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How the internal factors of the islamic banking affected their performance

Chapter 1: Introduction

Introduction to the Subject

Background of the Subject

General Objective

The purpose of this study is to examine how the internal factors of the Islamic Banking affected their performance before, during and after the financial crisis in the GCC in comparison to the conventional banking in the same area.

Research Questions

This study aims to answer the following questions:

- How did the financial crisis affect the profitability of Islamic Banks in comparison to Conventional Banks?

- What are the internal factors (bank specific characteristics) that influence the profitability of Islamic banking for every year from 2006 - 2009?

- Did these factors have the same impact on the profitability of Islamic Banking before, during and after the financial crisis?

- Did these internal factors influence the profitability of Islamic Banking in the same manner as of the Conventional Banking?

Need for the Study

Significance of the Study

Assumptions of the Study

Limitations of the Study

Although we cannot neglect the importance of the external factors on the profitability of Islamic Banking, they were not included in this study. To understand the reason behind this decision, we need to go through the different types of external factors and how they are classified:

- Macroeconomic Factors

- Country Regulation Rules

- Bank Regulation Rules

These factors were not included for the following reasons:

- Since we are examining the performance of 92 banks (27 Islamic Banks and 65 Conventional Banks) in 6 countries, the number of countries used in the study is not significant enough to study the impact of GDP and inflation accurately on Bank profitability especially when examining each year separately

- Country Regulation Rules as per the IMF Database, although it differs slightly for the selected countries, did not change over the period from 2006 to 2009. This means that for each bank, these factors remained constant.

- Data about Bank Regulation Rules could not be obtained for GCC banks

Delimitation of the Study

This study was delaminated to the Islamic and Conventional Banks in the GCC whose data could be obtained in the Bankscope database.

Chapter 2: Literature Review

Overview of Islamic Banking

Islamic Baking has established as an alternative to conventional interest-based banking. The first stirring of the Islamic Banking movement began in 1963 by Dr. Ahmed Alnajar in a small town in Egypt, called Mit Ghamar. Dr. Alnajar completed his education in Germany and found that it had many saving banks operating on interest. He took the idea from a savings bank in Germany and created his own small Islamic bank that was interest free.

After Dr. Alnajar's small bank proved successful, the establishment of other Islamic banks followed. In 1971, the Nasser Social Bank was founded in Egypt with the objective of lending out money as a charity on the basis of a profit and loss sharing system and helping people in need. And in 1975, the idea of Islamic banking spread to other Islamic regions such Dubai Islamic bank in United Arab Emirates and The Islamic Development (IDB) Bank in Jeddah, Saudi Arabia (Wilson, 1990).

Even though Islamic Banking has only been around for thirty years and is still in an evolving stage, Islamic Banking is the fastest growing segment of the credit markets in the Muslim countries. In 2009, Assets held by Islamic Banking banks rose by 28.6 percent to $822bn from $639bn in 2008, according to The Banker's “Top 500 Islamic Financial Institutions” survey while conventional banks posted annual asset growth of just 6.8 percent.

Furthermore, GCC states accounted for $353.2bn or 42.9 percent of the global aggregate, while Iran remained the largest single market for Shariah-compliant assets, accounting for 35.6 percent of the total.

Finally, Islamic banking operations are not limited to Islamic countries but are spreading throughout the world. One reason is the "growing trend toward transcending national boundaries, and unifying Muslims into a political and economic entity that could have a significant impact on the pattern of world trade" (Abdel-Magid, 1981).

Islamic Banking Rules and Principles

Islamic banking rules are according to the Islamic Shariah derived from the Quran and prophet Mohamed's sayings. The three main practices that are clearly prohibited in the Quran and the prophet's sayings are, Riba (Interest), Gharar (Uncertainty), and Maysir (Betting).

Prohibition of Riba or any predetermined or fixed rate in financial institutions is the most important factor in the Islamic principles pertaining to banking. As stated in the Quran “Allah forbids riba”. Riba means an increase and under Shariah the term refers to the premium that must be paid by the borrower to the lender along with the principle amount as a condition for the loan (Omar and Abdel, 1996).

Gharar occurs when the purchaser does not know what has been bought and the seller does not know what has been sold. In other words, trading should be clear by stating in a contract the existing actual object(s) to be sold, with a price and time to eliminate confusion and uncertainty between the buyers and the sellers.

Maisir is considered in Islam as one form of injustice in the appropriation of others' wealth. The act of gambling, sometimes referred to betting on the occurrence of a future event, is prohibited and no reward accrues for the employment of spending of wealth that an individual may gain through means of gambling. Under this prohibition, any contract entered into, should be free from uncertainty, risk and speculation. Contracting parties should have perfect knowledge of the counter values intended to be exchanged as a result of their transactions.

Therefore, and according to Ahmed and Hassan (2007), the principles of Islamic banking and finance enshrined from al-Qur'an and Prophet Mohamed‘s Sayings can be summed up as follows:

- Any predetermined payment over and above the actual amount of principal is prohibited.

- The lender must share in the profits or losses arising out of the enterprise for which the money was lent.

- Making money from money is not acceptable in Islam.

- Gharar (deception) and Maisir (gambling) are also prohibited.

- Investments should only support practices or products that are not forbidden or even discouraged by Islam.

Islamic Banking Products

Islamic Banking products have to be done according to Islamic rules and principles, based on profit and loss sharing as well as avoiding interest. According to BNM statistics 2007, Al Bai Bithaman Ajil financing is the most common in Islamic Banking. There are a lot of Islamic Banking products; however there are some famous Islamic products that will be discussed in this section.

1. Al Bai Bithaman Ajil /BBA

This involves the credit sale of goods on a deferred payment basis. In BAA, the Islamic bank will purchase certain assets on a deferred payment basis and then sell the goods back to the customer at an agreed price including some margin or profit. The customer will make payment by installments over an agreed period. A fixed rate BBA is a powerful hedging tool against interest rates (Rosly, 1999).

2. Murabahah

Murabahah is a contract of sale. The Islamic Bank acts as a middle man and purchases the goods requested by the customer. The bank will later sell the goods to the customer in a sale and purchase agreement, whereby the lender re-sales to the borrower at a higher price agreed on by both parties. These are more for short term financing

3. Mudharabah

According to Kettel (2006), Mudharabah is a basic principle of profit and loss, where instead of lending money at a fixed rate return, the banker forms a partnership with the borrower, thereby sharing in a venture's profit and loss. Mudharabah is an agreement between the lender and entrepreneur, whereby the lender agrees to finance the project on a profit sharing basis according to a predetermined ratio agreed by both parties concerned. If there are any losses the lender will bear all the losses.

