Financial Performance And Compliance With Basel III Capital Standards: Conventional vs. Islamic Banks

This study is a commentary on the financialperformance and quality capital of Islamic versus conventional banks currentlyoperating in the Gulf Cooperation Council (GCC) region. In addition toassessing the financial performance of the full set of banks across various GCCcountries, the study is the first toconsider the extent to which Islamic vs.conventional GCC banks comply with the new Basel III requirements of raising betterquality capital. The study uses bank-level data for 75 (55 conventionaland 20 Islamic) banks in Kuwait, United Arab Emirates, Kingdom of Saudi Arabia,Oman, Qatar, and Bahrain. Financial ratios are used tomeasure and compare Islamic vs. conventional banks performances, and weemploy a comprehensive and the most recent sample of data available in the region, consisting of cross-sections from 2003 to 2011.The results reveal that Islamic banks are, onaverage, less efficient but more profitable, more liquid, more solvent (lessrisky), and enjoyed higher internal growth rates than conventional banks during2003-2011. The results indicate that there are statistically significant differencesbetween the two types of banks, as far as profitability, solvency, and internalgrowth rate ratios are concerned; however, there are no statisticallysignificant differences in liquidity and efficiency. The results also indicatethat banks, as a whole, appear to be largely sufficiently capitalized for BaselIII. Gulf Cooperation Council banks are well positioned to absorb higherprovisions and impairment charges given the higher capital adequacy ratiosreported by most. The Common Equity Ratio, Tier 1 Capital Ratio, and Capital AdequacyRatios (CARs), for the majority of banks in 2011, comfortably satisfy theenhanced capital requirements of Basel III. The results show that Islamic bankshave, on average, noticeably higher (and significantly different) capitalratios compared to conventional institutions. With regard to theimpact of the global financial crisis on both types of the banks, the resultsindicate that Islamic banks performed better thanconventional banks during the period 2006-2009, as the former enjoys highercapitalization, higher liquidity reserves, and also maintained stronger growthcompared to conventional banks in almost countries.Findings of this study may be useful for capital-market participants, as the full set of banks across various Gulf Cooperation Councilcountries needs to be examined before any substantive conclusions can bereached about the relative performance of Islamic versus conventional banks.Further, as the full implementation of Basel III requirements will not takeplace until 2019, the results of this study will convey information that shouldencourage banks to consider the earlier implementation of Basel III capitalrequirements in order to provide themselves with a reputational boost, as wellas a competitive advantage.

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Financial Performance Comparison of Islamic and conventional banks in the United Arab Emirates (UAE)

International Conference on Advances in Business Management and Law (ICABML) ◽

10.30585/icabml-cp.v1i1.39 ◽

2017 ◽

Vol 1 (1) ◽

pp. 477-494 ◽

Cited By ~ 1

Author(s):

Mosab I Tabash ◽

Ali T Yahya ◽

Asif Akhtar

Keyword(s):

Financial Performance ◽

United Arab Emirates ◽

Financial Risk ◽

Descriptive Analysis ◽

Performance Comparison ◽

Capital Adequacy ◽

Operating Efficiency ◽

Islamic Banks ◽

Significant Difference ◽

Conventional Banks

This paper examines the financial performance of Islamic and commercial banks in the United Arab Emirates (UAE). The paper gives an empirical insights and comparisons between the performance of Islamic and conventional banking sectors. The sample of the study consists of 5 fully-fledged Islamic banks and 14 conventional banks working in the UAE under the period 2011-2014. The study uses descriptive analysis, correlation, independent sample t test and multiple regression analysis to assess the performance and to compare between both types of banks. The Return on Assets (ROA) is used as proxy for profitability for both types of banks while bank size (log A), liquidity, capital adequacy, financial risk and operating efficiency as proxies for financial performance for both types of banks. The results showed that there is no significant difference between Islamic banks and conventional banks in terms of profitability (ROA) while there is a significant difference between Islamic and conventional banks in terms of liquidity, operation efficiency, capital adequacy, and financial risk. Further, the results indicated that the Islamic banks have higher operating efficiency, bank size and more liquidity than their counterparts of UAE. However, conventional banks are found to have better capital adequacy ratio than Islamic banks. In terms of financial risk, Islamic banks are found to have higher five times than conventional banks which may reflect challenges in the area of risk management in Islamic banks. Keywords: Financial performance, Islamic banks, Conventional banks, ROA, UAE. JEL Classification: A10, E60, G21

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Developing “best practices” for bankers’ pay in line with Basel III.

