Emirates Islamic Bank started in 2004 for providing high quality Islamic banking and related services across the United Arab Emirates. They offer a range of products and services conforming which are Shari'a compliant to the highest standards related to Islamic finance. All the bank activities are generally overseen by a Shari'a board which comprises several various prestigious scholars expert in Islamic law.
Emirates Islamic Bank's desire to comply with all aspects of Shari'a rules means that they are doing things differently from major conventional banks. They as per Islamic banks neither charge nor pay interest. They usually seek to avoid any uncertainty in their transactions. Against conventional credit facilities which offer loans and overdrafts, they use Islamic financing compliant methods such which include Murabaha, Ijarah and Salam. Against paying interest for savings accounts or investing their customer's money in some interest paying funds, EIB use Islamic policy of profit-sharing structures or Islamic investment funds. Most of their products are totally different from usual products offered by most other banks. Emirates Islamic bank promise consumers to expect the superior levels of service from them.
Objective of Study
Here we are going to study with a hypothesis that Islamic banks like Emirates Islamic Bank though they are different from normal banks in operation, are profitable and doing well. We are going to prove this hypothesis with the example of Emirates Islamic Bank.
UAE Banking Industry
Common thing about most of the banks of UAE is that they have Islamic banking in common. They are different from other types of traditional banking in many different ways. Traditional banking and finance involved money making activities by utilizing different opportunities and exploiting resources to earn maximum profit. The Islamic banking and financial institutions don't operate according to traditional banking principles. The Islamic institutions involve principle of Sharia and try protecting benefits of common people. They tend to provide 0% interest loans and several financial instruments that can make to favoring to business growth.
Islamic banking and finance depends upon the principles of Sharia that defines several ideas of marketing. It is Islamic religious reference that is applied to the real world by the Islamic banks. These financial institutions are responsible for successful implementation of these principles. They try to provide 0% interest lending to establish business and trading. Sharia also opposes the monopoly of any business and so don't allow any type of patent or copyrights that can protect any products or services. Islamic financial institutions deal in providing best opportunities for the person interested in trade expansion. Sharia also protects ownership of business and ownership only belongs to one who invests capital and effort both. According to the Sharia, the corporate takeover is not allowed and any type of acquisition or merger cannot be entertained.
The objectives of the Islamic banks in particular in UAE have been mentioned as follows:
The foremost objective of the Islamic banks is to make the world free from economic injustice.
They believe in a different convention as compared to the non-Islamic banks in the country and worldwide.
It is one of the most ethical forms of banking even though it might appear a lot more exotic in the beginning.
They are committed to Islamic ideals and rules of Sharia in almost all their activities.
They are focused on 100% customer satisfaction. They deliver quality service as per the customer needs.
They aspire to become a Bank that makes their employees feel proud and are willing [1] to offer a chance to learn and advance on merits.
They use creativity and technology to differentiate between their services. Try to make their products and services easily accessible to their customers.
They will reward their shareholders by providing them competitive returns on their investment in the Bank.
The banks aim at charging 0% interest rates as it is a sin in Islam.
It is clearly observable that the financial institutions of UAE & other Islamic countries are making huge return from their services offered.
Islamic banking is growing rapidly with 10-15% growth rate every year. It has spread in whole world with 300 institutions in 51 countries including United States, with 250 mutual funds running on the principles of Islamic ideas.
Financial Products, Instruments related to Islamic banking
The instruments and services that are provided by Islamic banks and financial institutions are:
Bai'al-inah (sale and buy-back agreement): In this scheme a sold asset can be acquired back after some period of time without charging any interest from the buyer in case of late payment or defaulting.
Bai muajjal (credit sale): In this scheme the bank gets the profit from allowing the sale of a product or asset on the basis of payment made in installments. The deal is made by deciding the profit margin that is needed and maturity date of loan.
Bai' bithaman ajil (deferred payment sale): The deal can be made for an asset that is sold and payment is made after some period of time. The deal is made considering the profit margin for both the parties.
Mudarabah (profit sharing): Here the bank or capital investor shares the profit made by the entrepreneur by investing the money in business activity. All the expertise, management and labor are provided by entrepreneur with the capital provided by the investor.
Sukuk (Islamic bonds): These are the Islamic binds that are certificate of fixed [2] amount of principle that will be given back after maturity with some profit.
Murabahah (cost plus): The asset is traded at a price that involves the profit margin that is fixed with the agreement of both the parties. It is fixed income loan scheme and involves a predefined profit earning.
Musawamah: It is the negotiation of price between the two parties for an asset whose cost price is not subjected to reveal during the deal. The selling party may also not be having knowledge of cost price and deal is made with agreement of both parties. It is very common way of negotiations in Islamic countries.
Ijarah: Here the selling of benefit of use or service is made at a fixed price for a period of time. It is wage, rent, or lease that is decided for the specified period and the buyer may take benefit only up to the given period. As in UAE, the property is not available for purchase permanently by any expatriate. They can take it on lease or pay high rent for the fixed duration. It is very common practice in these countries.
Bai salam: It is scheme in which the advance payment of the price for an asset is made for the future delivery. The quality and specifications of the product is predefined and any discrepancy may lead to disputes.
Qard hassan/ Qardul hassan (good loan/benevolent loan): It is a type of loan that is provided on the goodwill basis and it is subjected to just payback the amount taken.
Takaful (Islamic insurance): It is a risk management scheme, where a Muslim can have cover for their risky time.
Hibah (gift): This is a type of incentive given by a debtor to the creditor in return of the amount. This is the profit sharing mechanism of banks with saving money invested by people by providing them dividend.
