UAE.
Key words: financial ratio, analysis, banks, balance sheet, income statement.
Performance Evaluation of Firms
According to Miniaoui and Gohou (2011) there were 23 licensed banks in UAE as of 2010. Islamic banks represent 16% of the UAE banking sector. All of them are listed either on Dubai Financial Market or Abu Dhabi Securities Market. The majority of the banks, approximately 75%, are publicly owned. The sample of 15 banks will reflect the major tendency of the development of the UAE banking sector. The choice of 5 Islamic banks and 10 commercial banks will help assess their comparative financial performance (Miniaoui and Gohou, 2011). In accord with International Monetary Fund (2012) local banks are under government control and ruling families. Also, Miniaoui and Gohou (2011) stated that 10 large banks are in the ownership of Dubai merchant family.
The current paper aims to assess the financial performance of UAE banks in the post-crisis period. The paper is structured so the financial performance could be evaluated in the longevity (2010-2011) and between two groups – Islamic and commercial.
In UAE, the banks are divided into two groups – Islamic and conventional banks. The banks use a variety of performance indicators. There were six financial ratios chosen to make the comparison valid. The analysis of financial ratios allows standardizing of assessment criteria for evaluation of the financial performance. Using data from balance sheet and income statement the paper is to assess the performance gap between Islamic and conventional banking systems.
Islamic banks are the financial institutions which organize their operations in the framework of Islamic legal code – Shari’a (Miniaoui and Gohou, 2011). The rest of the banks are considered conventional banks, but in this paper they are called commercial banks. The analysis of financial ratios was used to receive generalized performance indicators and compare the financial performance using standardized approach.
1.1. Background of the Problem:
This paper represents a comparative study between Islamic and commercial banks. Financial institutions of UAE had experienced a stable growth before global financial crisis of 2008 thanks to the implementation of the basic principles. For example, long-term finance should be supplied by entities with committed long term horizons, and a broad spectrum of financial instruments should be available to support long-term investments. Even small Islamic banks according to international standards perform better showing tendency for growth striving for global expansion.(Naser, 1999). Previous research related comparison of performance of Islamic and commercial banks was insufficient because of several reasons. In general, comparison of financial ratios of UAE Islamic and commercial banks was not carried out. Only a few authors paid attention to this problem. The first comprehensive research was carried out by Miniaoui and Gohou (2011) examining balance sheets of 37 UAE banks. However, the research related to the comparison between conventional and Islamic banks. In addition, the research related pre-crisis period. The current research relates post-crisis period analyzing two years period of 2010 and 2011. This paper is devoted to examination of post-crisis comparative performance of Islamic and commercial banking sectors based on financial ratios analysis. The results of the previous research showed that the conventional banks performed better than Islamic banks. Miniaoui and Gohou (2011) stated that Islamic banks started to close the difference in post-crisis period. The main objective of the current research is to assess the financial ratios between Islamic and commercial banks in the UAE.
Analysis of financial ratios provides a standardized approach to comparing banks. Using financial ratios provides a platform of evaluation the banks performance on equal field. This technique gives an opportunity to assess the performance of the banks disregard of their size, market share, and sales volume.
Primary data collection concerns tailored data collection by the user of that data. It can take many forms, depending on whether you seek information from experts. Observation, surveys, key informant interviews, and focus groups are the main primary data collection tools, although many other tools exist. So that comparison of primary data usually offers a limited insight. Analysis of financial ratios reveals the ability of a bank to make profits, provide sales growth, fund the business, and use debt for growth. For example, analysis of ROA may show the efficiency of operations of a small bank in comparison to a large bank which has higher revenue. ROA may reveal that the small bank is operating more efficiently than the large bank generating more profit per AUD of assets employed.
The current evaluation of financial performance between Islamic and commercial banks allows comparing the performance of Islamic and commercial banks to reveal the efficiency of their operations. The results of the current research can be used in decision making process for investing purposes. Analysis of financial ratios is an effective tool of assessing the relative strength of the banks. Analysis of financial ratios is based on balance sheet and income statement data measuring stability, profitability, liquidity, operational efficiency giving relevant information (Nersesian, 2011). Raw financial data does not reflect the real position of the banks in the market and their inner efficiency. Analysis of financial ratios is widely used and indispensable technique that adds value for investors and market analysts.
Financial ratios help reveal trends of the banking sector. Comparison of the financial ratios of Islamic and commercial banks helps average ratios and make conclusions when comparing the ratios to the industry benchmarks.
The importance of this research is conditioned by representation of financial data for analysis of the two sub-sectors in the banking industry. Previously, limited number of papers represented similar analysis. This study will aim to fill this gap and offer vast information for further research of banking sector in UAE. The necessity of this research is enforced by an opportunity to expand existing studies with assessment of the financial performance of Islamic and commercial banks. Previous research offered vast data regarding financial performance of Islamic and conventional banks during the global financial crisis. The current research is aimed at evaluation of the performance of UAE Islamic and commercial banks in post-crisis period.