Risk Governance and Control Financial Markets & Institutions ◽

10.22495/rgcv1i3art1 ◽

2011 ◽

Vol 1 (3) ◽

pp. 7-16 ◽

Cited By ~ 1

Author(s):

Peiyi Yu ◽

Jessica Hong Yang ◽

Nada Kakabadse

Keyword(s):

Financial Crisis ◽

Risk Taking ◽

Global Financial Crisis ◽

Capital Requirements ◽

Capital Adequacy ◽

Incentive Compensation ◽

Basel Iii ◽

Bank Capital ◽

Bank Executives ◽

The Global Financial Crisis

This paper proposes hybrid capital securities as a significant part of senior bank executive incentive compensation in light of Basel III, a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. The committee developed Basel III in a response to the deficiencies in financial regulation brought about by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. The hybrid bank capital securities we propose for bank executives’ compensation are preferred shares and subordinated debt that the June 2004 Basel II regulatory framework recognised as other admissible forms of capital. The past two decades have witnessed dramatic increase in performance-related pay in the banking industry. Stakeholders such as shareholders, debtholders and regulators criticise traditional cash and equity-based compensation for encouraging bank executives’ excessive risk taking and short-termism, which has resulted in the failure of risk management in high profile banks during the global financial crisis. Paying compensation in the form of hybrid bank capital securities may align the interests of executives with those of stakeholders and help banks regain their reputation for prudence after years of aggressive risk-taking. Additionally, banks are desperately seeking to raise capital in order to bolster balance sheets damaged by the ongoing credit crisis. Tapping their own senior employees with large incentive compensation packages may be a viable additional source of capital that is politically acceptable in times of large-scale bailouts of the financial sector and economically wise as it aligns the interests of the executives with the need for a stable financial system.

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Effects of the Global Financial Crisis on the Agency Cost of Islamic Banks and Conventional Banks

Applied Finance and Accounting ◽

10.11114/afa.v4i1.2799 ◽

2017 ◽

Vol 4 (1) ◽

pp. 44

Author(s):

Talla M Aldeehani

Keyword(s):

Financial Crisis ◽

Global Financial Crisis ◽

Gulf Cooperation Council ◽

Agency Cost ◽

Islamic Banks ◽

Empirical Testing ◽

Before And After ◽

The Status ◽

Conventional Banks ◽

The Global Financial Crisis

In this paper, we investigate the effect of the 2008 global financial crisis on the agency cost (AC) of Islamic banks (IBs) and conventional banks (CBs). Many pioneering scholars (see, for example, Archer et al., 1998) have recognized fundamental differences in the capital structures and risks of IBs compared to CBs and called for more empirical testing of these issues. This effort is in response to those calls. Focusing on AC, we collected data for all Gulf Cooperation Council (GCC) banks satisfying the period from 2001-2014. The data was split into “before” and “after” the 2008 crisis. Although statistically insignificant, the analysis shows higher AC for IB compared to CBs before and after the crisis. However, we provide evidence of significant differences in AC causal models for the two types of banks. For conventional banks, only profitability factors explain variability in AC before and after the crisis. For Islamic banks, however, in addition to profitability, liquidity, deposits and financing facilities matter depending on the status of the economy. We provide further discussions, implications, and recommendations.

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A Comparative Study of Islamic and Conventional Banking in Bangladesh: Camel Analysis

Journal of Business and Technology (Dhaka) ◽

10.3329/jbt.v10i1.26907 ◽

2016 ◽

Vol 10 (1) ◽

pp. 73-91 ◽

Cited By ~ 3

Author(s):

Md Tanim Ul Islam ◽

Mohammad Ashrafuzzaman

Keyword(s):

Comparative Study ◽

Financial Performance ◽

Financial Statements ◽

T Test ◽

Capital Adequacy ◽

Islamic Banks ◽

Management Capability ◽

Significant Difference ◽

Conventional Banks

The aims of this study are to evaluate the financial performance of Islamic and conventional banks of Bangladesh through CAMEL test during the period of 2009 to 2013. The study tries and to determine whether there are significant differences between the two categories of banks for each of the ratios used in CAMEL test. A sample of five listed conventional banks and five listed Islamic banks were selected to study the objectives. The data used in this study were compiled from the financial statements of the respective sample banks. To make substantial noteworthy results, t-test(independent sample) is used. This paper found no significant difference between the Islamic banks and conventional banks regarding capital adequacy, management capability and earnings but found a significant difference regarding asset quality.Journal of Business and Technology (Dhaka) Vol.10(1) 2015; 73-91

