Financial Performance And Compliance With Basel III Capital Standards: Conventional vs. Islamic Banks

Abstract

This study is a commentary on the financialperformance and quality capital of Islamic versus conventional banks currentlyoperating in the Gulf Cooperation Council (GCC) region. In addition toassessing the financial performance of the full set of banks across various GCCcountries, the study is the first toconsider the extent to which Islamic vs.conventional GCC banks comply with the new Basel III requirements of raising betterquality capital. The study uses bank-level data for 75 (55 conventionaland 20 Islamic) banks in Kuwait, United Arab Emirates, Kingdom of Saudi Arabia,Oman, Qatar, and Bahrain. Financial ratios are used tomeasure and compare Islamic vs. conventional banks performances, and weemploy a comprehensive and the most recent sample of data available in the region, consisting of cross-sections from 2003 to 2011.The results reveal that Islamic banks are, onaverage, less efficient but more profitable, more liquid, more solvent (lessrisky), and enjoyed higher internal growth rates than conventional banks during2003-2011. The results indicate that there are statistically significant differencesbetween the two types of banks, as far as profitability, solvency, and internalgrowth rate ratios are concerned; however, there are no statisticallysignificant differences in liquidity and efficiency. The results also indicatethat banks, as a whole, appear to be largely sufficiently capitalized for BaselIII. Gulf Cooperation Council banks are well positioned to absorb higherprovisions and impairment charges given the higher capital adequacy ratiosreported by most. The Common Equity Ratio, Tier 1 Capital Ratio, and Capital AdequacyRatios (CARs), for the majority of banks in 2011, comfortably satisfy theenhanced capital requirements of Basel III. The results show that Islamic bankshave, on average, noticeably higher (and significantly different) capitalratios compared to conventional institutions. With regard to theimpact of the global financial crisis on both types of the banks, the resultsindicate that Islamic banks performed better thanconventional banks during the period 2006-2009, as the former enjoys highercapitalization, higher liquidity reserves, and also maintained stronger growthcompared to conventional banks in almost countries.Findings of this study may be useful for capital-market participants, as the full set of banks across various Gulf Cooperation Councilcountries needs to be examined before any substantive conclusions can bereached about the relative performance of Islamic versus conventional banks.Further, as the full implementation of Basel III requirements will not takeplace until 2019, the results of this study will convey information that shouldencourage banks to consider the earlier implementation of Basel III capitalrequirements in order to provide themselves with a reputational boost, as wellas a competitive advantage.

Performance and Profitability of Islamic Banks in Saudi Arabia: An Empirical Analysis

“…Liquidity ratios indicate the ability of the bank to meet short-term financial obligations on time and hence avoid financial distress (Ross et al, 2005;Al-Hares et al, 2013). We measure liquidity ratios by taking cash and bank balances to total assets (CTAR) and the total loans to deposits ratio (LDR) (Al-Hares et al, 2013).…”

“…We measure liquidity ratios by taking cash and bank balances to total assets (CTAR) and the total loans to deposits ratio (LDR) (Al-Hares et al, 2013). However, it is well documented in the literature that more cash implies lower profitability (Molyneux and Thornton, 1992).…”

Effects of Banks’ Free Capital on Performance in Light of the 2008 Financial Crisis: Evidence from the GCC Region

“…They found some evidence of the effect of the increased capital on the level of assets risks. The ability of the GCC banks to comply with Basel III capital requirement accord was examined by Al-Hares et al [23]. The general conclusion of this study is that the banking industry of this region appears in a strong position to comply with the accord that will implement in 2019.…”

Are the Islamic Banks Really more Profitable than the Conventional Banks in a Financial Stable Period?

“…Profitability also helps to detect the healthiest banking system during periods of financial stability; when the banking market is in equilibrium. Profitability ratios generally measure a bank's ability to generate profits as a function of expenses, other relevant costs incurred over a period of time as well as the payment of income taxes (Islam and Salim, 2001;Abbas et al, 2012;Osama et al, 2013). In other words, this kind of quotient acts as an indicator of management evaluation.…”