A prediction was made on the basement of the previous research. According to Miniaoui and Gohou (2011), Islamic banking system performs better than conventional banks. Said (2012) examined the small and large Islamic banks and compared their performance to non-Islamic banks. Mehta (2012) conducted a research of banks financial ratios examining two periods – before and after global financial crisis of 2008. Similar research was represented by International Monetary Fund (2012) that compared the performance of domestic and international banks. Rao (2003) shed light on UAE commercial banks financial performance and stock prices. Hashmi (2007) offered a research of domestic banks residing in UAE. Al-Hassan, Khamis and Oulidi (2010) offered a comprehensive research of the pre-crisis period – 2003-2008 years - of UAE banking sector. Cihak and Hesse (2008) analyzed financial performance of UAE banks with substantial part of Islamic banks in the sample.
However, the research cannot be considered sufficient because the studies of Hashmi (2007), Al-Hassan, Khamis and Oulidi (2010), Cihak and Hesse (2008), and Rao (2003) represented the results of the research that is outdated. Although the research conducted by Said (2012), Miniaoui and Gohou (2011), and Mehta (2012) is relatively up-to-date, there is a need to analyze the performance of the banks after the global crisis. This is the reason why the period of 2010-2011 was chosen for the purposes of the current research.
The objectives of the current research are as follows:
The main objective of the current research is to make conclusion regarding relative performance between UAE banks using method of financial ratios analysis.
2. Literature Review:
The financial performance evaluation and the financial analysis by ratios are presented in multiple books and articles authored by both UAE and foreign authors. The literature review is divided into two parts: the first part represents theoretical research with appropriate statistical support; the second part is represented by data offered by UAE commercial and Islamic banks.
Rao (2003) represented analysis of stocks of the following UAE commercial banks: Emirates Bank International, National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, National Bank of Dubai, Dubai Commercial Bank, Mashreq Bank. The listed banks constitute approximately 72% of the capitalization of UAE banking sector. Stock prices were analyzed with the help of Capital Asset Pricing Model (Rao, 2003).
Hashmi (2007) offered an analysis of UAE banking sector. There were 46 domestic and foreign banks examined in terms of management and financial performance. UAE banking sector is protected from foreign expansion, but recently more foreign banks starting to operate in the economy. It was also mentioned that banking sector in UAE is well-managed in highly competitive environment (Hashmi, 2007).
The research represented International Monetary Fund (2012) shed the light on effect made by the world crisis on UAE financial system. The contributors of the research stated that capitalization and profitability of UAE banks is satisfactory. UAE financial systems are highly integrated in global developments in financial sector. The study emphasized the necessity of monitoring of liquidity of individual banks and encourages them on managing liquidity risks (International monetary Fund, 2012).
A comprehensive study of UAE banking sector was represented by Al-Hassan, Khamis and Oulidi (2010) where the evolution of Gulf Cooperation Council was traced on the basement of analysis of regional comparisons. The period from 2003 to 2008 was analyzed in terms of balance sheet exposures, risk assessment, trend analysis, and financial soundness. Financial stability of UAE banks was evaluated as well (Al-Hassan, Khamis and Oulidi, 2010).
The book written by Nersesian (2011) examined a range of issues related credit, banks, and investors. The author used cash flow analysis for in-depth research of the problem. The main topics that were included in the book were cash management, credit risk, financial analysis, market research, project evaluation, risk management, working capital, hedging, random walks, and moving average. Financial tool used by the author allow for making conclusions regarding the current position of the UAE financial and banking sector (Nersesian, 2011).
Gibson (2012) emphasized on using financial accounting information and financial analysis. The book is very useful offering much information regarding management accounting, risk management, advanced financial management, and analysis of financial ratios. The information represented in the source can be very useful for conducting in-depth analysis of financial ratios.
The article about UAE Islamic banks proposed by Miniaoui and Gohou (2011) related financial analysis of Islamic banks, financial instruments used in Islamic banks, and decision making process in Islamic banks. The main focus of the article is consideration of appropriate Islamic mode and computation of financial ratios for making right decisions in banking area. The study can be of use for the purposes of the current paper (Miniaoui and Gohou, 2011).
The study represented by Said (2012) is an invaluable source of information measuring financial efficiency of forty-seven Islamic banks. The period of 2006-2009 was taken for the analysis. For the purposes of hypotheses testing there were the following statistical tools used: Data Envelopment Analysis, on-parametric technique, and t-test. The examination of efficiency of Islamic banks showed different results for small, medium, and large banks (Said, 2012).
