This chapter begins with a detailed ratio comparison between Islamic and conventional banks. The ratio comparison outlines different categories such as asset quality, capitalization, operation, and liquidity. There is a table of ratios to illustrate numerically the ratio comparison. This chapter then introduces descriptive statistical and by using test, also displayed the growth ratios. This is followed by the regression output. In the regression there are three dependent variables: ROA, ROE, and NIM, according to the model.
4.1 Descriptive Statistics
Table No.4.1 Independent Samples T test
95% Confidence Interval of the Difference
F
Sig.
t
df
Sig. (2-tailed)
Mean Difference
Std. Error Difference
Lower
Upper
ROA
7.083
.008
2.711
202
.007
1.476
.544
.403
2.549
2.725
199.660
.007
1.476
.542
.408
2.544
ROE
1.587
.209
.271
201
.787
.856
3.162
-5.379
7.092
.264
125.590
.792
.856
3.243
-5.561
7.274
NIM
13.748
.000
1.820
199
.070
7.662
4.210
-.641
15.965
1.902
105.747
.060
7.662
4.028
-.324
15.648
LLR
31.392
.000
-3.182
170
.002
-3.747
1.178
-6.072
-1.422
-3.519
124.734
.001
-3.747
1.065
-5.854
-1.640
EA
.007
.931
.862
203
.390
1.6978
1.9698
-2.1860
5.5817
.858
191.506
.392
1.6978
1.9793
-2.2062
5.6019
COSR
1.143
.286
-.513
203
.608
-3.5106
6.8428
-17.0027
9.9816
-.503
114.795
.616
-3.5106
6.9860
-17.3488
10.3277
NLA
.404
.526
-1.284
197
.201
-3.56122
2.77455
-9.03285
1.91041
-1.293
196.925
.198
-3.56122
2.75457
-8.99346
1.87103
LIQ
7.614
.006
-4.655
202
.000
-51.91276
11.15172
-73.90146
-29.92406
-4.539
112.222
.000
-51.91276
11.43780
-74.57481
-29.25071
Source: Constructed by Author Using Data from Bank Scope
Shown in table 4.1 the T.test results, it is considered in the light of profitability results of (ROA). the Liquidity ratio of Islamic Banks (positive) for a period of five years is better than the conventional banks Which means that the ability of Islamic banks to meet their obligations in emergency situations without the need to break their deposits with others correspondent banks. It is also noticeable from the standard deviation used to measure the risk of liquidity. The standard deviation of Islamic banks was 3.5 per cent, which greater risk than the conventional banks was 0.01 per cent.
More over the return on equity ratio, the revenue to shareholders on their investments in Islamic bank is better than the conventional bank namely, which measure they have achieved all dollar investor of the profits from their owners. The revenue to shareholders on their investments in Islamic bank is better than the conventional bank.
Moreover, basic on t.test there no significant or different between conventional bank and Islamic banks concerning the net interest margin (NIM) and net loans assets.
In fact, Reserve for impaired loans to gross loan (LLR) is greater for conventional banking than Islamic banking .on the other hand standard deviation used to measure the risk of assets quality. The standard deviation of Islamic banks was 0.9 per cent, which greater risk than the conventional banks was .384 per cent.
In addition, Total Equity over Total Assets (TE/TA) the capital indicator Islamic banks are better than conventional banks, which means that Islamic banks are better capitalised. More details, the standard deviation has shown that the conventional banks more risk of equity to assets than Islamic banks. The standard deviation of Islamic banks was 12.6 per cent, which lower risk than the conventional banks was 15.4 per cent.
As shown in table 4.1, non interest expense to gross revenue (COSR) depend on t.test result the Islamic banks is better than conversational that Islamic banks as a group perform better than the conventional banks.
Finally, Liquidity assets to deposit short term funding (LIQ) and Net loans Assets (NLA)the Islamic banks is better than conventional banks as sbleen the tae no. 4.1.
