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The IUP Journal of Accounting Research and Audit Practices:

A Comparative Financial Ratio Analysis of Conventional and Islamic Banks in GCC

Article Details

Pub. Date	: Oct, 2020
Product Name	: The IUP Journal of Accounting Research and Audit Practices
Product Type	: Article
Product Code	: IJARAP41020
Author Name	: Arindam Banerjee, Manoj Kapur
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 20

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Abstract

Banking system constitutes the fundamental pillar of every economy. Banks act as financial intermediaries between sectors that have excess funds and those that are in deficit. The history of banking in the Gulf Cooperation Council (GCC) region dates back to 1918 with the establishment of the first bank in Bahrain. The regional banking sector is unique in nature owing to oil wealth and lending business that focuses on building, real estate and customer loans. Over the years, the banking system has evolved globally in its offerings to suit the changing consumer demands. One of the primary determinants of this change resulted from the religious beliefs of the people resulting in the phenomenal growth of Islamic banking system. The predominance of these banks is in countries with significant Muslim population such as Iran, Pakistan and Sudan, but not restricted to them. Islamic banks operate under Sharia principles of risk sharing and interest prohibition as contrasted with conventional banks that buy capital to pool funds and sell capital to generate interest income or profit. This paper applies banks' internal factors related to their balance sheet and income statement. Using a total of 24 financial ratios pertaining to the internal factors, the paper attempts to compare and contrast between conventional and Islamic banks. This research explains the structure, operation and management of banks in the GCC region coupled with the functioning of Islamic banks. The paper also aims at determining the profitable and efficient banks among the chosen sample. The sample includes 20 banks, equally distributed between Islamic and conventional banks, using data for the period 2014 to 2017. The sample is broadly categorized based on profitability ratio, efficiency ratio, asset indicator ratio and risk ratios. Further sub-categorization is done to arrive at a total of 24 ratios. An independent t-test is used to determine a substantial ratio between Islamic and conventional banks.

Description

Dubai Islamic Bank was the first standalone Islamic Bank established in 1975. Over the years, several international banks have established Islamic banking division that upholds traditional Islamic values and offers products and services compliant with Sharia principles. Today, more than 200 Islamic banks operate in 70 countries with $2.6 bn in assets under management. In its initial years, Islamic banks witnessed their growth in South Asia and Gulf Cooperation Council (GCC) countries. Islamic banks receive funds from deposits instead of shareholders. In contrast to the conventional banks, the principle of risk sharing leads to a better return on equity for Islamic banks. Statistical evidence also shows that Islamic banks tend to achieve a higher profit margin compared to conventional banks.