Background On Islamic Banking And Finances Finance Essay

Fiscal establishments are working as an intermediary to ease the effectual usage of financess. The beginnings of financess are provided by single nest eggs and channelled through mediators. The mediators in Malaysia are usually practiced in two different types of banking system which comprises of the conventional banking system and Islamic banking system. The Islamic banking of Malaysia was foremost introduced in 1983. Malaysia authorities is to the full supported for the Islamic banking which the Central Bank of Malaysia has a long term aim to make an Islamic banking system analogue to the conventional system. The system so far has proceeded efficaciously and has gained a enormous response from the populace non even Muslims every bit good as non-Muslims.

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There have highly differences of the rules of money and banking system between Islamic Bankss and conventional Bankss. The cardinal difference is that Islamic Banking is based on Shariah foundation. The chief rules of Islamic banking activities comprise of the prohibition of involvement in all signifiers of dealing, set abouting concern and trade activities on the footing of just and legitimate net income giving Zakat, prohibition of monopoly, and cooperation for the benefit of society and development of all “ Halal ” facets of concern that are non prohibited by Islam ( Khan, 1983 ) . Unlike the conventional banking system need to pay fixed involvement to counterbalance the monetary value of recognition which reflecting the chance cost of money, the purposes of Islamic banking will be ever on maximising net incomes without any limitation.

Bank Islam Malaysia Berhad ( BIMB ) is the first fully fledged Islamic bank in Malaysia. However, as clip has passed, many new Bankss had developed offering legion sorts of funding merchandises, therefore consumers have a broad scope of picks at about zero exchanging cost. The betterment of engineering was surrogate Islamic Bankss to supply more advanced services to clients and this aid Islamic bank ‘s growing insignificantly. Until the twelvemonth 2011, it had 17 Islamic Bankss operate in Malaysia ( Bank Negara Malaysia, 2011 ) . However, the growing of Islamic Bankss and their public presentation are ever being questioned. Therefore, it is of import to look into the public presentation of Bank Islam Malaysia Berhad to see where the bank bases and how it had performed against its rivals.

The aim of this study is to analyze the fiscal public presentation of Bank Islam Malaysia Berhad in the period between 2010 and 2011 and do comparative appraisals of Malaysia ‘s involvement free Islamic bank ( Bank Islam Malaysia Berhad ) and the interest-based conventional commercial Bankss ( Hong Leong Bank Berhad ) . The fiscal public presentation of Bankss is measured based on standards such as liquidness ratios, hazard and solvency ratios, profitableness ratios and efficiency ratios. Furthermore, this study besides will look at the issues related to Islamic banking and finance and supply appropriate solution or recommendation.

2. Literature Reviews

A ) Issues on Islamic Banking and Finance

Islamic banking is an happening that has taken the fiscal universe by storm. Its continued developed during the period of cosmopolitan fiscal meltdown has concerned even more involvement in it. All the major non-Muslim states of the universe are viing against each other to go the nucleus of Islamic finance. However, there is non all good and good, because the alone popularity and development is followed by contentions and challenges. There are some of the cardinal issues of Islamic banking and finance are present in this study.

The first issue is an bureau job in Musharakah and Mudarabah funding. The bank depends on the other spouse ( s ) to manage the concern and do the daily determinations under musharakah. Although the bank could engage external hearers and advisers to oversee the direction of the concern, such method would take to extra costs. Islamic bank does non lend straight in direction determinations under mudarabah, but to the full relies on the concern venture ‘s legal guardian or enterpriser. Since this legal guardian is evidently an agent of the Islamic bank, therefore is of course capable to the bureau struggle of involvement. Therefore, Islamic bank undergoes the bureau job with its associated costs under both musharakah and mudarabah. Muslim Bankss operate chiefly in developing states, where there is a high grade of fiscal market defect and a prevalent presence of inefficiency and decay. When Bankss have small entree to reliable accounting information, due to a deficiency of standardised fiscal coverage demands and processs, the bureau job becomes more sensitive. The complications presented by this bureau job with the deficiency of verifiable fiscal information, has made hard the profit-sharing features of these signifiers of Islamic funding and genuinely encourage debt funding ( e.g. , murabahah and ijarah ) over equity funding ( e.g. , musharakah and mudarabah ) .