Table No.4.2 financial ratios
bank type
N
Mean
Std. Deviation
Std. Error Mean
ROA
Islamic Bank
105
3.60
4.186
.408
Conventional bank
99
2.12
3.538
.356
ROE
Islamic Bank
105
18.35
11.990
1.170
Conventional bank
98
17.50
29.939
3.024
NIM
Islamic Bank
105
12.62
41.100
4.011
Conventional bank
96
4.96
3.603
.368
LLR
Islamic Bank
75
3.87
3.408
.394
Conventional bank
97
7.61
9.743
.989
EA
Islamic Bank
105
16.19
12.664
1.236
Conventional bank
100
14.49
15.461
1.546
COSR
Islamic Bank
105
49.28
19.495
1.903
Conventional bank
100
52.79
67.220
6.722
NLA
Islamic Bank
105
49.30
20.697
2.020
Conventional bank
94
52.86
18.159
1.873
LIQ
Islamic Bank
105
36.94
30.525
2.979
Conventional bank
99
88.85
109.877
11.043
(Source bankscope)
4.2 Growth Analysis of Deposits
Table-4.3 Growth of deposits
2008
2007
2006
2005
mean
Islamic Banks
21.26
29.07
25
28.78
26.15
Conventional Banks
27.15
33.82
34
16.95
27.88
Figure-4.1 Growth of deposits
Source bankscope
As can be seen in the table 4.3, according to figure 4.1 the total deposits grew at an average rate of 27.88 percent in conventional banks for the whole period. Deposits rose to 34 and 33.38 percent, in 2006 and 2007 respectively, and then it declined to 27.15 percent in 2008.In contrast to, Islamic banks deposits declined at an average 26.15 percent during the period 2004 - 2008 as will as fell to 25 percent in 2006, there was slight increase of 29.07 percent in 2007. The end of period total deposit decreased to 21.26.
4.1.1 Growth Analysis Total Revenue
Table-4.4 Total Revenue
Total Revenue
2008
2007
2006
2005
mean
Islamic Banks
13.20
20.97
37.54
98.01
35.83
Conventional Banks
1.78
10.95
18.36
43.04
17.64
Source bankscope
Figure-4.2
Source bankscope
According to table 4.4 and figure 4.2 the Conventional banks had record growth in profits in 2005, which grew by 43.04 percent and then diminished growth to 18.36 percent in the following years, declining to negative 1.7 percent in 2008. On the other hand, profit growth Islamic banks were more than profit growth by conventional banks. it jumped in 2005 to 98.01 percent, surpassing the growth of profits conventional banks. There was very sharp drop score negative 13.20 percent in 2008. The most important sources of income Islamic banks and most stable, namely, investment and finance, which is done in accordance with its methods of the Islamic finance.On the other hand, reported that sources of income in conventional banks less diversified sources of income in Islamic banks. It does not exceed their income sources more than to two sources: interest, commissions and fees.
The most significant point of view that Islamic banks draw most of its income from the use of the Islamic methods of financing, while derived conventional banks most of its income from loans usury.
4.1.2 Growth Analysis Total Equity
Table 4.5 total equity
Total Equity
2008
2007
2006
2005
mean
Islamic Banks
42.07
48.83
75.15
27.92
3.04
Conventional Banks
10.49
21.08
15.52
54.80
25.47
Figure 4.3
Source bankscope
Table 4.5 and figure 4.3 shown, the rate of growth of total equity for the whole period was an average 3.04 percent in the case of Islamic banks as against 25.47 percent for the conventional banks. The rate of growth of total deposits in the case Islamic banks was 26.15 percent during 2004-2008. Also, at the same period was 27.88 percent in the conventional banks.