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Factors Influencing the Margins of Islamic Banks

Global Business Review ◽

10.1177/0972150918772970 ◽

2018 ◽

Vol 19 (4) ◽

pp. 1026-1036

Author(s):

Nurhafiza Abdul Kader Malim ◽

M.K. Normalini

Keyword(s):

Global Financial Crisis ◽

Positive Impact ◽

Liquidity Risk ◽

Institutional Development ◽

Capital Adequacy ◽

Islamic Banking ◽

Islamic Banks ◽

Factors Influencing ◽

Conventional Banks ◽

The Global Financial Crisis

This article investigates the factors influencing the margins of Islamic banks in 15 countries for the period 2007–2013. The article also analyses the effect of the global financial crisis (2007–2009) on the Islamic banks’ margins. Despite the rapid growth of Islamic banking, the margins of Islamic banks remain higher than conventional banks. The margins reflect the costs of financial intermediation, as higher margins may discourage clients from using bank services. The findings reveal that the margins of Islamic banks are affected mainly by capital adequacy, overhead costs, liquidity risk, bank size and institutional development. Interestingly, the crisis has a positive impact on Islamic banks’ margins. These findings will be useful for the design of policies in narrowing the margins.

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Examining the Relationship between Efficiency and Capital Adequacy Ratio: Islamic versus Conventional Banks --- An Empirical Evidence on Egyptian Banks

Accounting and Finance Research ◽

10.5430/afr.v7n2p232 ◽

2018 ◽

Vol 7 (2) ◽

pp. 232 ◽

Cited By ~ 2

Author(s):

Hassan Mohamed Mohamed Hafez

Keyword(s):

Financial Crisis ◽

Significant Relationship ◽

Global Financial Crisis ◽

Negative Relationship ◽

Capital Adequacy ◽

Islamic Banks ◽

Conventional Banks ◽

The Global Financial Crisis ◽

High Level ◽

The Relationship

This paper aims to investigate the relationship between the efficiency of banks in Egypt and capital adequacy ratios. We collected data on a sample of 40 banks comprising Islamic banks, conventional and conventional banks with Islamic windows pre and post the global financial crisis from year 2002 to 2015. We used data envelopment analysis liner programming (DEA) to calculate the efficiency of banks then we used a panel regression analysis through the application of Eviews software to investigate the relationship between the efficiency of banks and capital adequacy ratios. Pre the financial crisis, results, concluded that, there is a significant positive relationship between the efficiency of banks and capital adequacy ratios, credit risk, profitability, bank size and the quality of management. Whilst a significant negative relationship with the liquidity. The efficiency of conventional banks outperformed the efficiency of Islamic and conventional banks with Islamic windows. The increase in capital follows an increase in the level of risk borne by banks and increases capital adequacy ratios which leads to a rise in the loan portfolio and therefore, increase the level of loans provisions, which confirms the high level of efficiency for banks. Capital increase provide an additional protection against any additional risks. Post the financial crisis, the efficiency of banks has been affected especially for conventional banks. The efficiency of conventional and conventional banks with Islamic windows shows a negative significant relationship with capital adequacy ratios. The efficiency of Islamic banks outperformed other banks and shows a positive significant relationship with capital adequacy ratios. Results revealed that the efficiency of banks determines the level of capital and risk borne by banks.

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The Performance of Islamic Banks during the 2008 Global Financial Crisis: Evidence from the Gulf Cooperation Council Countries

10.31235/osf.io/vahtz ◽

2019 ◽

Author(s):

Mohammed Ebrahim Hussien ◽

Md. Mahmudul Alam ◽

Wahid Murad ◽

Abu N.M. Wahid

Keyword(s):

Financial Risk ◽

Global Financial Crisis ◽

Structural Break ◽

Gulf Cooperation Council ◽

Capital Adequacy ◽

Data Series ◽

Islamic Banks ◽

Gross Domestic Product Growth ◽

Specific Data ◽

Before And After

Purpose – The purpose of this study is to analyze the profitability performance of Islamic banks of the Gulf Cooperation Council (GCC) region during 2008 global financial crisis.Design/methodology/approach – Bank specific data are taken from the Bank Scope database and macroeconomic data are collected from International Financial Statistics. Using a panel data series of 30 banks for the period of 2005 to 2011, the study shows the evidence of structural break for the crisis year as well as the factors that impact the profitability of Islamic banks.Findings – The performance of GCC Islamic banks was significantly influenced during the crisis period by capital adequacy, credit risk, financial risk, operational efficiency, liquidity, bank size, gross domestic product, growth rate of money supply, bank sector development and inflation rate. The study also finds that there is a structural change before and after the global financial crisis.Originality/value – This is an original study that shows that the shariah compliant banks have performed better during the crisis and are not affected based on their internal performance records; rather, they have been affected indirectly from the macro shock due to the overall economic crisis.