Besides, competition from conventional Bankss besides is one of the issues on Islamic banking and finance. The Muslim Bankss can supply funding, but the type of concerns is restricted by the Shariah. For illustration, the certain out investings or joint venture undertakings that considered to be harmful to the person, society or the environment are non allowed to put. As a consequence, the scope of mudarabah and musharakah for Islamic Bankss is instead more restricted than it is for conventional Bankss. Muslim Bankss contend with conventional Bankss in both the recognition and sedimentation markets. Some conventional Bankss, such as the CIMB Bank Berhad, are increasing the competition for financess by presenting Islamic sedimentation instruments. As the increased competition, Islamic Bankss happening the trouble to pull important financess in the signifier of mudarabah sedimentations, a factor that farther restricts the growing of mudarabah and musharakah funding.

Another issue on Islamic banking and finance is concerned with privateness and confidentiality issues. In general, enterprisers are independent, free-spirited people who uneasily look out their proprietary information. Entrepreneurs may non see such demands complete since supervising and joint direction are the chief characteristics of musharakah funding. However, both mudarabah and musharakah need that the bank be given elaborate information about how the concerns they finance operate and be allowed to take portion in all direction determinations. This state of affairs is likely to do hurt among those enterprisers who prefer to maintain the inside informations private in their concern operations. An enterpriser who is concerned about rivals come ining the market place is non normally willing to portion information on operating processs and the grade of profitableness. This state of affairs may good cut down the demand for mudarabah and musharakah funding.

Furthermore, Islamic merchandise and service consciousness is still low particularly in the Western and East Asiatic markets. In Malaysia, although the figure of banking consumers utilizing Islamic banking merchandises and services are lifting, visibly a bulk still have non adopted the system. Harmonizing to Barathy Doraisamy, Arunagiri Shanmugam, Ravindran Raman ( 2011 ) , the system has non wholly reached or spread to all degrees of community as comparison with the full-blown market of conventional banking. Hamid and Nordin ( 2001 ) in their survey found out that a there is a high degree of consciousness of Islamic banking but hapless information of specific Islamic banking merchandises, every bit good as a hapless apprehension of the difference between Islamic and conventional Bankss. Gerrard and Cunningham ( 1997 ) revealed that a survey on Islamic banking in Singapore found that merely a little portion of Muslims have a consciousness of the Islamic banking civilization, while non-Muslims are about non-existent of consciousness towards it. From Haron et Al. ( 1994 ) survey shows that merely 40 per centum of Muslim consumers believed faith factor as of import in sponsoring Muslim Bankss. Therefore there is a general deficiency of consciousness of Islamic banking system among society in Singapore either they are Muslims or non-Muslims ( Gerrard and Cunningham 1997 ) .

Another issue faced by the Islamic Bankss is the deficiency of skilled peoples at operational degree and a deficit of Shariah bookmans. The people working in conventional Bankss can probably understand the process of Muslim Bankss but require cognizing the Shariah regulations and ordinances in order to develop an Islamic merchandise. Harmonizing to Ainely ( 2000 ) , there is a deficit of knowing Shariah Scholars with banking experience and cognition. Harmonizing to Iqbal & A ; Molynenx ( 2006 ) , the rapid growing of Islamic banking has caused the industry non able to bring forth adequate experts needed to prolong this growing. Currently, many professionals interested in working in this industry deficiency of clip to derive the needed experience to enable them to proficiently pull off or advice on Islamic fiscal minutess. The deficiency of Islamic finance experts has affected the growing of the current industry at different degrees.

Furthermore, Islamic Bankss besides face recognition hazard like traditional Bankss. The recognition hazard would be non-payment of the bank ‘s portion by the loaner enterpriser in instance of net income sharing manners of funding ( Mudarabah and Musharakah ) . This state of affairs occurs due to asymmetric information available to borrowers and loaners – in this instance the borrower would hold internal information about the proposed undertakings and their profitableness which the bank would non hold entree. Under Murabahah contract, the rate of return is fixed and predetermined, the jobs such as inauspicious choice and moral jeopardy would non happen. However, due to non-performance of the trading spouse ( mudarib ) , recognition hazard in Murabahah contract stays in the signifier of counterparty hazard.