4. Musharakah

Musharakah means partnership whereby the Islamic institution provides the capital needed by the customer with the understanding that they both share the profit and loss according to a formula agreed before the business transaction is transacted. In Musharakah all partners are entitled to participate in the management of the investment but it is not compulsory. Musharakah can help in providing financing for large investments in modern economic activities

5. Al Ijarah

Ijarah means meaning to give something on a rental basis. In Ijarah, the bank acquires ownership based on the promise and leases back to the client for a given period. The customer pays the rental but the ownership still remains with the bank or lender. As the ownership remains with the lessor (bank), it continues to give the service for which it was rented. Under this contract, the lessor has the right to re-negotiate the quantum of the lease payment at every agreed interval to ensure rental remains in line with the market rates (Hume, 2004).

6. Wadiah

Wadiah is a trust contract and the bank provides gift (hibah) and various types of benefits to the customer. This is exactly like a normal conventional savings account.

7. Istisna

Istisna allows one party buys the goods and the other party undertakes to manufacture them according to agreed specifications. Normally, Istisna is used to finance construction and manufacturing projects.

8. Salam

Salam is defined as the forward purchase of specified goods with full forward payment. This contract is normally used for financing agricultural production. According to Hassan (2004), Salam based future contracts for agricultural commodities, supported by Islamic Banks, can help to overcome the agricultural financial problems

Table 2.1 lists the products of conventional banking and their correspondent products in Islamic Banking.

Deposit Services

Current Deposit

Wadiah Wad Dhamana / Qard Hasan

Savings Deposit

Wadiah Wad Dhamana / Mudaraba

General Investment deposit

Mudaraba

Special Investment deposit

Mudaraba

Retail / Consumer Banking

Housing & Property Finance

BBA / Ijara wa Iktina /Diminishing Musharaka

Hire Purchase

Ijara Thumma Al-Bai

Share Financing

BBA / Mudaraba / Musharaka

Working Capital Financing

Murabahah/ Bai Al-Einah/ Tawarruq

Credit Card

Bai Al-Einah/ Tawarruq

Charge Card

Qard Hasan

Corporate Banking/ Trade Finance

Project Financing

Mudaraba / Musharaka / BBA / Istisna / Ijara

Letter of Credit

Musharaka/ Wakala/ Murabaha

Venture Capital

Diminishing Mudaraba/ Musharaka

Financing Syndication

Musharaka + Murabaha/ Istisna / Ijara

Revolving Financing

Bai Al-Einah

Short-term Cash Advance

Bai Al-Einah/ Tawarruq

Working Capital Finance

Murabaha/ Salam/ Istijrar

Letter of Credit

Murabaha

Letter of Guarantee

Kafala + Ujr

Leasing

Ijara

Export/ Import Finance

Musharaka/ Salam/ Murabaha

Work-in-Progress, Construction Finance

Istisna

Bill Discounting

Bai al-Dayn

Underwriting, Advisory Services

Ujr

Treasury / Money Market Investment Products

Sell & buy-back agreements

Bai al-Einah

Islamic Bonds

Mudaraba / Mushraka + BBA / Istisna / Ijara

Government Investment Issues

Qard Hasan/ Salam/ Mudaraba

Other Products & Services

Stock-Broking Services

Murabaha/ Wakala/ Joala

Funds Transfer (Domestic & Foreign)

Wakala/ Joala

Safe-Keeping & Collection (Negotiable Instruments)

Wakala/ Joala

Factoring

Wakala/ Joala/ Bai al-Dayn

Administration of Property, Estates and Wills

Wakala

Hiring of Strong Boxes

Amana/ Wakala

Demand Draft, Traveller's Cheques

Ujr/ Joala

ATM Service, Standing Instruction, Telebanking

Ujr

Source: Obaidullah, 2005

Financial Crisis and the Islamic Banking

To be able to compete with conventional banks, Islamic banks have to offer financial products that are comparable to the ones offered by the conventional banks. This exposes the Islamic banks to similar credit, liquidity and risks driven by market instability. Despite that, Islamic banks managed to remain stable at the early phases of the crisis. That was driven by three main Factors. First, Islamic bank's financing activities are strongly tied to the real economic activities than their conventional counterpart.

Even though Musharakah and Mudharabah both provide better risk sharing while keeping strong link to the real sector, they are used minimally for different reasons. Most financing activities are done through Murabah and Ijarah followed by Istinsa. In the GCC and during 2007, Murabaha comprised of 65.4%, Ijarah 12.78% and Istinsa 2.83%. Both Murabaha and Ijrah transactions require the Islamic bank to know the client's purspose and use of finance as well the ownership of the asset by the bank. This help in ensuring that the funds are used for their stated purposes. On the other hand, conventional banks do not require disclosing the use of funds as long as the client is believed to creditworthy or can post suitable collateral.

Second, Islamic banks avoid direct exposure to exotic and toxic financial derivative products. Since

Shariah prohibits riba and gharar, the asset portfolio of Islamic banks did not include any CDOs, CMBSs, and CDSs which turned out to be highly toxic for conventional banks and amplifying factor for the crisis. These derivative products, initially used for hedging purposes, became device for highly speculative investments among conventional financial institutions. Unavailability of hedging instruments for Islamic financial institutions, which was perceived as weakness before the crisis, became a strengthening factor for them. However, exposure to other investment risks driven from equity markets, sukuk, real-estate and ownership stakes in other businesses remain a source of concern when overdone or undertaken purely for speculative gains.

Third, Islamic banks in general have a larger proportion of their assets in liquid form than their conventional counterparts. This is driven by two main reasons: (1) there is no lender of last resort (LOLR) facility available to Islamic banks, and they do not have access to market liquidity in the form of the interbank market, high liquidity was maintained for risk management purpose. (2) Excess liquidity is required due to lack of interest-free short-term investment opportunities as real economic investments require some development period.