An empirical analysis offered by Cihak and Hesse (2008) revealed changes in financial strength in Islamic banks during crisis period. More than 18 banking systems with a substantial part of Islamic banks were examined. The study represented comparison between large and small Islamic banks and their performance during the crisis period. It was also revealed that the market share occupied by Islamic banks does not influence their financial strength (Cihak and Hesse, 2008).
Miniaoui and Gohou (2011) provided a study of performance of Islamic banks during financial crisis. The authors objected the fact that Islamic banks performed better than conventional banks. The profitability and productivity of the banks were examined using Islamic financial instruments. The balance sheet data of 37 banks in UAE was examined. The authors used both conditional and unconditional performance analysis showing that conventional banking performed better than Islamic banks.
Also, a wide range of resources was used for the analysis of balance sheets and financial statements in order to represented an in-depth analysis of financial performance of both Islamic and commercial banks.
Data used in this paper are collected from financial statements of 15 banks residing in UAE. Financial statements used in the analysis are represented by balance sheets and income statements. Financial information was taken from annual reports for the years 2010-2011. The primary data is reflected in the Appendices 1-15. The annual reports are the source of relevant and up-to-date information for the current research. The data collected are from 5 Islamic banks and 10 commercial banks. The aim of the current paper is to assess the financial performance of Islamic and commercial banks. It will help to evaluate the magnitude of the difference between the banks using different methodology.
There were six financial indicators chosen for the current analysis, namely: liquidity, debt, solvency, profitability, ROA, and debt-to-equity ratios. The meaning, formula, and interpretation of financial ratios are described below. The choice of the ratios for analysis is not a matter of chance. The listed above ratios reflect the performance of the banks in the best way. Necessary data for calculation was grouped in the table according to the formulae. Further, ratios were calculated and minimum and maximum values were reflected in the Appendices 16 and 17. Minimum and maximum values of the ratios were grouped by the main characteristic – either Islamic or commercial. Also, financial ratios were grouped by the years – 2010 and 2011. Thus, there is an opportunity to compare between Islamic and commercial banks and for the two years. There were difficulties in collecting data because the banks are using different terms to define the same concepts. Also, Islamic banks use different financing tools in comparison to commercial banks that posed some challenges in the course of the research. The process of choosing the banks for analysis was hampered by the unavailability of the financial data for the public.
3.1. Liquidity Ratios:
Liquidity ratio measures ability of a bank to pay off its short-term obligations. It can be done by measuring liquid assets of a bank against its short-term liabilities. Date is usually taken from a balance sheet. There are several ways to calculate this ratio which measure different types of assets. Conservative methods exclude easily convertible assets from the formula while innovative approaches may include assets that could be converted into cash within a short period of time. In this case, cash and cash equivalents were taken to calculate liquidity ratio to make the calculations easier (Gibson, 2012).
Liquidity ratio shows coverage of liquid asset to current (short-term) liabilities and ability to fund ongoing operations. The greater the value of this ratio then better financial position of a bank. It demonstrates performance and managing policies of banks. The ratio shows cash reserves that are necessary to create balance between cash and non-cash assets. Large cash reserves may hamper profit generating while much loan investments may pose risk of not being able to pay off current obligations in case of depositors’ willingness to withdraw money (Mehta, 2012).
3.2.1. Debt Ratio:
Debt ratio measures relative weight of total liabilities to total assets. Debt ratio is calculated using both short-term and long-term liabilities. For creditors low debt ratio means minimal losses in case of liquidation of a bank. For owners high debt ratio is better as it is an opportunity to magnify earnings. Debt ratio can be compared to industry level to determine whether a bank financial position is under- or over-leveraged. It is sometimes difficult to determine the optimal level of leverage because it depends on many factors. High debt level can provide a bank with tax advantages due to deductibility from business expenses. Also, higher debt level can provide higher return on equity. Higher debt provides a capital to start-up a business. On the other hand, high debt requires sufficient cash flow to service debt load. Cash outflow directed on paying off a debt may pressurize a business. Also, there is a threat of interest rate increase. Directing cash flows to service debt may withdraw cash means from other areas of business starving for financing. Debt ratio takes on a value from 0.00 to 1.00 determining the percentage of assets that could be claimed by creditors in case of a bank bankruptcy (Nersesian, 2011).
3.2.2. Debt-to-Equity Ratio:
The Debt-to-Equity Ratio measures the relative proportion of the capital contributed by creditors and shareholders. Also, this ratio shows the ability of a bank to fulfill its obligations in case of bankruptcy. In this paper the following formula for the Debt-to-Equity Ratio will be used:
Debt-to-Equity Ratio = Total Debt/Total Equity.