Last but non least, liquidness hazard is peculiarly serious for the Islamic finance industry as the Shariah compliant repo market is about non-existent and Muslim Bankss may face many restrictions when tapping interbank instruments. In add-on, this challenge causes Bankss giving profitableness and in conclusion destructing stockholder value to run an overly liquid balance sheet. Harmonizing to Sheikh ( 2006 ) , Muslim Bankss frequently face two types of liquidness jobs. Some have extra liquidness which they do n’t cognize where to put for short periods since the investing chances are few. This caused the high cost of passenger car in the signifier of certain chances of inordinate liquidness financess. On the other manus, there are Bankss face liquidness deficits when depositors withdraw money and do non hold admittance to financess for short periods. In general, Islamic assets have characteristics of long-run in nature and comparatively illiquid. Presently, there is no a job as the bulk of the Muslim states are flush with hard currency. However, the mismatch between the continuance of long-run and illiquid assets and the short-run liabilities that can show serious challenges as was obvious from the liquidness squeezing that faces western Bankss and has caused in serious diminution and near planetary fiscal meltdown under the normal market conditions ( Akhtar et. al. , 2009 ) . However, the industry is still facing deficit job with short-run investing merchandises. Some Muslim Bankss have tried to construction alternate merchandises, but the recognition evaluations and liquidness issues associating to their balance sheet caused they are inability to bring forth assets.

B ) Analysis on Islamic Banking and Finance Performance

The outstanding betterment of the Islamic banking sector throughout the universe requests for an analysis of the grade of public presentation of Islamic Bankss. Performance rating is the key to back up the growing and development of any administration. It ensures that the vision, mission, and value of the organisation are linked to a public presentation betterment enterprise. The growing of a public presentation of bank is of import for all of its stockholders such as depositors, bank directors and regulators ( Samad A. and Hassan, 1998 ) .

One of the of import topics in the fiscal environment is the efficiency of the banking system. It is hard to mensurate the efficiency and fight of fiscal establishments because the intangible nature of merchandises and services of the banking system. Many research workers have used end products, costs, efficiency and public presentation to cipher the productiveness and efficiency of the fiscal industry. The public presentation of bank can supply information to depositor and investors whether to put or to retreat financess from the bank and whether to buy or sell the bank ‘s securities. Besides that, regulators besides need to place the public presentation of bank for ordinance intents. In contrast, the bank director needs to see the public presentation of Bankss in order to cognize how good the bank has achieved towards its intent or end.

Performance rating is an of import demand for sustained growing and development of any state of affairs, which besides include Islamic banking development. Harmonizing to Hassan ( 2007 ) , it is customary in Bankss to measure the pre-determined ends and aims, as the ends and aims altering, the criterions of rating of Bankss have experienced alterations over clip. By and large, there are two classs of ratio analysis in fact-finding the fiscal public presentation of Islamic Bankss on the method analysis of anterior surveies ( Widagdo, A.K. et Al, 2008 ) . First, surveies observe the public presentation of Islamic Bankss during a certain clip ( e.g. Sarker, 1999 ; Arief, 1989 ; Wibowo and Saptutyningsih, 2004 ) . Studies under this class normally look over public presentation Muslim Bankss during several old ages and do inter-temporal comparing. The 2nd will be the surveies examine the public presentation of Islamic Banks and so compare with the public presentation of conventional Bankss ( e.g. Samad, 1999 ; Samad and Hassan, 2000 ; Rosly and Bakar, 2003 ) .

By study the fiscal public presentation of Islamic Bankss during a certain period, Sarker ( 1999 ) evaluated the efficiency of Muslim Bankss under the conventional banking model in Bangladesh. Harmonizing to the findings, if Muslim Bankss run under a conventional banking model, they could non run with its full efficiency degree. He claimed further that the Islamic bank necessitating different sets of prudential ordinances that are exclusive to each merchandise because of dissimilar hazard features of Islamic merchandises. Wibowo and Saptutyningsih ( 2004 ) inspected the fiscal public presentation of two chief Muslim Bankss in Indonesia, which are BMI and BSM, in between the twelvemonth 2000 and 2003 by utilizing a tool called CAMEL-modified. The result shows that public presentation of BMI was greater than the public presentation of BSM.

In Malaysia, empirical surveies on Malayan Islamic banking are restricted to Bank Islam Malaysia Berhad ( BIMB ) . Arif ( 1989 ) , Wong ( 1995 ) , Samad ( 1999 ) , and Samad and Hassan ( 2000 ) carry out the surveies on Bank Islam Malaysia. Arief ( 1989 ) studied the fiscal public presentation of BIMB. He discovered that BIMB represented impressive advancement during the first six old ages of its constitution. He besides gives the suggestion that BIMB should establish survey and development to assist the Ummah.

