THE NON FINANCIAL AND FINANCIAL PERFORMANCE OF ISLAMIC BANKS

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.

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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




LIQUIDITY 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)





LIQUIDITY 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





LIQUIDITY 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

THANK YOU FOR LISTENING

ALL THE BEST FOR FINAL EXAM

THE NON FINANCIAL AND FINANCIAL PERFORMANCE OF ISLAMIC BANKS

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