Capital intensive industries prone to have high debt-to-equity ratio while companies having low level of capital have debt-to-equity ratio lower than 0.5. A high value of this ratio means that a firm is using aggressive financing strategy using debt. Such a policy may result in volatile earnings and incurring additional interest expense. The increased amount of debt can be a source of additional earnings. Low debt-to-equity ratio means that a firm does not take advantage from financial leverage (Nersesian, 2011).
It is very important to control debt because if the cost of debt outweighs increase in earnings, then business activities can be difficult to manage. Therefore, such as financing policy must be reconsidered. Debt-to-Equity Ratio heavily depends on the sector of economy an organization operates. For the purposes of the current paper total debt consists of short-term and long-term debt. Creditors and investors usually prefer low debt-to-equity ratios because in this case their interested are better protected (Nersesian, 2011).
3.3. Profitability Ratio:
3.3.1. Gross Profit Margin:
Profitability ratio is designed to assess the ability of a business to generate earnings. There are many ways to calculate profitability ratios. Profitability ratios help determine the bottom line of an organization and return to investors (Nersesian, 2011). They help evaluate overall efficiency and performance of a bank. For the purposes of the current research profitability will be calculated using the following formula:
Profitability Ratio = Gross Profit/Net Sales.
There are several approaches for calculation profitability ratios. One of the most popular techniques is calculating profit margin shown in the formula above. The profitability ratios can be divided into two groups: margin ratios and return ratios. Thus, return on assets is also a profitability measure. Also, profitability ratios represent the ability of a bank to generate shareholders’ returns. Gross profit ratio used in this paper to measure the effectiveness of the costs control. The higher the value of this ratio is the better a bank controls its costs. This ratio is often used by investors to compare financial institutions within banking sector. The best results are obtained when comparing profitability ratio to the ratios of competitors. It also called the profit margin or the margin (Nersesian, 2011).
3.3.2. Return on Assets (ROA):
Return on assets is profitability ratio measuring profitability of a bank relatively to total assets. It shows the efficiency of using total assets and ability of assets to generate profits. Profitability ratios are the most common and frequently used tools of measuring profitability of banks. They help determine return to investors showing overall performance and efficiency (Nersesian, 2011). There are many profitability ratios including margin and return ratios. The initial return on assets shows efficiency of managing assets investment when generating profits. The ratio is calculated by dividing net income by total assets. Net income is taken form income statement of a bank while total assets can be found in a balance sheet. The result shows the amount of profit generated relative to investment in total assets. The return on assets belongs to the category of asset management ratios. The higher the value of this ratio, the better is bank ability to generate sales investing in total assets (Said, 2012). ROA helps compare performance of the banks because it is more effective than to compare absolute values of assets and net income. It gives an idea of relative performance of the banks that have significantly different amounts of assets and net income (Gibson, 2012).
ROA = Net Income/Total Assets
4. Empirical results:
There was a quantitative approach used in the current research. Secondary data collected from the financial statements of the UAE banks was analyzed. The results that were found came from ADX (Abu-Dhabi Security Exchange) and under Annual report of UAE. These results are validated and updated on a yearly basis. The results were also found from the references that were cited below. There were two statistical methods used in the current research. The coefficient method was used for the purposes of economic analysis of financial statements of the banks. This method is widely used together with factor analysis. This method is based on the accounting reports of the banks. It is a system of relative parameters helping evaluate financial position of a bank. Index method of economic analysis is based on relative indicators that reflect the relation between the actual level of the analyzed indicator during the reporting period and the level of the analyzed indicator in the basic period.
4.2. Descriptive Statistics:
The analysis of minimum and maximum ratios showed that the commercial banks more prone to fluctuations of the ratios than Islamic banks (Appendix 18b). However, it does not mean that they perform worse than Islamic banks. The increase in ratios is observed in 2011 if compared to 2010. All of the financial ratios of Islamic and commercial banks increased simultaneously. Liquidity ratio increased for almost all of the banks that were analyzed. Only one Islamic bank and three commercial banks are excluded from this list. The increase in liquidity of Islamic banks was more evident and made up larger percentage in comparison to commercial banks. Abu-Dhabi Islamic bank experienced significant increase of liquidity while Sharjah Islamic Bank was exposed to a slight decline in liquidity ratio of 8.1%. Other Islamic banks showed liquidity increase. RAKBANK had experienced a significant growth of liquidity that made up more than 8 times of the level of 2010. The liquidity of Union National Bank poses threat to the ability of the banks to pay off its debts in case of need. The decline in liquidity of National Bank of Umm Al-Qaiwain made up a little bit more than 16% meaning that the management of the bank should pay attention to asset management. The other two commercial banks - Bank of Sharjah and Abu-Dhabi Commercial Bank – had experienced a slight decline in liquidity ratio that made up less than 10%. However, even a slight decline should be considered by the management of the banks because it concerns the interests of its stakeholders. The liquidity of other commercial banks can be described as steadily growing. In whole, Islamic banks showed better results with regard to the liquidity ratio. In most cases the growth of liquidity of Islamic banks exceeded the ratios of commercial banks.