4.1.3 Growth Analysis Total Assets
Table 4.6 total assets
Total Assets
2008
2007
2006
2005
mean
Islamic Banks
19.87
30.82
30.58
31.80
28.27
Conventional Banks
26.00
35.67
32.26
22.09
29.01
Figure 4.4
Source bankscope
It shown in table 4.6 and figure 4.4, In the case of total assets conventional banks posted a higher an average rate of growth during the periods. It was 29.01 percent as against 28.27 percent while the end of 2008; it was 26.00 percent against 19.87 percent for the Islamic banks. Obviously, assets of conventional and Islamic banks grew during 2005, 2006 and then jumped in 2007. This can be attributed to benefit conventional banks of the high demand for funding, which coincides with the current construction boom and higher oil prices. Phenomenon is noteworthy that the growth in assets of Islamic banks has exceeded asset growth of conventional banks. This is despite the fact that both groups enjoyed the same economic conditions in terms of the expansion of the real estate sector and high oil prices in the Middle East.
4.1.4 Growth Analysis Investment
Table 4.7 Growth Analysis
Total Investment
2008
2007
2006
2005
mean
Islamic Banks
29.44
29.50
18.68
29.43
26.76
Conventional Banks
33.01
16.82
11.27
7.44
17.14 Source bankscope
Figure 4.5
Source bankscope
A similar trend is observed in the case of total investments, which grew at a rate of 26.76 percent during 2004-2008 in particular of Islamic banks while the conventional banks witnessed grow rate at 17.14. During the 2008 growth in investment in Islamic banks declined to 29.44 percent while In the case of conventional banks it increase to 33.01 percent surpassing the growth rate of Islamic banks.
4.2 Regression Results
There are three parts of regression output. Part one the sample results including Islamic and conventional banking. Part two and three consist of results for conventional and Islamic banks. Multiple regressions is applied to estimate the determinants of profitability for both types of banking. Moreover, Islamic and Conventional banks in Middle East are examined and treated in the regression analysis as one country because there are similarities among banking systems.
4.2.1 Aggregate Sample Regression Analysis
The regression results in table 5.6 mix Islamic and Conventional banks. According to the Model, there are three different dependent variables:
ROA, ROE, and NIM.
Table 4.8 regression Islamic and conventional bans
ROA
ROE
MIN
(Constant)
5.602
56.029
6.837
.344
.423
.213
LLR
-.255
.181
.124
.002
.041
.145
EA
.425
-.305
-.084
.000
.001
.313
COSR
-.018
-.252
-.356
.813
.003
.000
NLA
.120
.081
.071
.214
.449
.491
LIQ
-.025
-.007
.109
.724
.927
.159
CPI
-.073
-.134
-.072
.506
.208
.479
lngdp
-.206
-.026
.203
.032
.828
.085
R Square
.282
.121
.185
Adjusted R Square
.250
.082
.148
Source bankscope
The first regression equation, ROA, expresses significant positive coefficients with the logarithmic of Total Assets, Total Equity to Total Assets (EA), and Total Loans to Total Assets (NAL). This indicates that large banks in the Middle East witht higher ROA. Spathis, Kosmidou, and Doumpos (2002) also found a positive relation between total assets (size) and ROA for Greek banks, which is consistent with our results. Furthermore, impaired to gross loans consider significant positive relation with ROA. The net loan to deposit and short term (LIQ) is an insignificant positive relation with ROA.
The second regression model ROE is another dependent variable. The independent variables for ROE express similar coefficients to ROA except TE/TA and Deposits. TE/TA got a positive significant relation with ROE. This indicates that the less equity issued, the higher return on equity generated, which means more efficiency with shareholders investments. Deposits also had appositive relation with ROE.
Third, NIM is the final model used to identify profitability of conventional banks in the MIDDLE EAST.Middle East The results appear to be similar to Ben Naceur's (2003) findings, but in this case, TE/TA, has a positive significant coefficient with NIM. This means that lower equity ratios lead to higher interest income. Finally, all the variables are significant. Also, the regression results are consistent with the correlation matrix and the overall R squared Is 14.80 percent .
4.2.2 Islamic Banking Results Analysis
This section discusses the results in table 5.7 for Middle East Islamic banks. The results will be compared to the Bashir and Hassan (2004) findings. They used ROA and ROE as profitability indicators in their regression model. The results will also be compared to the correlation matrixes for Net Income Margin (NIM).