As the global financial crisis became a global economic crisis, it started to affect Islamic banks in an indirect manner. The financial crisis has triggered a chain reaction whereby the slowdown in the real economies of the developed countries has started to affect economic growth and investment activities in export driven economies of the developing countries through lower trade in goods and services as well as through the declining commodity prices including that of oil. The economic downturn is not only affecting the investment and financing activities of financial institutions including those of Islamic banks, it is also reducing the funding of these banks through lower personal savings and declining corporate profits. It should be noted that most of the Islamic banking industry comprises of commercial banks whose major funding source are retail deposits, investment banking constitutes only a small portion of the industry. Islamic banks in some regions may face risk on their financing and investment side of the balance sheet due to the crisis induced volatility of equity markets where these banks have large positions. Downturn in the real estate markets where these banks have large direct and indirect exposures is also another source of risk. Similarly, the changing wealth position of their high-net-worth (HNW) clients who also hold financial exposure in the hard-hit conventional financial sector of the West and therefore are now postponing any investment plans is also a factor. The relative importance of each of these factors varies by the region. For example, the banks in the GCC and particularly in the UAE are more exposed to real estate market risk, followed by risk of international equity markets. For the banks in Asia, their investments in domestic and international equity markets are a source of concern as equity markets are showing higher volatility. In some of the countries, the existing fiscal imbalance which has widened after the crisis is also a factor in the increased volatility of the markets

Previous Literature

The study of bank profitability is an important tool to evaluate bank operation by examining the different factors affecting bank profitability and using these factors for management planning and strategic analysis. In the last four decades, many studies have been conducted to study both bank profitability and the determinants of bank profitability either for particular country or for a panel of countries. These studies normally divide these factors into internal factors and external factors. Internal factors represent the bank-specific characteristics such as bank size, liquidity structure; liabilities…etc while external factors can be macroeconomic factors such as inflation and GDP growth or Country-specific regulations rules and practices.

In the area of banking profitability, many studies have been conducted to investigate the profitability of conventional banks while only few were conducted in the field of Islamic banking. In this chapter, we will review these studies for conventional banking first and then will focus on studies in the Islamic banking field. Then we will cover the conceptual framework of this research.

Conventional Banking

Different studies have been conducted in the field of conventional banking profitability. Short (1979), Bourke (1989), Molyneux and Thornton (1992), Goddard, Molyneux, and Wilson (2004), Peters et al. (2004) are some of the researchers in the field.

Short (1979) is one of the early scholars who studied the relationship between banking profit rates and concentration for sixty banks in Canada, Western Europe and Japan during the 1970's and he included independent variables including government ownership and concentration by using H index to quantify concentration. Results showed that the government ownership impact on profitability varied throughout the countries studied but expressed an overall negative relationship. He also found evidence that indicated higher concentration rates lead to higher profit rates (Short, 1979).

Bourke (1989) also compared concentration to bank profitability but included other determinants. Bourke (1989) covered ninety banks in Australia, Europe, and North America between 1972 and 198 and examined different internal and external factors: internal factors such as staff expenses, capital ratio, liquidity ratio, and loans to deposit ratio; external factors such as regulation, size of economies of scale, competition, concentration, growth in market, interest rate, government ownership, and market power. His results show that increase in government ownership leads to lower profitability in banking. He also found that concentration, interest rates, and money supply are positively related to profitability along with capital and reserves of total assets as well as cash and bank deposits of total assets. Bourke adds that well capitalized banks enjoy cheaper access to sources of funds as they are less risky than less capitalized banks (Bourke, 1989).

Later, Molyneux and Thornton (1992) studied the determinants of European banks profitability. The paper examined eighteen counties in Europe between 1986 and 1989. This paper replicated Bourke's (1989) work by using internal and external determinants of bank profitability. However, Molyneux and Thornton (1992) results showed that government ownership expresses a positive coefficient with return on capital (profitability) which contradicts with Bourke's findings. Other results were similar to Bourke's, showing that concentration, interest rate, and money supply were positively related to bank profitability (Molyneux and Thornton, 1992).

In one of the recent papers on bank profitability on European banks, Goddard, Molyneux, and Wilson (2004) shows similar findings to the paper by Molyneux and Thornton (1992). It investigates the determinants of profitability in six European countries and it covered 665 banks between 1992 and 1998. The study used cross-sectional and dynamic panel models. The variables used in the regression analysis were ROE, the logarithmic of total assets, Off Balance Sheet (OBS) dividends, Capital to Asset Ratio (CAR). The results from both models were similar: evidence reveals that there is a positive relationship between size (total assets) and profitability. Meanwhile, OBS appears to have a positive relationship with profitability for UK but neutral or negative for other European countries. Moreover, results also state that CAR has a positive relationship with profitability. Furthermore, the paper touched on ownership type by indicating that there is high competition in banking due to the fact that there is foreign bank involvement in domestic banks, and that profitability is not linked to ownership (Goddard, Molyneux, and Wilson, 2004).

Peters et al. (2004) studied the characteristics of banks in post-war Lebanon for the years 1993 to 2000 and compared the results to a group of banks from five other countries in the Middle East including UAE, KSA, Kuwait, Bahrain and Oman for the years 1995 through 1999. They used Return on Equity (ROE) measure profitability and leverage and they employed regression models that relate bank profitability ratios to various explanatory variables. This study tests the relationships between bank profitability and size, asset portfolio composition, off-balance sheet items, ownership by a foreign bank, and the ratio of employment to assets. The results show a strong association between economic growth and bank profitability, whether measured by ROE or ROA. They found that Lebanese banks are profitable, but not as profitable as a control group of banks from five other countries located in the Middle East.

Islamic Banking

In the area of Islamic Banking, Bashir (2000) assessed the performance of Islamic banks in eight Middle Eastern countries. He analyzed important bank characteristics that affect the performance of Islamic banks by controlling economic and financial structure measures. The paper studied fourteen Islamic banks from Bahrain, Egypt, Jordan, Kuwait, Qatar, Sudan, Turkey, and United Arab Emirates between 1993 and 1998. To examining profitability, the paper used Non Interest Margin (NIM), Before Tax Profit (BTP), Return on Assets (ROA), and Return on Equity (ROE) as performance indicators. There were also internal and external variables: internal variables were bank size, leverage, loans, short-term funding, overhead, and ownership; external variables included macroeconomic environment, regulation, and financial market. In general, results from the study confirm previous findings and show that Islamic banks profitability is positively related to equity and loans. Consequently, if loans and equity are high, Islamic banks should be more profitable. If leverage is high and loan to assets is also large, Islamic banks will be more profitable. The results also indicate that favorable macro-economic conditions help profitability (Bashir, 2000).

Hassoune (2002) examined Islamic bank profitability in an interest rate cycle. In his paper, compared ROE and ROA Volatility for both Islamic and conventional banks in three GCC region, Kuwait, Saudi Arabia, and Qatar. He states that since Islamic banking is based on profit and loss sharing, managements have to generate sufficient returns for investors given that they are not willing accept no returns (Hassoune, 2002).