A lot of the banks from the sample showed a decline in debt ratio. This is a positive trend showing that the banks reduce their debts. Ten banks out of fifteen analyzed showed decrease in debt ratio – four Islamic banks and six commercial banks. Islamic banks performed better than commercial banks in terms of serving debt. However, the growth of debt ratio in commercial banks was insignificant.
The solvency ratio was the most unstable ratio across both groups of the banks analyzed. The two of five Islamic banks - Dubai Islamic Bank and Noor Islamic Bank - showed a significant increase of solvency ratio (ninefold and sixteenfold correspondingly), while one Islamic bank – Emirates Islamic Bank - experienced a significant decrease of this ratio equal 120%. The other two banks experienced a slight decline (Sharjah Islamic Bank) and a slight growth of solvency (Abu-Dhabi Islamic Bank). A significant volatility in solvency ratio can be also observed in the groups of commercial banks. Two commercial banks experienced a significant growth of solvency, namely: Abu-Dhabi Commercial Bank (more than fivefold) and Commercial International Bank (sixfold). The high value of ratio means strong ability to survive during the hardships. The half of the commercial banks represented showed negative solvency ratio meaning weak ability to cover liabilities by net earnings. In general, Islamic banks showed better ability to manage their liabilities with the help of earnings because the percentage of the Islamic banks with negative solvency ratio equals 40, while the percentage of commercial banks with negative solvency ratio is 50.
The group of Islamic banks revealed the growth of profitability except for Emirates Islamic Banks that showed a slight decline in profitability. Dubai Islamic Bank has to be mentioned here because of its outstanding growth of profitability experienced in 2011 – 516%. The commercial banks mainly showed an increase in profitability, however, the share of the commercial banks with negative ratio made up 40% that is high in comparison to Islamic banks showing only 20% of the banks having negative profitability. Again, Islamic banks performed better than the commercial banks.
The analysis of the return on assets ratio revealed the tendency for growth among Islamic banks. Some of them experienced a significant growth of this ratio, namely: Dubai Islamic Bank and Emirates Islamic Bank which ratios increased in 750 and 2000 times accordingly showing good asset management ability of the banks. Sharjah Islamic Bank reveal negative ROA while the two remaining banks showed insignificant growth of the ratio. Two of the commercial banks showed a significant increase of the return on assets ratio while 40% of the commercial banks underperformed. One of the commercial banks showed neither increase nor decline in the ratio – National Bank of Dubai. The other two banks experienced a slight growth of the return on assets ratio. Again, Islamic banks seem to outperform with 80% of the financial institutions having positive ROA in comparison to the commercial banks with 50% of outperforming banks in the group.
Debt-to-Equity ratio decreased in one Islamic bank and in five commercial banks showing the willingness to finance operating activities through debt. Thus, 50% of commercial banks prefer to leverage their business with the help of debt. The same tendency can be observed in the group of Islamic banks.
Taking into account the limitations of the current research the following recommendations could be developed: all 23 banks operating on the territory of UAE could be represented in the research, more financial ratios can be used for the purposes of financial analysis, and the three period can be taken for analysis to compare the financial performance of the banks in the longevity.
Based on the results of analysis of financial ratios, the paper concludes that the overall financial performance of UAE banks was improved which is the evidence that the banks recovered from global financial crisis. Profitability of both Islamic and commercial banks remains stable. However, some of the financial institutions both from Islamic and commercial sector showed a slight decline in profitability. The liquidity ratios of the banks also experienced slight changes. However, these changes were insignificant. In whole, the liquidity of the banks remained stable or showed slight growth. Debt ratio of both Islamic and commercial banks reduced. The majority of commercial banks succeeded to reduce their debt ratio. All Islamic banks experienced decline in debt ratio except for Sharjah Islamic Bank. More frequent occurrence of the banks with increased debt ratio is conditioned by the larger sample of commercial banks. Interestingly, solvency of the majority of the banks in two groups declined. Three of five Islamic banks showed this tendency. Abu Dhabi Islamic Bank and Noor Islamic Bank improved their solvency. Only four of ten commercial banks succeeded to improve this ratio. Thus, 60% of Islamic banks of the sample improved solvency in comparison to 40% of commercial banks. Profitability of the examined banks did not change much. Three Islamic banks succeeded to improve this ratio making 60% of the total sample of Islamic banks while profitability of commercial banks was improved in 50% of the cases. The calculation of the return on assets also revealed increase in this ratio among Islamic banks – 60% of the banks improved this ratio. The results of analysis of commercial banks regarding ROA did not differ from previous results showing increase in 50% of the cases, 10% of the banks succeeded to maintain the same ratio during 2010-2011, and 40% of the banks showed decline in ROA. Thus, analysis of ROA is in line with the analysis of the previous ratios. The percentage of the banks showing decline in ROA among Islamic and commercial banks made up 40%. Debt-to-equity ratio of Islamic banks increased in 4 of 5 Islamic banks making 80% of the sample of this group. It means that the majority Islamic banks pursue aggressive strategy of debt financing. Only Dubai Islamic Bank showed decrease in this ratio meaning that the bank perform financing through equity. The number of commercial banks that reduced their debt-to-equity ratio and the number of the banks of this group that increased debt financing is equal. It means that 50% of commercial banks, similarly to Islamic banks, prefer use debt leverage in their business. However, the percentage of the banks that use debt financing is significantly lower than that of Islamic banks.
