Title:
Stability of Islamic versus conventional banks: Malaysian Case
Author:
Wahid, Muhamad Azhari
Dar, Humayon
Abstract
Purpose: This paper investigates the stability and its determinants involving Malaysian Islamic and conventional banks over the period of 2004 – 2013.
Design: The study employs the financial ratios and z-score index as indicators of bank stability. A series of parametric and non-parametric tests are used to compare the stability of Islamic and conventional banks. Then, we estimate pooled OLS regression controlling for Islamic banks dummy, crisis period dummy, bank specific, market structure, and macroeconomic factor to examine the determinants of bank stability.
Findings: The result reveals that Islamic banks are
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Keywords: Banking, Stability, Islam, Malaysia 1.0 Introduction
The recent 2007 – 2009 global financial crisis has led to series of failures of many conventional banks throughout the world. Furthermore, some empirical researches have evidenced the superiority of Islamic banks’ performance over its conventional counterparts during the crisis period (Hasan & Dridi 2010; Parashar & Venkatesh 2010). These led to increase in global attention towards stability of Islamic banking system.
Despite of increased attention on Islamic banks, recent studies have evidenced mixed result on the stability of Islamic banks over its conventional counterparts (Belouafi et al. 2013; Kassim & Abd. Majid 2010; Rokhim & Gamaginta 2009; Bourkhis & Nabi 2013). Thus, indicates that there is non-consensus on the stability of Islamic banks over its conventional counterparts.
Bank stability during the recent 2007 – 2009 global financial crisis has been studied from various perspectives; among others are the application of various measures of bank stability, determinants of bank stability, and impact analysis. Recent studies which examine the impact of crisis on bank stability have given attention specifically during the crisis period. While it is useful to examine the degree of bank stability during the period of crisis, it is also important to determine its degree after the period of crisis. This is vital as the impact of
The banking industry has undergone major upheaval in recent years, largely due to the lingering recessionary environment and increased regulatory environment. Many banks have failed in the face of such tough environmental conditions. These conditions
The American Banking system has always focused on order, resiliency and the ability to withstand the storm. When comparing banking systems, it is required analyze both the strengths and the weaknesses of each system. While examining the American banking system, a key strength that is presented is the pride if its resiliency, “these improvements in the resiliency of the banking system have been reinforced by a series of key capital and liquidity rules that have been enacted in the United States, including the Basel III capital and liquidity frameworks as adopted in more stringent form” (The State of American Banking).
The recent financial crisis has a huge impact on systemic Important Financial Institutions; it’s distressing effect can be felt in almost every business area and process of a bank. A fairly large literature investigates the impact of financial crisis on large, complex and interconnected banks. The great recession did affect banks in different ways, depending on the funding capability of each bank. Kapan and Minoiu (2013) find that banks that were ex ante more dependent on market funding and had lower structural liquidity reduced supply of credit more than other banks during crisis. The ability of banks to generate interest income during the financial crisis was hampered because there was a vast reduction in bank lending to individuals and
The Banking Industry plays an important role in the economic development of the country and is the most dominant segment of the financial sector. Banks encourage economic growth by allocating savings to investments that have potential to yield higher returns. They perform their basic role of accepting deposits and lending funds from these deposits. Banks securely save the money of depositors, provide interest to them, and lend the funds raised from depositors to consumers. They are in a wide range of sizes, from large Global Banks to Regional and Community Banks. We can study the structure of an organized banking industry by taking an example of Indian banking industry:
A bank is an institution that facilitates financial transactions between the parties. Amongst its standard operations are accepting deposits from the customers, lending money as loan (cite). The major source of income for banks is interest income which is earned on loans given to the customers, business firms and corporations. This very nature of it makes banking institutions so crucial for economic development of any country. Strong banking operations and fundamentals paves the way for higher customer and investor confidence in the company.
From the year 1970 until now, more than 500 Islamic financial Institution have been established worldwide which include 300 Islamic banks. Currently, Islamic financial institution are operating in 75 Muslim and non-Muslim countries.