Bashir and Hassan (2004) studied the determinants of Islamic banking profitability covers 43 Islamic Banks between 1994 and 2001 in 21 countries. Their figures show Islamic banks to have a better capital asset ratio compared to commercial banks which means that Islamic banks are well capitalized. Also, their paper used internal and external banks characteristics to determine profitability as well as economic measures, financial structure variables, and country variables. They used, Net-non Interest Margin (NIM), which is non interest income to the bank such as, bank fees, service charges and foreign exchange to identify profitability. Other profitability indicators adopted were Before Tax Profit divided by total assets (BTP/TA), Return on Assets (ROA), and Return on Equity (ROE).

Results obtained by Bashir and Hassan (2004), were similar to the Bashir (2000) results, which found a positive relationship between capital and profitability but a negative relationship between loans and profitability. Bashir and Hassan also found total assets to have a negative relationship with profitability which amazingly means that smaller banks are more profitable. In addition, during an economic boom, banks profitability seems to improve because there are fewer nonperforming loans. Inflation, on the other hand, does not have any effect on Islamic bank profitability. Finally, results also indicate that overhead expenses for Islamic banks have a positive relation with profitability which means if expenses increase, profitability also increases (Bashir and Hassan, 2004).

Alkassim (2005) examined the determinants of profitability in the banking sector of the GCC countries and found that asset have a negative impact on profitability of conventional banks but have a positive impact on profitability of Islamic banks. They also observed that positive impact on profitability for conventional but have a negative impact for Islamic banking. Liu and Hung (2006) examined the relationship between service quality and long-term profitability of Taiwan's banks and found a positive link between branch number and long-term profitability and also proved that average salaries are detrimental to banks' profit.

Masood, Aktan and Chaudhary (2009) studied the co-integration and causal relationship between Return on Equity and Return on Assets for 12 banks in KSA for the period between 1999- 2007. For their research, the used time series model of ADF unit-root test, Johansen co-integration test, Granger causality test and graphical comparison model. They found that there are stable long run relationships between the two variables and that it is only a one-direction cause-effect relationship between ROE and ROA. The results show that ROE is a granger cause to ROA but ROA is not a granger cause to ROE that is ROE can affect ROA input but ROA does not affect the ROE in the Saudi Arabian Banking sector.

Conceptual Framework

Theoretical framework is a basic conceptual structure organized around a theory. It defines the kinds of variables that are going to be used in the analysis. In this research, the theoretical framework consists of seven independent variables that represent four aspects of the Bank Characteristics. Theses aspects are the Bank Size (Total Assets), Capital Structure (Equity and Tangible Equity), Liquidity (Loans and Liquid Assets) and Liabilities (Deposits and Overheads). Bank profitability is the dependent variable and two measures of bank profitability are used in this study, namely return on average equity (ROAE) and return on average assets (ROAA).

In this section we develop the hypothesis to be examined in this research paper.

Development of Hypotheses

This paper attempts to test seven hypotheses. A hypothesis is a claim or assumption about the value of a population parameter. It consists either of a suggested explanation for a phenomenon or of a reasoned proposal suggesting a possible correlation between multiple phenomena. According to Becker (1995), hypothesis testing is the process of judging which of two contradictory statements is correct.

Hypothesis 1: Profitability has a positive and significant relationship with the total assets (ASSETS).

Total Assets of a company represents its valuables including both tangible assets such as equipments and properties along with its intangible assets such as goodwill and patent. For banks, total assets include loans which are the basis for bank operations either through interest or interest-free practices. Total assets is used as a tool to measure the bank size; banks with higher total assets indicate bigger banks. Molyneux and el (2004) included total assets in their study and found a positive significant relationship between total assets and profitability. Therefore, total assets are expected to have positive relation with profitability which means that bigger banks are expected to be more profitable. Total assets are converted logarithmic to be more consistent with the other ratios

Hypothesis 2: Profitability has a positive and significant relationship with equity to asset ratio (EQUITY).

Total equity over total assets measures bank's capital structure and adequate. It indicated bank ability to withstand losses and handle risk exposure with shareholders. Hassan and Bashir (2004) examined the relationship between EQUITY and bank profitability and found positive relationship. Therefore, EQUITY is included in this study and it is expected to have a positive relation with performance because well capitalized banks are less risky and more profitable (Bourke, 1989)

Hypothesis 3: Profitability has a positive and significant relationship with Tangible Equity to total liabilities ratio (TNGEQTY).

Tangible Equity represents the subset of shareholder's equity that is not common shares and not intangible asset. Tangible Equity became very popular after the financial crisis as a measure of bank viability since it indicates of how much ownership equity owners of common stock would receive in the event of a company's liquidation. Beltratti and Stulz (2009) examined tangible equity to liabilities in their study to examine why some banks perform better during the financial crisis and found positive and insignificant relationship between TNEQTY and bank profitability. Therefore, TNEQTY is included in this study and it is expected to have positive relationship since banks with better capital structure - in since of more equity - seems to perform better.

Hypothesis 4: Profitability has a positive and significant relationship with the loans to assets ratio (LOANS)

Total loans over total assets a liquidity ratio used that indicates how much of bank assets are tied to loans. For banks, the higher LOANS ratio means less liquidity. Demirguc-Kunt and Huizinga, (1997) found positive relationship between LOANS and bank profitability. LOANS is included in this study and anticipated to have positive relationship with profitability. Furthermore, conventional banks rely on interest-based loans while Islamic banks rely on profit and loss sharing interest-free lending. Therefore, this ratio is also used to compare the performance of interest-based loans and interest-free lending.

Hypothesis 5: Profitability has a positive and significant relationship with the liquid assets to total assets ratio (LIQUID).

Liquid assets include currency, deposit accounts, and negotiable instruments that can be converted easily into cash. Liquid assets to total assets ratio is a liquidity ratio that measure how easily the banks' assets can be converted into cash. Beltratti and Stulz (2009) found that LIQUID has positive and significant relation with profitability as banks with more liquid assets tend to perform better. Therefore, LIQUID is included in this study and expected to have positive relationship with profitability.

Hypothesis 6: Profitability has a reverse and significant relationship with the deposits to assets ratio (DEPOSITS).

Deposits to total ratio is another liquidity indicator but is considered a liability since they measure the impact of liabilities on profitability. Bashir and Hassan (2004) examined deposits in their study and found a negative relationship with profitability. Therefore, we expect that DEPOSITS to have negative relationship with profitability.

Hypothesis 7: Profitability has a positive and significant relationship with the overhead to assets ratio (OVERHEAD).

Overhead costs represent all bank expenses excluding interest expenses as they are considered as operations expenses. Overhead over total assets is a liability ratio that measures the operation efficiency of the bank. Alkassim (2005) included OVERHEAD in his research and found positive relationship to profitability. Therefore, OVERHEAD is included in this study and expected to have positive relationship to profitability.