The current paper has limitations related the sample of the banks, the number and the choice of the financial ratios, and the period of time chosen for analysis. As it was stated above, there are 23 licensed banks operating on the territory of UAE. The sample used in the current analysis consists of 15 banks that is a significant part of the total quantity of the banks operating on the territory of UAE. Another limitation concerns the choice of financial ratios. The choice of the ratios represents the most significant ratios in banking sector showing profitability, solvency, and liquidity of the banks. However, adding more financial ratios for analysis will help expand the research and show other sides of financial position of the UAE banks. One more limitation is connected with the period of 2010-2011 that was taken for analysis. This analysis of financial ratios embraces the post-crisis period showing the relative financial performance for the period. However, the period is very short. Probably, further research should embrace a larger period of time to reflect the performance of the UAE banks before the crisis, during the crisis, and after the crisis. This analysis will help make conclusions regarding financial performance and stability of the UAE banks across time. In addition, analysis of financial performance of the banks during the crisis and in the post-crisis period helps conclude regarding the ability to survive during economic hardships. Variables:
Appendix 16 Minimum and Maximum Ratios of Islamic and Commercial Banks as of 2010
Appendix 17 Minimum and Maximum Ratios of Islamic and Commercial Banks as of 2011
Interpretation of figures
For the year 2010 and 2011, the liquidity ratios for Islamic and commercial banks were too low below the recommended level of 2.0 for current ratio and 1.0 for quick and cash ration. However, the case of commercial banks recorded a maximum value of liquidity ratio as 1.287 and 1.342 in 2010 and 2011 respectively. This shows that at some point in the year, the company was able to pay for the current liabilities at that particular time. However, the minimum values shows that the company is unable meet the short term financial obligations. For Islamic bank, the ratio is below 1.0 for both minimum and maximum values. Comparing the two companies, commercial banks seem to have a relatively liquidity strength for the two years cited.
For the debt ratio, it seems that the company’s assets are highly financed by debts because the debts carry a higher percentage on the total assets. For the Islamic bank for instance, the maximum debt ratio is 0.739 and maximum 0.910 meaning that 73% to 91% of the assets in 2010 were financed by debts. For commercial bank in the same year, the maximum was 89% and minimum 75.8%. The year 2011 also had higher proportion of assets financed by debts. For Islamic bank it was 75.1% minimum and 88% maximum while for commercial banks, it was minimum 71.6% and maximum 89.6%. Comparing the two companies, commercial banks were better in 2010 but Islamic banks were better in 2011. Commercial banks can be said to be more credit worth than Islamic banks based on these ratios.
The utilization of total assets to generate income is indicated by Return on Assets ratio. For the year 2010, the ratios are minimum 0.00 and maximum 0.015 for Islamic banks and 0.001 and 0.075 minimum and maximum for commercial banks respectively. This means that commercial banks were more efficient in utilizing total assets to generate profit. The same trend is exhibited for the following year 2011. The ratios were minimum 0.017 and maximum 0.041 for Islamic banks and 0.005 and 0.08 respectively for commercial banks.
The Debt-to-Equity ratio (D/E) relates what is borrowed and what is owned by the company. The lower the ratio, the better is the firm. In 2010, the minimum and maximum ratios for Islamic banks were 0.367 and 1.592 respectively while that of commercial banks was 0.294 and 5.207 for minimum and maximum respectively. Commercial banks were worse than the Islamic banks in the two years 2010 and 2011. The ratio increased for the two companies in the two years. This shows that the debt burden increased in these two years.
The solvency ratios indicate the ability of the firm to pay for the financial obligations that falls due in a longer period of time. The two companies, Islamic bank and commercial banks have solvency ratio below 1.0 meaning that they cannot meet their long-term financial obligations using the after tax profit.
