THE NON FINANCIAL AND FINANCIAL PERFORMANCE OF
ISLAMIC BANKS
Presented by : • SAAD• AISYAH• IZYANI
QUESTIONCompare the non financial
performance of two Islamic banks over a period of five years with the
financial performance. Make an overall assessment of the performance of the banks.
What do we mean by Performance:
There are some different terminologies in use; however, according to Akram khan(1998), all these terms agree on at least two basic premises:
First, public business should be conducted in a way that makes the best possible use of public funds. Public managers should ensure that their decisions are not only legal and ethical but also done with due regard for economy, efficiency and effectiveness. It means that the persons responsible for managing public resources should adopt generally accepted management practices.
Second, the people who conduct public business should be accountable for prudent and effective management of resources entrusted to them. The legislatures confer responsibility upon public managers to return, the legislatures expect the public managers to account for the use of the public resources and activities performed. Auditing is a super-imposed activity on this relationship. Auditors provide assurance to the legislatures that the account rendered by the public managers is fair and tree.
Performance Auditing : "A comprehensive audit is an examination that provides an
objective and constructive assessment of the extent to which:
Financial, human and physical resources are managed with due regard to economy, efficiency and effectiveness, and
Accountability relationships are served. The comprehensive audit examines both financial and
management controls, including information systems and reporting practices, and recommends improvements where appropriate."
Performance auditing is a recent expansion in the scope of financial auditing.
Traditionally, financial auditing has been concerned with financial control and accuracy of accounts.
Islamic Banks’ Performance The Islamic banks have two avowed objectives:
eliminating interest from financial transactions and promoting values of an Islamic society.
It has been taken for granted that IB is only about avoiding Riba (Siddiqi, 2000)
A question to be asked: is that enough? Can we assume Islamic banks to be the same
as Mukallaf? What makes IB more responsible? The rule of Ahkam. The rule of Maqasid: Din-Nafs-Aql-Mal-Nasl
Islamic banks’ performance. Cont..
إ7ن الله قال تعالى: (يأمر ب7العدل7 واإل7حس
(ان “Surely Allah enjoins the doing
of justice and the doing of good (to others) and the giving to the kindred, and He forbids indecency and evil and rebellion; He admonishes you that you may be mindful.” Nahl, 90.
Amslaha la’mmah and Almaslaha lkhasah (Public interest and private interest).
The right attached to someone’s else right.
Islamic banks’ performance. Cont..
نفسه ومنهم مقتصد ذين اصطفينا من عبادنا فمنهم ظالم ل قال تعالى: ( ثم أورثنا الكتاب الومنهم سابق بالخيرات )
The meaning: “Then We gave the Book for an inheritance to those whom We chosefrom among Our servants; but of them is he who makes his soul to suffer a loss, and
ofthem is he who takes a middle course, and of them is he who is foremost in deeds of
goodness by Allah's permission; this is the great excellence.”
Islamic Banks’ performance. Cont..
Shahul and Mughees paper(2010):
They took in consideration on their way of stating the objectives of IB:
1: maqasid shariah as it is defined by ibn A’shur which is: to promote welfare and avoid vices.
2: and Abu Zaharah which classified Maqasid into:*Tahdhib al-Fard
(Educating the individual) *Iqamah al-`Adl (Establishing justice)*Jalb al-Maslahah (Promoting Welfare)
Promoting welfare
and avoiding
vices
Iqamah al-`Adl
Jalb al-Maslaha
h Tahdhib al-Fard
NON FINANCIAL PERFORMANCE MEASURES – maqasid approach
Mughees & Shahul (2010)
AVERAGE WEIGHTS FOR ALL 3 MAQASID
Mughees & Shahul (2010)
NON FINANCIAL RESULTPERFORMANCE RATIOS
NON FINANCIAL RESULTPERFORMANCE INDICATORS
1st objective : KFH 3rd objective : BIMB Overall (1st obj + 3rd obj) : BIMB
FINANCIAL PERFORMANCE MEASURES
Profitability ratios Return on asset (ROA) = net profit/ total asset
How bank can convert assets into net earnings Return on equity (ROE) = net profit/share capital