Chapter 3: Methods

Data Sample

Since the main objective of this research is study how the financial crisis affected the profitability of Islamic Banking in the GCC region in comparison to the conventional banking in the same region, a time-series cross-sectional data is used for the period of 2006 to 2009. Cross-sectional data provide information on variables for a given period of time while time-series data give information about variables over a number of periods of time.

The financial data for all GCC banks used in this study were extracted from Bankscope database. Bankscope database has many advantages: it has information for over 30,000 banks, plus the accounting information is presented in a standardized format. Therefore, the accounting information of Islamic Banking is adjusted to be comparable with accounting information of conventional banks.

After removing all records with missing data, a total of 92 banks were included in this study for the years from 2006 to 2008 (27 Islamic Banks and 65 Conventional Banks). As for 2009, out of these 92 banks, only 38 banks have their financial reports published by the time of data extraction. Therefore, 2009 data sample was limited to those 38 banks (9 Islamic Banks and 29 Conventional Banks).

Most of previous researches that studied bank profitability used panel data as it combines cross-sectional and time-series data in the regression model. The advantage of using panel data is that more observations on the explanatory variable are available. Since we are trying to study how the bank profitability was affected by the financial crisis over the years, we use the regression model to examine the data of each year separately. This help to understand how profitability measures and determinants vary over the period from 2006 to 2009.

Goodness of fit

To ensure the fit distributions of observations in the sample data, chi-square test was applied. Chi-square is a statistical model that is used to determine if the distribution of observations in the sample data closely matches the hypothetical distribution of the population. In our case, the distribution of the population is represented by the total number of Islamic banks and conventional banks in the GCC.

For years 2006 - 2008:

Type

Frequency

Sample Percent

population Percent

Conventional

65

70.65

68

Islamic

27

29.35

32

Chi-Square: 0.2974
Degree of Freedom: 1
Pr > ChiSq: 0.5855

For year 2009:

Type

Frequency

Sample Percent

population Percent

Conventional

29

76.32

68

Islamic

9

23.68

32

Chi-Square: 1.2076
Degree of Freedom: 1
Pr > ChiSq: 0.2718

The results of chi-square test indicate whether the observed proportions from our sample differ significantly from the hypothesized proportion. In our case, the Islamic to conventional banks ratio does not differ significantly from the distribution of the population.

Variable Definition

A total of nine variables are used in the regression model. The variables are divided into two dependent variables representing the profitability measures of Islamic banking and they are Return on Average Assets (ROAA) and Return on Average Equity (ROAE), and seven independent variables which are Total Assets, Equity, Tangible Equity, Loans, Liquid Assets Deposits and Overheads. These seven variables represent four bank-specific internal factors which are Bank Size, Capital Structure, Liquidity and Liabilities. The table below summarizes the variables used in this study and the expected result.

Dependent Variables

ROA

Return on Assets

Net Income / Total Assets

ROE

Return on Equity

Net Income / Equity

Independent Variables

Bank Size

ASSETS

Total Assets

Log (Total Assets)

Positive (+)

Capital

EQUITY

Equity

Equity / Total Assets

Positive (+)

TNGEQTY

Tangible Equity

Tangible Equity / Total Liabilities

Positive (+)

Liquidity

LOANS

Loans

Loans / Total Assets

Positive (+)

LIQUID

Liquid Assets

Liquid Assets / Total Assets

Positive (+)

Liabilities

DEPOSITS

Deposits

Deposits / Total Assets

Negative (-)

OVERHEAD

Overhead Costs

Overhead Costs / Total Assets

Positive (+)

Profitability Measures

There are many ratios that have been used by researchers to measure bank profitability but the two most often used ratios are the return on assets (ROA) and the return on equity (ROE) (Iqbal et al., 2005).

- Return on Assets (ROA)

Return of Assets ROA of a bank is the net after-tax income divided by its total assets (Rose, 2002). The return on assets (ROA) is the most important single ratio in comparing the efficiency and operating performance of banks since it indicates the return generated from the assets financed by the bank. Average assets are being used in this study, in order to capture any differences that occurred in assets during the fiscal year.

- Return on Equity (ROE)

ROE is the ratio of a bank's net after-tax income divided by its total equity capital (Rose, 2002). The return on equity (ROE) indicates how effectively the management of the enterprise (bank) is able to turn shareholders‟ funds (i.e. equity) into net profit. It is the rate of return flowing to the bank's shareholders (Samad, 1999). The higher ROA and ROE reflect higher managerial efficiency of the bank and vice versa.

Determinants of profitability

Previous studies categorize determinants of profitability into internal factors and externals factors. Internal factors are basically the bank-specific characteristics such as bank size, concentration, liquidity, liabilities…etc. External factors can include macroeconomic such as inflation and GDP growth, and bank regulation rules and policies including restrictions and degree of independence from regularity authority.

- Total Assets

- Equity

- Tangible Equity

- Loans

- Liquid Assets

- Deposits

- Overhead Costs

Methodology

In line will the previous literature, Multiple Regression Equation will be used to examine the determinants of profitability in the Islamic Banking and compare the results with those of the conventional banking:

Model 1 - ROA

ROA = α1 + β1 ASSET + β2 EQUITY + β3 TNGEQTY + β4 LOANS + β5 LIQUID +β6 DEPOSITS + β7 OVERHEAD + ε

Model 2 - ROE

ROE = α2 + β1 ASSET + β2 EQUITY + β3 TNGEQTY + β4 LOANS + β5 LIQUID +β6 DEPOSITS + β7 OVERHEAD + ε

Where:

Independent Variables:

ROA: Return on Assets

ROE Return on Equity

Dependent Variables:

ASSETS: log (Total Assets)

EQUITY: Equity / Total Assets

TNGEQTY: Tangible Equity / Total Liabilities

LOANS: Loans / Total Assets

LIQUID: Liquid Assets / Total Assets

DEPOSITS: Deposits / Total Assets

OVERHEAD: Overhead Costs / Total Assets

Data and Variables

Descriptive statistics on the variables used in this study are provided in the tables below for both Islamic banks and conventional banks classified by year from 2006 to 2009. These descriptive information includes mean, maximum, minimum and standard deviation.

These tables show some facts on the Islamic and conventional banking in the GCC. For example, looking at the ROAA, we can see that for the year 2006 and 2007, ROAA of Islamic banking was higher than for conventional banking. In the 2008, both Islamic banking and conventional banking has negative ROAA but conventional banking managed to turn it to positive in 2009 while Islamic banks could not. DEPOSITS ratio seems to be lower for Islamic banking than for conventional banking while EQUITY, TNGEQTY and OVERHEAD ratios are higher for Islamic banking.