Profitability ratios for these companies were minimum and maximum for Islamic bank 0.11 and 2.96 respectively in 2010. For commercial banks it was 0.109 and 1.478 respectively. It shows that in 2010, Islamic banks performed better than commercial banks in terms of profitability ratios. They generated more profit than commercial banks. The trend is the same for 2011.
There were 15 banks analyzed for the purposes of the current research. The sample contained 5 Islamic and 10 commercial banks. The performance of the banks was analyzed using solvency ratio, profitability ratio (profit margin), ROA, and debt-to-equity ratio. The choice of the ratios was conditioned by the efficiency of the analysis. Data for the analysis was collected from financial statements of the banks attached to the paper in Appendices part. The period of analysis is two years – 2010 and 2011. The choice of the period is not casual. The aim was to analyze the performance of the banks in post-crisis period. There were a number of studies analyzing the performance of UAE banks during the global crisis. However, the research is missing the analysis of the performance of the UAE banks during post-crisis period. This paper aims to fill this gap. The research was based on the analysis of financial statements. Financial data were taken from the annual reports of the UAE banks.
The financial performance of the banks operating in UAE after global crisis is satisfactory except for several Islamic and commercial banks. However, there is a positive tendency was revealed when comparing the performance of the banks for 2011. It means that the general performance of the UAE banking sector is good.
In general, the majority of Islamic banks performed better by many indicators. However, this paper examined 5 Islamic and 10 commercial banks. Maybe the results of the research will be different if an equal number of Islamic and commercial banks were considered. Thus, a conclusion can be made that Islamic banks using different principles than the commercial banks succeeded to develop a significant competitive advantage based on core principles of Muslim religion works quite good. However, further research is needed to prove this claim.
Appendix 1 Balance Sheet 2010-2011 of Dubai Islamic Bank, AED ‘000 (Dubai Islamic Bank, 2011).
Appendix 1a Income Statement 2010-2011 of Dubai Islamic Bank, AED ‘000 (Dubai Islamic Bank, 2011).
Income from Islamic financing and investing assets 38 3,448,506 3,221,695
Income from Islamic sukuk 517,332 376,260
Income from International murabahats and wakala, short term 39 83,133 36,313
Gain from other investments 40 39,036 136,163
Commissions, fees and foreign exchange income 41 700,587 687,030
Income from investment properties 42 70,042 90,166
Income from sale of properties held for sale 43 15,390 14,498
Other income 44 130,837 140,006
Gain on buy back of sukuk financing instrument 23 - 6,418
Total income 5,004,863 4,708,549
Personnel expenses 45 (908,883) (817,819)
General and administrative expenses 46 (563,409) (542,943)
Depreciation of investment properties 14 (24,205) (22,669)
Impairment loss on financial assets, net 47 (994,964) (801,055)
Impairment loss on non-financial assets, net 48 (91,948) (62,824)
Total expenses (2,583,409) (2,247,310)
Profit before depositors’ share and tax 2,421,454 2,461,239
Depositors’ share of profits 49 (1,386,808) (1,435,631)
Operating profit for the year 1,034,646 1,025,608
Share of profit/(loss) from associates 11 28,551 (1,099,891)
Gain on acquiring controlling interest 20 - 637,038
Profit for the year before tax 1,063,197 562,755
Income tax expense 26 (6,782) (3,492)
Profit for the year 1,056,415 559,263
Equity holders of the parent 1,010,141 553,153
Non-controlling interests 46,274 6,110
Profit for the year 1,056,415 559,263
Basic and diluted earning per share attributable to the equity
holders of the parent (AED) 50 AED 0.26 AED 0.15
Appendix 2 Balance Sheet 2010-2011 of Emirates Islamic Bank, AED’000 (Emirates Islamic Bank, 2011).
Cash, and balances with U.A.E Central Bank 4 1,195,167 1,121,466
Financing receivables 7 12,969,041 14,625,722
Investments 8 2,197,591 2,839,960
Investment properties 9 1,111,317 1,317,918
Prepayments and other assets 10 285,389 295,857
Fixed Assets 11 98,918 104,505
TOTAL ASSETS 21,483,795 32,746,515
Customers’ accounts 12 17,125,152 24,222,865
Other liabilities 14 709,998 790,822
Zakat payable 1,053 11,704
Investment wakala 15 1,081,872 1,081,872
TOTAL LIABILITIES 19,005,709 29,819,339
Share capital 16 2,430,422 2,430,422
Statutory reserve 17 206,865 206,865
General reserve 17 112,644 112,644
Cumulative changes in fair value 515 -
(Accumulated losses)/Retained earnings (315,744) 86,804
TOTAL EQUITY ATTRIBUTABLE TO EQUITY
HOLDERS OF THE BANK 2,434,702 2,836,735
Non-controlling interest 18 43,384 90,441
TOTAL EQUITY 2,478,086 2,927,176
TOTAL LIABILITES AND EQUITY 21,483,795 32,746,515
COMMITMENTS AND CONTINGENT LIABILIITES 19 4,360,138 4,208,558
ASSETS UNDER MANAGEMENT 20 1,285,550 1,285,550
Appendix 2a Income Statement of Emirates Islamic Bank, AED’000 (Emirates Islamic Bank, 2011).