Wadiah (safekeeping): It is a type of safe deposit in banks that is guaranteed with the repayment at the demand of depositor.
Wakalah (power of attorney): This is allowing a person to have all the transaction on his behalf.
Emirates Islamic Bank's Recent Financials
Income Statement
2009
2008
Balance Sheet
2009
2008
Inferences
Balance sheet and Income statement of the company directly shows that the company doesn't have any interest income. Its major revenue is from financial investments and commission. The bank mainly operates as per the shari'a principle and its income includes income from financial activities, short term investments and short term Murabaha. It also invests in property related investments. It doesn't have any interest related expense. Its expense mainly includes administrative and rental expenses. Over and above this, banks also have depreciation and impairment expenses which includes loss due to obsolescence and expiry losses.
Above shown graph shows company's equity and profit shares from period 2000-2006. It has been increasing continuously from year 2000 to year 2006. In period 2005 to 2006, Company's equity remained constant but its profit has taken the major jump by increasing more than 17%.
Above graph shows the change in components of financial statement with year on year basis. Assets have been increasing at a rate of 93% per annum. Deposits have been increasing consistently at the rate of 124% with compounding growth. Equity in the bank has been increasing at the rate of 18% whereas the income of the bank has been increasing at the rate of gigantic 150%. Buy the picture has not been everywhere rosy. Expenditure of operation has also been increasing a lot with 96% annual growth rate
Ratio Analysis
Financial ratio which is also known as accounting ratio is a ratio telling relative magnitude of division of two numerical values usually taken from a firm's financial statements. It is generally used in for acc, there accounting purposes. There is variety of standard ratios used to explain the comprehensive financial position of a corporation or an organization. Financial ratios can be used by inside managers to use the company's financial status and define the plan on which they have to make the company improve its financial efficiencies. These ratios can be utilized by outsiders such as investors to analyze the company's economic position to check out whether they can invest in the firm or not. By analyzing the ratio, investors can fully verify whether company's stock price is logical or not. Whether they are fundamentally correct not? Security analysts generally use financial ratios to analyze the strength and weaknesses of various companies.
Financial ratios generally quantify many quality aspects of a business. They are usually an integral part analysis of the financial statement. Financial ratios get categorized as per the financial act which ratio measures. They are grouped together in different categories each informing different aspects of the company. Liquidity ratios generally measure the presence of cash available to pay debt. Activity ratios generally measure that how quickly a firm is able to convert its non-cash assets into cash assets. Debt ratios generally measure the capability of firm to repay its long-term debt pending. Profitability ratios basically measure the utility of firm's assets and control of its total expenses to generate a permissible rate of return. Market ratios basically measure investor's response of owning a company's stock. It also checks the cost of issuing stock. These ratios are usually analyzed with company's ability to return the amount invested or actually just the return on equity. The relationship gets formed between return investor can assume and the kind of value of an investment associated with company's shares.
Financial ratios facilitate for comparisons:
between different companies
between different industries
between different time horizons for one company
between a company with its industry average
Ratios generally don't have any significance until they are related and compared with something else. Therefore they form the main basis of comparative analysis of two firm's financial and operational status.
ROE
(return on equity) = net income / average common equity.
ROA
(return on assets) = net income / average total assets.
NIM
(net interest margin) = net interest income / average total assets.
Efficiency Ratio
Efficiency ratio = noninterest expense / ( net interest income + noninterest income)
Fee Income Ratio
Fee income ratio = noninterest income / (net interest income + noninterest income)
EPS
(earnings per share) = net income / # of outstanding shares
NPM
(net profit margin) = net income / total operating revenues
AU
(Asset Utilization) = total operating revenues / average total assets
EM
(Equity Multiplier) = total assets / common equity
Emirates Islamic Bank
2009
2008
Equity
2314688000
934375000
Total Asset
25289369000
26400450000
Net Income
130794000
238533000
Net Interest Income
0
0
Non-Interest Income
1508134000
1499361000
Non-Interest Expense
402428000
464491000
Operating Income
130268000
400472000
Outstanding Shares
1868485000
931588000
ROE
5.7%
25.5%
ROA
0.5%
0.9%
NIM
0.0%
0.0%
Efficiency Ratio
308.9%
116.0%
Fee Income Ratio
1157.7%
374.4%
EPS
0.14
0.26
NPM
100.4%
59.6%
AU
0.5%
1.5%
EM
10.93
28.25
Inferences
Above ratio Analysis shows a lot of parameters about company's financial health. Recently in year 2009 company's Return of equity has not been that great. It has reduced consistently from 57% in 2007 to 5.7% in 2009. This shows that investors are not getting proper return on their investment in bank. Asset utilization is also consistently decreasing year on year. Asset utilization has been decreased recently from 3.8% to 0.5% in just two year. This 85% decrease within two years shows that company's asset's income generating capacity on decline recently. Company's efficiency and fee income ratio has been on increase recently. Investor's share investors are earning a lot recently. Bank's Earnings per share has increased from 0.01 to 0.14 in last two year time span with a peak of 0.26 in 2008. Equity Multiplier which is ratio of total assets and common equity is also decreasing consistently from 2007 to 2009. Its value has decreased a lot from 22.68 to 10.93 recently. Therefore here we can see that company's financial has shown a downward pattern recently. Its asset has lost its efficiency and most part of them has become nonperforming asset.
Conclusion
From above study we can conclude that Emirates Islamic bank is successful in making its mark in the field of Islamic banking. It is one of the most recognized names in the field of Banking in UAE. They prefer Shari'a principle to be base of their operation. Recently they are not doing well in maintaining operational and asset efficiency but its history shows that they are good and they have raised the level of Islamic banking. They just have to bring back their efficiency.