Descriptive Statistics - Islamic Banks

2009

Variable

N

Mean

Std Dev

Minimum

Maximum

ROAA

9

-1.91444

10.23591

-28.41

4.96

ROAE

9

-4.86444

39.11601

-104.04

24.27

EQUITY

9

21.68

7.69115

13.19

36.56

ASSETS

9

3.82222

0.56597

3.1

4.66

LOANS

9

47.15778

24.11311

1.77

65.72

DEPOSITS

9

64.88667

23.51866

14.95

83.54

LIQUID

9

21.12

10.66565

3.96

30.96

TNGEQTY

9

28.78

13.73087

14.42

57.69

OVERHEAD

9

5.90333

11.95335

0.96

37.74

2008

Variable

N

Mean

Std Dev

Minimum

Maximum

ROAA

27

2.09926

6.92912

-30.07

10.19

ROAE

27

13.06037

12.53575

-32.08

31.62

EQUITY

27

25.30593

18.32378

6.34

92.32

ASSETS

27

3.52259

0.58526

1.98

4.64

LOANS

27

48.59185

25.39087

1.7

88.32

DEPOSITS

27

59.4037

24.60383

7.26

83.44

LIQUID

27

20.4963

13.30896

0.03

57.47

TNGEQTY

27

78.05333

227.56642

6.75

1201

OVERHEAD

27

3.11741

2.96539

0.34

14.45

2007

Variable

N

Mean

Std Dev

Minimum

Maximum

ROAA

27

5.15296

4.72983

-7.23

18.33

ROAE

27

20.48407

11.53482

-7.62

48.02

EQUITY

27

26.97037

17.2038

7.83

94.75

ASSETS

27

3.42037

0.5604

2.14

4.52

LOANS

27

46.58407

23.43044

2.34

82.81

DEPOSITS

27

58.54407

23.06997

5.03

82.97

LIQUID

27

23.71333

18.21896

0.26

81.09

TNGEQTY

27

100.49407

341.46581

8.53

1805

OVERHEAD

27

2.76074

1.92776

0.42

8.31

2006

Variable

N

Mean

Std Dev

Minimum

Maximum

ROAA

27

6.23

6.82785

-0.65

35.1

ROAE

27

20.65815

15.56718

-5.9

73.18

EQUITY

27

30.88

21.69757

7.63

95

ASSETS

27

3.24593

0.59087

2.17

4.45

LOANS

27

47.51926

25.52218

3.31

87.09

DEPOSITS

27

54.91407

24.9323

4.86

86.9

LIQUID

27

25.31519

19.19956

0.24

74.75

TNGEQTY

27

123.47296

361.45561

8.32

1899

OVERHEAD

27

2.83704

1.82051

0.62

7.53

Descriptive Statistics - Conventional Banks

2009

Variable

N

Mean

Std Dev

Minimum

Maximum

ROAA

29

0.90793

3.97936

-18.62

4.68

ROAE

29

8.71724

18.09252

-73.23

29.78

EQUITY

29

14.9731

5.16499

8.6

26.18

ASSETS

29

4.09655

0.53291

2.65

4.84

LOANS

29

58.20172

17.37435

2.22

78.46

DEPOSITS

29

72.68069

16.93623

10.72

86.92

LIQUID

29

22.55172

9.11762

10.29

56.71

TNGEQTY

29

16.55138

6.94827

9.33

35.49

OVERHEAD

29

1.45724

0.75628

0.62

4.36

2008

Variable

N

Mean

Std Dev

Minimum

Maximum

ROAA

65

-0.61185

6.44206

-25.33

7.75

ROAE

65

2.97031

28.92545

-135.99

34.8

EQUITY

65

18.59492

12.67793

0.77

58.04

ASSETS

65

3.77046

0.67367

2

4.89

LOANS

65

51.28046

23.67111

0.27

82.01

DEPOSITS

65

67.40108

21.09781

2.1

87.45

LIQUID

65

20.20646

11.44084

3.79

75.84

TNGEQTY

65

25.90185

27.86691

0.74

138.23

OVERHEAD

65

2.19554

2.27083

0.21

11.04

2007

Variable

N

Mean

Std Dev

Minimum

Maximum

ROAA

65

4.514

4.11481

-2.77

20.43

ROAE

65

20.88708

13.08376

-36.87

88.04

EQUITY

65

21.11846

15.06605

6.59

69.91

ASSETS

65

3.73154

0.62688

2.22

4.84

LOANS

65

45.45323

21.72181

0.44

74.47

DEPOSITS

65

66.08862

19.94167

0.23

86.81

LIQUID

65

27.89123

12.72405

1.3

78.86

TNGEQTY

65

33.13277

40.9337

7.1

232.36

OVERHEAD

65

1.82338

1.41553

0.17

7.88

2006

Variable

N

Mean

Std Dev

Minimum

Maximum

ROAA

65

3.97323

3.81081

-6.76

19.4

ROAE

65

20.49815

12.11583

-11.08

57.34

EQUITY

65

21.05015

13.29398

7.59

74.16

ASSETS

65

3.60123

0.60934

2.13

4.62

LOANS

65

45.53354

23.21159

0.21

79.78

DEPOSITS

65

66.96662

19.32375

0.01

87.32

LIQUID

65

26.85492

15.27206

2.2

79.75

TNGEQTY

65

31.79769

39.7111

6.61

287.05

OVERHEAD

65

1.95

1.50485

0.16

9.25

Finally, by examining the total assets, we can see that the mean of total assets of the Islamic banks in the data sample grow from USD 4,375 to USD 13,654 over the last 4 year while for conventional banks, it grow from USD 8,664 to 21,323. Therefore, conventional banking in the GCC continue to be more significant in terms total assets as it continue to be around double the size of Islamic banks.

2009

2008

2007

2006

Islamic Banks

13,654

7,259

5,855

4,375

Conventional Banks

21,323

14,001

12,176

8,664

Mean of total assets from 2009 to 2006

Chapter 4: Results

The objective of this thesis is to answer four different questions in the field of Islamic profitability. These questions are:

- How did the financial crisis affect the profitability of Islamic Banks in comparison to Conventional Banks?

- What are the internal factors (bank specific characteristics) that influence the profitability of Islamic banking for every year from 2006 - 2009?

- Did these factors have the same impact on the profitability of Islamic Banking before, during and after the financial crisis?