Income from financing activities, net 21 699,951 919,883
(Loss)/income from investment securities, net 22 (45,531) 49,091
Income from Group Holding Company, net 23 240,642 345,419
Property related income, net 24 19,301 23,016
Commission and fee income, net 25 237,904 233,242
Other operating income, net 26 38,593 80,886
TOTAL INCOME 1,190,860 1,651,537
General and administrative expenses 27 (430,035) (378,623)
Depreciation of investment properties (25,144) (17,189)
TOTAL EXPENSES (455,179) (395,812)
NET OPERATING INCOME BEFORE ALLOWANCES
Allowances for impairment, net of recoveries 28 (783,289) (530,526)
NET OPERATING (LOSS)/INCOME AFTER
ALLOWANCES FOR IMPAIRMENT
Investment, savinabug and wakala accounts’ share of profit 29 (400,944) (665,859)
NET (LOSS)/PROFIT FOR THE YEAR (448,552) 59,340
Equity holders of the Bank (401,495) 61,262
Non-controlling interest 18 (47,057) (1,922)
NET (LOSS)/PROFIT FOR THE YEAR (448,552) 59,340
(Loss)/earnings per share (Dirham) 30 (0.165) 0.025
Appendix 3 Balance Sheet 2010-2011 of Abu Dhabi Islamic Bank, AED ‘000 (Abu Dhabi Islamic Bank, 2011).
Cash and balances with central banks 15 11,207,145 5,400,335
Balances and wakala deposits with Islamic
banks and other financial institutions 16 2,515,371 2,906,382
Murabaha and mudaraba with financial institutions 17 5,216,501 12,823,542
Murabaha and other Islamic financing 18 23,365,559 22,682,521
Ijara financing 19 25,465,782 25,270,071
Investments 20 1,652,605 1,639,414
Investment in associates 21 851,503 837,195
Investment properties 22 155,240 191,654
Development properties 23 966,747 1,050,445
Other assets 24 1,964,650 1,870,072
Property and equipment 25 973,963 585,887
TOTAL ASSETS 74,335,066 75,257,518
Depositors’ accounts 27 55,171,783 56,517,045
Other liabilities 28 1,862,757 2,091,500
Tier 2 wakala capital 29 2,207,408 2,207,408
Sukuk financing instruments 30 4,590,625 5,439,523
Total liabilities 65,763,999 67,146,866
Share capital 31 2,364,706 2,364,706
Legal reserve 32 1,755,894 1,754,899
General reserve 32 585,921 443,182
Retained earnings 1,311,406 984,069
Proposed dividends 33 577,546 511,783
Proposed dividends to charity 1,028 6,816
Other reserves 34 (28,043) 42,122
Tier 1 sukuk 35 2,000,000 2,000,000
Equity attributable to the equity holders of the Bank 8,568,458 8,107,577
Non-controlling interest 36 2,609 3,075
Total equity 8,571,067 8,110,652
TOTAL LIABILITIES AND EQUITY 74,335,066 75,257,518
CONTINGENT LIABILITIES AND COMMITMENTS 14,378,921 12,156,042
Appendix 3a Income Statement 2010-2011 of Abu Dhabi Islamic Bank, AED ‘000 (Abu Dhabi Islamic Bank, 2011).
Income from murabaha, mudaraba and wakala
with financial institutions 118,236 187,719
Income from murabaha, mudaraba, ijara and other
Islamic financing from customers 5 3,609,400 3,453,005
Investment income 6 86,056 75,699
Share of results of associates 17,339 14,798
Fees and commission income, net 7 429,339 343,325
Foreign exchange income 30,083 29,071
Income from investment properties 8 7,743 5,265
Income (loss) from development properties 9 4,178 (4,300)
Other income 9,926 14,441
Employees’ costs 10 (895,735) (792,815)
General and administrative expenses 11 (462,529) (431,210)
Depreciation 22 & 25 (91,390) (77,215)
Provision for impairment, net 12 (821,070) (749,212)
PROFIT FROM OPERATIONS, BEFORE DISTRIBUTION TO DEPOSITORS
AND SUKUK HOLDERS 2,041,576 2,068,571
Distribution to depositors and sukuk holders 13 (886,485) (1,045,006)
PROFIT FOR THE YEAR 1,155,091 1,023,565
Equity holders of the Bank 1,154,969 1,023,345
Non-controlling interest 36 122 220