Higher managerial performance Profit expense ratio (PER) = profit/total expenses
high PER indicates that a bank is cost efficient and makes higher profit with given expenses
Liquidity ratios Cash deposit ratio (CDR) = cash/deposit
Higher CDR indicates more liquid asset Loan deposit ratio (LDR) = loan/deposit
Indicates that bank takes more financial distress by making excessive loan
Current ratio = current asset/current liability Indicates that more liquid asset to pay back the deposits
FINANCIAL PERFORMANCE MEASURES – cont…
Risk and solvency ratio Debt equity ratio (DER) = debt/equity capital
Lower debt ratio indicates that bank capital can absorb financial shock better
Debt to asset ratio (DTAR) = debt/total asset Indicates the financial strength of a bank to pay
debtor Equity multiplier (EM) = Total asset/share capital
Higher EM indicates that bank has borrowed more funds to convert into asset with the share capital
Loan to deposit ratio(LDR) = loan/deposit High LDR means potential source of illiquidity and
insolvency
FINANCIAL RESULTFINANCIAL RATIOS KFH BIMB
1) Return on asset (ROA) 0.0020 -0.00852) Return of equity (ROE) 0.0139 -0.21573) Profit expense ratio (PER) 0.0618 -0.0702
1) Cash deposit ratio (CDR) 0.0089 0.02752) Loan deposit ratio (LDR) 0.6542 0.51723) Current ratio 1.7034 1.0370
1) Debt equity ratio (DER) 4.7054 26.77852) Debt to total asset ratio (DTAR) 0.7272 0.95653) Equity multiplier (EM) 5.7163 28.04784) Loan to deposit ratio (LDR) 0.5234 0.5172
LIQUIDITY RATIOS
PROFITABILITY RATIOS
RISK AND SOLVENCY RATIOS
PROFITABILITY RATIOSKFH has higher
ability to convert assets
into net earnings
KFH has higher managerial
performance
KFH makes more profit with given expense
FINANCIAL RATIOS KFH BIMB
1) Return on asset (ROA) 0.0020 -0.00852) Return of equity (ROE) 0.0139 -0.21573) Profit expense ratio (PER) 0.0618 -0.0702
1) Cash deposit ratio (CDR) 0.0089 0.02752) Loan deposit ratio (LDR) 0.6542 0.51723) Current ratio 1.7034 1.0370
1) Debt equity ratio (DER) 4.7054 26.77852) Debt to total asset ratio (DTAR) 0.7272 0.95653) Equity multiplier (EM) 5.7163 28.04784) Loan to deposit ratio (LDR) 0.5234 0.5172
LIQUIDITY RATIOS
PROFITABILITY RATIOS
RISK AND SOLVENCY RATIOS
LIQUIDITY RATIOSBIMB has more cash in vault
KFH takes more financial
distress by making
excessive loans
KFH has more liquid asset to pay back the
trusts (deposit)
FINANCIAL RATIOS KFH BIMB
1) Return on asset (ROA) 0.0020 -0.00852) Return of equity (ROE) 0.0139 -0.21573) Profit expense ratio (PER) 0.0618 -0.0702
1) Cash deposit ratio (CDR) 0.0089 0.02752) Loan deposit ratio (LDR) 0.6542 0.51723) Current ratio 1.7034 1.0370
1) Debt equity ratio (DER) 4.7054 26.77852) Debt to total asset ratio (DTAR) 0.7272 0.95653) Equity multiplier (EM) 5.7163 28.04784) Loan to deposit ratio (LDR) 0.5234 0.5172
LIQUIDITY RATIOS
PROFITABILITY RATIOS
RISK AND SOLVENCY RATIOS
RISK AND SOLVENCY RATIOS
BIMB involves in more risky
businessBIMB borrowed more funds to convert into
asset with the share capitalKFH has a bit
higher potential to
illiquidity and insolvency
BIMB has less ability to absorb
financial shock
FINANCIAL RATIOS KFH BIMB
1) Return on asset (ROA) 0.0020 -0.00852) Return of equity (ROE) 0.0139 -0.21573) Profit expense ratio (PER) 0.0618 -0.0702
1) Cash deposit ratio (CDR) 0.0089 0.02752) Loan deposit ratio (LDR) 0.6542 0.51723) Current ratio 1.7034 1.0370
1) Debt equity ratio (DER) 4.7054 26.77852) Debt to total asset ratio (DTAR) 0.7272 0.95653) Equity multiplier (EM) 5.7163 28.04784) Loan to deposit ratio (LDR) 0.5234 0.5172
LIQUIDITY RATIOS
PROFITABILITY RATIOS
RISK AND SOLVENCY RATIOS
OVERALL RESULTS BIMB is doing better in term of non
financial performance KFH is doing better in term of financial
performance
FINANCIAL GROWTH TO MAQASID AL-SHARIAH GRID MATRIX
KFH
BIMB
CONCLUSION In term of performance, is it mandatory
for Islamic banks to excel in both components? Are there any consequences if the Islamic banks are not performing well?
There is still gap between the financial and non financial progress of banks
Islamic banks have to improve their performance so that they can succeed in both financial and non financial performance
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ALL THE BEST FOR FINAL EXAM