- Did these internal factors influence the profitability of Islamic Banking in the same manner as of the Conventional Banking?

In this chapter we will cover the Pearson Correlation Coefficient and Multiple Regression results for the data sample and then we will address these questions and will evaluate the results of our model to answer these questions.

Pearson Correlation Coefficient

Multiple Regression Results:

Multiple Regression - Islamic Banking

2009

2008

2007

2006

Variable

ROAA

ROAE

ROAA

ROAE

ROAA

ROAE

ROAA

ROAE

Constant

-13.41662 (0.4556)

-68.12575 (0.3232)

-2.05837 (0.6674)

-8.62794 (0.665)

-0.90111 (0.8827)

13.32692 (0.5689)

-4.69693 (0.4099)

-22.51153 (0.2948)

EQUITY

-1.97496 (0.1753)

-11.22477 (0.0822)

0.13918 (0.0309)

0.33912 (0.1847)

0.30097 (0.0005)

0.41231 (0.1418)

0.08089 (0.0581)

-0.02646 (0.8612)

ASSETS

0.56295 (0.6389)

5.63096 (0.2661)

1.6763 (0.1242)

9.3132 (0.0457)

2.35517 (0.098)

11.06649 (0.0455)

0.74877 (0.639)

9.72965

(0.1159)

LOANS

0.22008

(0.248)

1.02925 (0.1699)

-0.04436 (0.1955)

-0.16085 (0.2562)

-0.10047 (0.0105)

-0.42275 (0.0055)

0.00102 (0.9785)

-0.09114 (0.5237)

DEPOSITS

0.01174 (0.7796)

0.05017

(0.74)

-0.00065347 (0.9762)

0.01488 (0.8705)

0.00604 (0.8096)

-0.01077 (0.9103)

0.00132 (0.9675)

-0.0012

(0.9921)

LIQUID

0.21807 (0.1201)

1.18075 (0.0583)

-0.02457 (0.5638)

-0.23683 (0.1909)

-0.13613 (0.0012)

-0.51207 (0.0014)

0.01464 (0.7246)

0.06183

(0.6913)

TNGEQTY

1.38133

(0.157)

7.61263 (0.0764)

0.03772 (0.1142)

0.08201 (0.3954)

-0.01262 (0.6752)

-0.03393 (0.7674)

0.04259 (0.0964)

0.19132

(0.05)

OVERHEAD

-0.57273 (0.0903)

-1.84497 (0.1084)

-0.71891 (0.0089)

-2.71259 (0.0157)

-0.46159 (0.2363)

-2.51031 (0.098)

1.13651 (0.0117)

2.62272

(0.0999)

R-Square

Adj R-Sq

F Value

0.993

0.9684

40.46 (0.0243)

0.9938

0.9723

46.14 (0.0214)

0.5867

0.4058

3.24 (0.0243)

0.5182

0.3074

2.46 (0.0446)

0.7306

0.6196

6.59 (0.0007)

0.5246

0.3289

2.68 (0.0459)

0.6515

0.508

4.54 (0.0051)

0.5075

0.3047

2.5 (0.058)

Multiple Regression - Conventional Banking

2009

2008

2007

2006

Variable

ROAA

ROAE

ROAA

ROAE

ROAA

ROAE

ROAA

ROAE

Constant

-10.88633 (0.0139)

-91.83821 (0.0297)

-10.67959 (0.1406)

-132.16843 (0.0163)

-3.77033 (0.3214)

-0.31186 (0.9891)

7.27075 (0.0612)

32.97334 (0.0588)

EQUITY

0.33083

(0.03)

2.39759 (0.0964)

-0.00521 (0.9454)

1.25524 (0.0303)

0.17778 (<.0001)

0.12709 (0.5596)

-0.03245 (0.3994)

-0.55738 (0.002)

ASSETS

0.78281 (0.1739)

7.73299 (0.168)

0.38106 (0.7189)

9.01256 (0.2563)

0.82674 (0.1558)

1.24962 (0.7203)

-0.05295 (0.9303)

2.18287 (0.4232)

LOANS

-0.00133 (0.9465)

-0.08544 (0.6581)

0.09645 (0.0007)

0.55782 (0.0074)

-0.01068 (0.4705)

0.03734 (0.6759)

-0.05022 (0.0027)

-0.19802 (0.0077)

DEPOSITS

0.05068 (0.0043)

0.5118 (0.0033)

0.06176 (0.1168)

0.63715 (0.0318)

0.00038022 (0.9856)

0.10103 (0.4279)

-0.0126 (0.6311)

0.02699 (0.8186)

LIQUID

0.04603 (0.2447)

0.51275 (0.1857)

0.0377 (0.3812)

0.2446 (0.4458)

-0.01352 (0.4871)

-0.05074 (0.6659)

-0.03675 (0.0669)

-0.26966 (0.0035)

TNGEQTY

-0.0743 (0.4851)

-0.93751 (0.3678)

-0.00109 (0.7013)

-0.00828 (0.6955)

0.00553 (0.3401)

0.00522 (0.8811)

-0.00049447 (0.6286)

-0.00277 (0.547)

OVERHEAD

0.83202 (0.0026)

6.30294 (0.014)

-0.5853 (0.0548)

0.38398 (0.8634)

1.16224 (<.0001)

3.53925 (0.0072)

0.81043 (0.0002)

2.85144 (0.0032)

R-Square

Adj R-Sq

F Value

0.7743

0.6865

8.82 (<.0001)

0.5862

0.4253

3.64 (0.0127)

0.5856

0.5298

10.5 (<.0001)

0.2851

0.1889

2.96 (0.0109)

0.8172

0.7925

33.2 (<.0001)

0.1667

0.0545

1.49 (0.1929)

0.5474

0.4865

8.98 (<.0001)

0.4378

0.3621

5.78 ( <.0001)

Question 1

The first question to be addressed in the research is how the financial crisis affected the profitability of Islamic Banks in comparison to Conventional Banks. Since we are mainly focusing on ROAA and ROAA as measures of profitability, the most appropriate approach would be to evaluate how these ratios fluctuate during the financial crisis.

Looking at the mean value of ROAE and ROAA from 2006 to 2009, we can find that although Islamic banks performed better in 2006 and 2007 in terms of ROAA while had almost similar value for ROAE, 2008 can be considered to be the worst in term of profitability for both Islamic and conventional banks. However the values for ROAA and ROAE were much lower for Islamic banks (ROAA: -1.91, ROAE: -4.86) than for conventional banks (ROAA: -0.61, ROAE: 2.97).