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Determinants of Corporate Risk Disclosure Practice: The Case of Islamic Banks in Gulf Cooperation Council Region

The Journal of Muamalat and Islamic Finance Research ◽

10.33102/jmifr.v15i1.99 ◽

2018 ◽

Vol 15 (1) ◽

pp. 16-38 ◽

Cited By ~ 3

Author(s):

Samir Srairi

Keyword(s):

United Arab Emirates ◽

Composite Index ◽

Gulf Cooperation Council ◽

Risk Information ◽

Rate Of Return ◽

Islamic Banks ◽

Risk Disclosure ◽

Gulf Region ◽

Corporate Risk ◽

Level Of Risk

The paper develops a framework to explore the risk disclosure practices of 29 Islamic banks operating in the Gulf Cooperation Council countries over the period of 2013-2016 and examines the potential factors which might be affecting risk disclosure. To analyze the level of risk disclosure, the paper develops a composite index by using the content analysis technique. We also employ OLS technique to examine factors affecting Islamic banks’ risk disclosure. The results indicate a very high difference in risk disclosure between countries. Only two countries, the United Arab Emirates and Bahrain, have a higher level of risk disclosure. The findings also suggest that reporting on some risk disclosure types especially displaced commercial risk and rate of return risk is very low. The regression results show that Islamic banks with a stronger set of corporate governance mechanisms and an active Shariah board appear to disclose more risk information. Other factors that influence risk disclosure practices of Islamic banks are bank size, leverage, cross-border listings and the level of political and civil regression. The study recommends that Islamic banks have to revise their communication strategies and provide more risk information related to rate of return risk and display commercial risk. In addition, GCC regulators should establish risk disclosure regulations which have to become mandatory for all Islamic banks. To the best of our knowledge, the paper provides the first analysis related to the determinants of corporate risk disclosures of Islamic banks in the Arab Gulf region.

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Islamic Banking Regulations in Light of Basel II

American Journal of Islamic Social Sciences ◽

10.35632/ajiss.v27i1.357 ◽

2010 ◽

Vol 27 (1) ◽

pp. 74-101 ◽

Cited By ~ 3

Author(s):

M. Kabir Hassan ◽

Muhammad Abdul Mannan Chowdhury

Keyword(s):

Financial Institutions ◽

Banking Regulation ◽

Capital Requirements ◽

Basel Ii ◽

Capital Adequacy ◽

Regulatory Agencies ◽

Islamic Banking ◽

Islamic Banks ◽

Minimum Capital ◽

Regulatory Standards

This paper seeks to determine whether the existing regulatory standards and supervisory framework are adequate to ensure the viability, strength, and continued expansion of Islamic financial institutions. The reemergence of Islamic banking and the attention given to it by regulators around the globe as to the implications of a recently issued Basel II banking regulation makes this article timely. The Basel II framework, which is based on minimum capital requirements, a supervisory review process, and the effective use of market discipline, aligns capital adequacy with banking risks and provides an incentive for financial institutions to enhance risk management and their system of internal controls. Like conventional banks, Islamic banks operate under different regulatory regimes. The still diverse views held by the regulatory agencies of different countries on Islamic banking and finance operations make it harder to assess the overall performance of international Islamic banks. In light of the increased financial innovation and diversity of instruments offered in Islamic finance, the need to improve the transparency of bank operations is particularly relevant for Islamic banks. While product diversity is important in maintaining their competitiveness, it also requires increased transparency and disclosure to improve the understanding of markets and regulatory agencies. The governance of Islamic banks is made even more complex by the need for these banks to meet a set of ethical and financial standards defined by the Shari`ah and the nature of the financial contracts banks use to mobilize deposits. Effective transparency in this area will greatly enhance their credibility and reinforce their depositors and investors’ level of confidence.

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