SPSS Analysis of the Financial Ratios of Islamic Banks - Paper Example

The results and findings of the financial ratios obtained for the study period (2005 to 2009) will be analysis using SPSS. In addition to that, there will also be an analysis and an explanation with regards to the financial performance of both Islamic Banks and Conventional Banks. The stability of the two bank systems will be analyzed to establish which one is more efficient of the two.

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During 2006

As per the findings of the SPSS analysis conducted, it can be deduced that Islamic banks are more efficient compared to Conventional Banks with regards to the use and application of their assets and equity in the generation of profit and revenue (ROA and ROE). When it comes to conventional banks, they are more efficient in achieving a greater EPS for their shareholders (however, the market share price is not taken into consideration). Despite a higher EPS, it was noted that conventional banks have a greater financial risk compared to Islamic banks.

In 2007

The profitability ratios (ROE, ROA and NPM) all show that efficiency of the use of assets and equity in the generation of profit was greater for Islamic banks compared to conventional banks. In addition to that, Islamic banks also had a lower financial risk rate. When it comes to conventional banks, they had higher earnings per share for the shareholders compared to Islamic banks (the market share price was, however, not taken into consideration)

In 2008

This is when the full impact of financial crisis was felt. It greatly impacted on conventional banks. During this year, heavy financial losses were experienced and additionally, the profitability ratios were also negative. However, the effects of the financial upheaval were felt more in conventional banks shareholders returns compared to the Islamic banks. It can, therefore, be observed that Islamic banks are exposed to less financial risk compared to conventional banks.

In 2009

In the analysis of the profitability ratios, it can be observed that the financial performance of conventional banks improved after the heavy losses that had been suffered in the previous year. However, even though there was an improvement in the financial performance of conventional banks, Islamic banks still performed better. In addition to that, conventional banks also recorded higher earnings per share for their shareholders compared to Islamic banks (the market share price was not taken into consideration). Islamic banks had less financial risks compared to conventional banks in the same time period.

STATA Analysis for the period 2005 to 2009

As can be observed from the table, the overall financial performance of Islamic banks is more efficient compared to that of conventional banks. Through an analysis of the various profitability ratios (ROA, ROE and NPM), it can be observed that Islamic banks are more efficient in their use of financial assets and equity in the generation of profits compared to conventional banks (ROA and ROE). Islamic banks are also more efficient in the generation of revenue through the use of their assets (assets turnover ratio)

But when it comes to the returns on shareholders, conventional banks recorded a higher performance compared to Islamic banks. Conventional banks are more efficient when it comes to increasing the wealth of their shareholders compared to Islamic banks (without taking into consideration the market share price). In addition to that, and compared to conventional banks, Islamic banks dependency on funding their assets through assets is at a lower rate than equity. The opposite is true for conventional banks. It is because of this reason that Islamic banks are exposed to less financial risks compared to conventional banks. This is also the reason why the impact of the financial crisis was felt more by conventional banks compared to Islamic banks. However, in times of economic prosperity, conventional banks have a higher chance of making more profits and getting higher returns compared to Islamic banks, mostly because of their financial leverage.

Generally, the performance of Islamic banks was better compared to that of conventional banks. The liquidity reserves and credit risk of Islamic banks are greater compared to those of conventional banks in the financial crisis period. The entrance of the financial crisis into the Islamic capital market was rendered impossible because of a number of reasons. The main reason is that Islamic banks are governed by Shariah laws. Shariah laws do not allow the sale of debt against debt and as such, it is impossible for a person to sale assets until that particular individual has the real asset. Shariah laws also illegalize all risky and speculative transactions.

In addition to that, when it comes to lending in Islamic finance, this is founded on assets backing. All mortgage loans are given against solid assets. But when it comes to conventional banks is that they provide large amounts of loans without collaterals and as such suffered more during the financial crunch. Another factor that improves and enhances the performance of Islamic Banks even in periods of financial crisis is that there has an Islamic regulatory system which ensures that all investors are well aware of the returns and probable losses. This full disclosure of information and transparency has a positive impact on the general performance.

From the regression analysis above, it can be observed that the performance of Islamic banks was better compared to that of conventional banks by a margin of 24%, this is between 2007 and 2009. However, in the second regression, there was a reduction by 4.5% and this was after the inclusion of a number of control variables so as to lower the bias caused by the omission of various variables. The third regression shows that the co-efficient of Islamic bank was at -0.239; however, this has no significance and this is due to the fact that it is only applicable for those Islamic banks which have no cash with regards to total assets, such as assumption cannot be realistic.

In overall, Islamic banks were not heavily hit by the financial crisis that was experienced globally because they do not take on so many risks. Islamic banks have a larger capacity to absorb financial shocks and crises compared to conventional banks. From the findings, it could be observed that there was little or no difference before, during, and after the global financial crisis, more so in the capital adequacy ratios of Islamic banks. However, one important factor to consider is that most conventional banks are greater than Islamic banks when it comes to the comparison of total assets. More analysis and investigation is needed to establish whether the size of a bank has any repercussions on the changes in profits in both Islamic and conventional banks.

References

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