2006

2007

2008

2009

Islamic Banks

ROAA

6.23

5.15

-1.91

2.10

ROAE

20.66

20.48

-4.86

13.06

Conventional Banks

ROAA

3.97

4.51

-0.61

0.91

ROAE

20.50

20.89

2.97

8.72

Mean value for ROAA and ROAE for Islamic and conventional banks

For 2009, Islamic banks managed to turn these ratios back to positive figures as well as the conventional banks. Furthermore, Islamic banks had higher ROAA and ROAE ratio than the conventional banks.

The two figures below show the ROAA and ROAE for Islamic and conventional banks in GCC from 2006 and 2009.

ROAA and ROAE for Islamic Banks

ROAA and ROAE for Conventional Banks

Question 2

The second question in this thesis has to deal with the internal factors (bank specific characteristics) that influence the profitability of Islamic banking for every year from 2006 - 2009.

In the Literature Review chapter, and in order to evaluate the different aspects of bank characteristics, we classified the internal factors to be examined into four categories. These categories are Bank Size, Capital Structure, Liquidities and Liabilities of the Bank.

Bank Size

In our study, we used the Total Asset to measure bank size. ROAA and ROAE continue to positive relationship with ASSETS for the period from 2006 to 2009 despite the crisis which agrees with Molyneux and el (2004). However, our results show positive significant relationship between both ROAA and ROAE with ASSETS in year 2007 only. For years 2006, 2008 and 2009, the relationship is positive but not significant to reject the null hypothesis.

Capital Structure

Two factors were used to evaluate the Capital Structure in relation to profitability: EQUITY and TNGEQTY. EQUITY has positive significant relationship with ROAE in years 2006 and 2007. Also, EQUITY has positive relationship with ROAE in 2008 and negative relationship in 2009 but both are not significant to reject the null hypothesis. Also, EQUITY has significant positive relationship with ROAA in years 2006, 2007 and 2008 but positive and not significant for year 2009. Therefore, our results agree with Hassan and Bashir (2004) for years 2006 and 2007.

As for the TNGEQTY, it continue to have negative relationship with ROAA and ROAE for the period from 2006 to 2009 except with ROAE for year 2009 where we have negative but not significant relationship. The relationship is positive and significant with ROAE in years 2007 and 2008 and with ROAA in years 2006, 2007 and 2008.

Liquidities

LOANS and LIQUID both were used in this study to understand the relationship between profitability and Liquidities of the Islamic banking. LOANS have negative relationship with ROAE and ROAA in years 2006, 2007 and 2008 but positive and not significant in year 2009. The relationship is significant negative in years 2007 and 2008. This contradicts with our hypothesis and with Demirguc-Kunt and Huizinga, (1997) who found positive relationship between LOANS and bank profitability.

As for LIQUID, it has negative relationship with ROAE and ROAA in all years expect for 2009 and the relationship is only significant in year 2007. This again contradicts with our hypothesis and with Beltratti and Stulz (2009) who found that LIQUID has positive and significant relation with profitability.

Liabilities

DEPOSITS and OVERHEAD were used as determinants for Liabilities. DEPOSITS have negative relationship with ROAE and ROAA in years 2006 and 2007 but positive in years 2008 and 2008 but none is significant. Therefore, the null theory cannot be rejected and our results don't agree with Bashir and Hassan (2004) who found a negative relationship with profitability.

As for the OVERHEAD, the relationship with ROAE and ROAA is negative for the period from 2006 to 2009 but only significant in year 2008. This contradicts with Alkassim (2005) who included OVERHEAD in his research and found positive relationship to profitability.

Question 3

The third question in the study is to understand if these factors have the same impact on the profitability of Islamic Banking before, during and after the financial crisis?

Bank Size

ASSETS continue to have positive relationship with ROAE and ROAA. This means that despite the crisis, bigger banks continue to be more profitable than smaller banks

Capital Structure

EQUITY always has positive relationship with ROAE and ROAA throughout the period expect for ROAE in year 2009. Also, TNGEQTY always has negative relationship with ROAE and ROAA before, during and after the crisis except for ROAE in year 2009.

This means that banks with better capital structure are in general less risky and more profitable but this seems to be changed after the crisis.

Liquidates

Both LOANS and LIQUID have negative relationship with ROAE and ROAE before and during the crisis (2006 to 2008) but positive relationship after the crisis (2009).

This means that before and during the crisis, the banks with less assets are tied to loans and with less liquid assets tend to be more profitable. But this reverse after the crisis.

Liabilities

OVERHEAD always has negative relationship with ROAE and ROAA before, during and after the crisis. As for DEPOSITS, it has negative relationship in years 2006 and 2007 and it turns positive in years 2008 and 2009. This means that bank with more deposits tend to be more profitable during and after the crisis.

Question 4

Last question in this study has to deal with Conventional Bank if the same internal factors influence the profitability of Islamic Banking in the same manner as of the Conventional Banking.

Bank Size

ASSETS has a positive relationship with ROAE and ROAA for both Islamic Banking and Conventional Banking which means that for both Banking and Conventional Banking, bigger banks tend to be more profitable despite the crisis.

Capital Structure

For the Conventional Banking, EQUITY has positive relationship with ROAE and ROAA for the period from 2006 to 2008 but negative relationship in year 2009. TNGEQTY has a negative relationship from 2006 to 2008 but positive in year 2009.

As for the Islamic Banking, EQUITY always has positive relationship with ROAE and ROAA expect for ROAE in year 2009. Also, TNGEQTY always has negative relationship with ROAE and ROAE except for ROAE in year 2009.

This means that EQUITY and TNGEQTY has the same impact on profitability for both Islamic and Conventional Banking before, during and after the crisis

Liquidities

For Conventional Banking, LOANS always has positive relationship with ROAE and ROAA expect for year 2006 while LIQUID always has negative relationship with ROAE and ROAA except for year 2008. For Islamic Bank, both LOANS and LIQUID have negative relationship except for year 2009.

This means that the LOANS have different relationship with profitability for Islamic and Conventional Banking as it is positive for Conventional Banking (except for year 2009) and negative for Conventional Banking (except year 2006) While LIQUID has negative relationship for both Islamic Banking (except year 2009) and Conventional Banking (except year 2008)

Liabilities

For Conventional Banking, DEPOSITS and OVERHEAD both have positive relationship with profitability except for DEPOSITS in year 2006 and OVERHEAD for year 2008.

For Islamic Banking, DEPOSITS has negative relationship for years 2006 and 2007 but positive relationship for year 2008 and 2009 while OVERHEAD has always negative relationship.

Chapter 4: Conclusion


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