The non financial and financial performance of islamic banks
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THE NON FINANCIAL AND FINANCIAL PERFORMANCE OF ISLAMIC BANKS. Presented by : SAAD AISYAH IZYANI. QUESTION. Compare 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.

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Question

QUESTION

Compare 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
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
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
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
Islamic banks’ performance. Cont..

  • قال تعالى: (إِنَّ اللَّهَ يَأْمُرُ بِالْعَدْلِ وَالْإِحْسَان)

  • “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.

  • Amslahala’mmah and Almaslahalkhasah (Public interest and private interest).

  • The right attached to someone’s else right.


Islamic banks performance cont1
Islamic banks’ performance. Cont..

قال تعالى: ( ثُمَّ أَوْرَثْنَا الْكِتَابَ الَّذِينَ اصْطَفَيْنَا مِنْ عِبَادِنَا فَمِنْهُمْ ظَالِمٌ لِّنَفْسِهِ وَمِنْهُم مُّقْتَصِدٌ وَمِنْهُمْ سَابِقٌ بِالْخَيْرَاتِ )

The meaning: “Then We gave the Book for an inheritance to those whom We chose

from among Our servants; but of them is he who makes his soul to suffer a loss, and of

them 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 cont2
Islamic Banks’ performance. Cont.. Cont..

  • Shahul and Mughees paper(2010):

  • They took in consideration on their way of stating the objectives of IB:

  • 1: maqasidshariah as it is defined by ibnA’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)


Non financial performance measures maqasid approach
NON FINANCIAL PERFORMANCE MEASURES – Cont..maqasid approach

Mughees & Shahul (2010)


Average weights for all 3 maqasid
AVERAGE WEIGHTS FOR ALL 3 MAQASID Cont..

Mughees & Shahul (2010)


Non financial result performance ratios
NON FINANCIAL Cont..RESULTPERFORMANCE RATIOS


Non financial result performance indicators
NON FINANCIAL RESULT Cont..PERFORMANCE INDICATORS

  • 1st objective : KFH

  • 3rd objective : BIMB

  • Overall (1stobj + 3rdobj) : BIMB


Financial performance measures
FINANCIAL PERFORMANCE MEASURES Cont..

  • 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
FINANCIAL PERFORMANCE MEASURES – cont… 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



Profitability ratios
PROFITABILITY RATIOS Cont..

KFH has higher ability to convert assets into net earnings

KFH has higher managerial performance

KFH makes more profit with given expense


Liquidity ratios
LIQUIDITY RATIOS Cont..

BIMB 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)


Risk and solvency ratios
RISK AND SOLVENCY RATIOS Cont..

BIMB has less ability to absorb financial shock

BIMB involves in more risky business

BIMB borrowed more funds to convert into asset with the share capital

KFH has a bit higher potential to illiquidity and insolvency


Overall results
OVERALL RESULTS Cont..

  • BIMB is doing better in term of non financial performance

  • KFH is doing better in term of financial performance



Conclusion
CONCLUSION Cont..

  • 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 Cont..

ALL THE BEST FOR FINAL EXAM 


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