Table 4.9 Islamic Banking regression
ROA
ROE
MIN
(Constant)
8.424
23.819
5.242
.602
.109
.795
LLR
-.106
.181
.075
.351
.798
.583
EA
-.216
-.305
.074
.024
.121
.512
COSR
-.754
-.252
-.110
.000
.214
.309
NLA
-.138
.081
.589
.256
.037
.000
LIQ
.081
-.007
.214
.413
.581
.074
CPI
-.249
-.134
.328
.022
.000
.012
lngdp
.291
-.026
-.073
.020
.261
.622
R Square
.409
Adjusted R Square
.347
F-Test
8.175
13.824
6.618
Source bankscope
First, ROA shows to be positively related to all the variables with the exclusion of Deposits but this is an insignificant relation. Moreover, our results confirm the Bashir and Hassan (2004) findings. However, our results indicate that TL/TA loans, which are interest-free lending in term of an Islamic bank, are positively and significantly related with ROA. On the other hand, the Bashir and Hassan (2004) findings indicate a significant negative relation between loans and ROA. In addition, the overall fit of the model is good at 52.4 percent.
Second, ROE, the second regression model, is compared to bank characteristics, which again expresses variation among coefficient signs. However, our results correspond with the Bashir and Hassan (2004) findings excluding loans.
Our results indicate all variable are a positive relation with ROE at significance level. On the other hand, Bashir and Hassan (2004) found a negative significant relation between lending and ROE. Overall, these variables explain ROE by 31.4 percent.
The NIM regression equation is another profitability indicator for Islamic banks but is classified as interest-free income from lending contracts. The p-values appear to be insignificant for some variables since they are greater than ten percent such as Total Assets, (TE/TA), Deposits, and Total Expenses.
Further, all the variables are positively related with NIM. In addition, results shown, and Non-Interest Expense was negative coefficients with NIM. This suggests that large well capitalized banks with lower non-interest expenses suffer higher NIM.
4.2.3 Conventional Banking Results Analysis
The results in table 5.7 represent conventional Banks in the Middle East these results will be compared to the Ben Naceur (2003) findings. He studied conventional banks and included similar variables. Though, only ROA and NIM were dependent and profitability indicators in his study.
Table 4.10
ROA
ROE
MIN
(Constant)
7.820
123.736
13.846
.393
.556
.156
LLR
-.288
.383
.016
.010
.158
.893
EA
.528
.497
-.139
.000
.003
.307
COSR
.127
.052
-.446
.232
.023
.000
NLA
-.229
.742
-.082
.557
.718
.847
LIQ
.352
.521
-.028
.332
.643
.943
CPI
.247
.086
-.326
.125
.651
.066
lngdp
-.168
5.589
.384
.358
.814
.056
R Square
R Square
.208
Adjusted R Square
Adjusted R Square
.140
F-Test
5.879005
5.879
3.038
First, in the ROA model, the explanatory variables appear to have positive coefficients with the exception of Total Assets and Total Expenses. Moreover, our results appear to be consistent with the Ben Naceur (2003) findings except for Total Expense with ROA. Our results indicate a negative significant relation between Total Expenses and ROA. A negative relation between Total Expenses and ROA may suggest that conventional banks need to cut their expenses.
Third, NIM is the final model used to identify profitability of conventional banks in the Middle East. The results appear to be similar to Ben Naceur's (2003) findings, but in our case, TE/TA, has a negative insignificant coefficient with NIM.
This means that higher equity ratios lead to lower interest income. This is irrational because higher equity ratios make banks less reliable on debt (Ben Naceur, 2003). Finally, all the variables are significant except for TE/TA.
The conclusion
In this chapter addresses used the growth rates to measurement the of total asset ,revenue ,deposit and total equity during 2004-228 besides that used descriptive statically and finally used financial ratio a ratio and regression , that comparison between Islamic and conventional banks.