This indicates the banks capacity to maintain capital commensurate with the nature and extent of all types of risks, as also the ability of the bank’s managers to identify, measure, monitor and control these risks. It reflects the overall financial condition of the banks and also the ability of management to meet the requirement for additional capital. This ratio acts as an indicator of bank leverage. Capital base of financial institutions facilitates depositors in forming their risk perception about the organization since Capital Adequacy is very useful for a bank to conserve and protect stakeholder’s confidence and prevent the bank from bankruptcy. Capital is seen as a cushion to protect depositors and promote the stability and efficiency of financial system around the world. It also specifies whether the bank has adequate capital to grip unanticipated losses. It also acts as a boundary for financial managers to maintain adequate levels of
Current and past crises may share some similarities, thus it is very useful to analyze past financial samples and compare with the present one. As the world’s economy is linked today, a single country’s financial crisis may develop to a global one. Governments should not only pay attention to their own past crises, but also keep an eye on other major economies. In addition, from the past crises, the management of systematic banking problems is the key to recovering the banking
There are several ways to measure a company’s earning and profitability. Return on Equity (“ROE”) and Return on Assets (“ROA”) are, historically, among the most widely used measures to assess relative profitability in the banking industry. The technique used in this paper is based on Dr. Cole’s ROE Model. This model helps “demystify” ROE and ROA; and focuses and analyzes the main factors that are driving profitability for a bank. For this paper, selected financial data for East West Bank (“EWB” or the “Bank”) and its Peer Group (“peers”) was obtained from the December 31, 2013 Uniform Bank Performance Report (“UBPR”) and various EWB documents ; and from interviews conducted with EWB management .
Islamic finance within compliance of Sharia law form the core of Islamic banking and have become one of the fastest growing segments of the financial industry, operating in over 75 countries (Cihak,Hesse2008). Islamic finance initially was concentrated in the Middle East and South East Asia, but is now found globally. The roots of Islamic finance stemmed from the efforts of Islamic scholars to identify alternatives to the interest based system that is prohibited and condemned by Allah within the Quran. Islamic finance also prohibits the practice of lending money for investments in tobacco, alcohol, gambling and weapons per Sharia law. In the wake of the global financial crisis however, there has been a renewed interest on the
Functions and governing modes are stood on Shariah and Islamic banks must make sure that all business actions are conforming to shariah necessities.
The Islamic finance industry has been evolving and growing rapidly for the past decade. The recent global financial meltdown has open opportunity to Islamic finance to offer a new outlooks and effective solutions to economics problems. Economists are now looking to the east, learning lessons and seeing advantage of Islamic finance. Since then, serious research on Islamic financial system has been carried out and Islamic financial system has been an interesting area of discussion.
Many authors agree that Islamic finance industry has a long way to become globally successful industry. To achieve its potential for solid growth, Islamic finance must improve number of areas including: improving regulatory supervision in the industry, adaptation of tax treatment to Islamic banking products, establishing liquidity control, introducing risk management tools, supporting standardization of financial products and others.
The challenge for Muslim countries like Bangladesh is to overcome its late entry into the market against well-established jurisdictions all over the world. Another subsequent challenge would also be to educate the masses and the other industry stakeholders regarding Islamic Problems and Prospects of Islamic Capital Market In Bangladesh 59 financial principles, products and investments. The challenge for them is to motivate authorities to provide favorable platforms and policies to make such initiatives viable. The Islamic financial operations are subjected to strange rules different from the ones applicable to the conventional operations; there are a number of challenges being faced by ICM. For instance, in many cases, the Islamic capital market has had to comply with the regulatory provisions meant for the conventional system which has an entirely different underlying objective and approach. Additionally, it should be noted that the
The paper will analyse and measure the performance of Islamic banks in comparison to conventional banks. The performances will be measured over a 5-year period from 2009 to 2015. In comparing Islamic and conventional banks, profitability and liquidity will be examined.