There are some surveies done in Malaysia in the instance of comparing the fiscal public presentation of Islamic Banks and conventional Bankss. Samad ( 1999 ) evaluated the productiveness of BIMB and managerial efficiency in the beginnings and utilizations of the financess and compared with conventional Bankss. He found that managerial efficiency, the productive efficiency of the mean fund use rate and net income earned by conventional Bankss are higher than BIMB. All profitableness indexes showed lower net incomes earned by BIMB than the conventional Bankss. In extra surveies, Dirar ( 1996 ) assesses the public presentation of BIMB and compares with Maybank Berhad and BSN Commercial. He has compared the growing, profitableness, liquidness and the capital adequateness ratio of the three Bankss in his survey. The research shows that BIMB ‘s major funding focal points on credit-based investing compared to the other two Bankss. Wong ( 1995 ) evaluated the public presentation of BIMB after 10 old ages of its operations. In the consequence, although the over-dependence on recognition finance remains its major defect, but BIMB ‘s accomplishments are applaudable. His survey has verified that Islamic bank has the ability to prolong its viability and development in a capitalistic fiscal environment. In footings of the societal duties, normally, BIMB has non made plenty great part in making the just distribution of income in Malaysia.

Rosly and Bakar ( 2003 ) made farther probe by analyzing the fiscal public presentation of the Islamic banking strategy and made an analysis by comparing with the conventional Bankss ‘ public presentation. The consequence presented that conventional Bankss were more efficient than Islamic banking strategy. Mahmood ( 2005 ) utilizing Bankss in Pakistan as a instance survey to compare the fiscal public presentation of Islamic banking and conventional banking. He discovered that, about in all ratios, Muslim Bankss were greater to conventional Bankss between the old ages 2000 to 2004. There is a similar survey conducted in other Middle East states, as evident in the survey of Kader, et Al. ( 2007 ) , that compared the fiscal public presentation of Islamic Bankss and conventional Bankss in the UAE was besides examined. The findings showed that there were no chief unsimilarity between Islamic Bankss and conventional Bankss in the profitableness and liquidness. In Bahrain state of affairs, Samad ( 2004 ) studied the comparative fiscal public presentation of Islamic Bankss and the mainstream Bankss during 10 twelvemonth period from 1991 to 2001. The consequence besides showed that there was no major difference between Islamic Bankss and mainstream Bankss in the profitableness and liquidness.

This study surveies on how long the spread between conventional and Muslim Bankss. Another country worth survey is the elements of the public presentation of Islamic Bankss and conventional Bankss. This prompts the current survey to contrast Islamic bank ‘s public presentation with conventional Bankss.

3. Methodology on Assessment of Performance

The chief aim of this survey is to compare the public presentation between Hong Leong Bank Berhad and Bank Islam Malaysia Berhad. The informations used in this survey are compiled from the income statement and balance sheets of selected Bankss from their one-year study of 2010 and 2011. In add-on, this survey used ratio analysis method to mensurate the fiscal public presentation of the both Bankss. Ratio analysis is being used by O’Connor ( 1973 ) and Libby ( 1975 ) in the early 1970s. In order to measure the public presentation of Bank Islam Malaysia Berhad, this survey approaches an analysis of inter-temporal public presentation of Bank Islam Malaysia Berhad. This paper compares the public presentation of Bank Islam Malaysia Berhad between the twelvemonth 2010 and 2011. In add-on to inter-temporal comparing, the survey makes comparing of the public presentation of Bank Islam Malaysia Berhad with Hong Leong Bank Berhad. The survey uses 16 fiscal ratios to buttockss bank ‘s public presentation and focuses on the 4 preponderantly group of ratios which are 1 ) Liquidity Ratios, 2 ) Hazard and Solvency Ratios, degree Celsius ) Profitability Ratios and vitamin D ) Efficiency Ratios. Due to different banking houses are non equal with regard to size, utilizing this method can take the disparities in size and compensates bank disparities.

1. Liquidity Ratios

a ) Current Ratio =

It determines how the efficiency of the bank ‘s direction ability to pay off the debt duty. A high current ratio is stand foring that the bank has good control to change over the liquid plus into hard currency to pay back the depositors.

B ) Cash Deposit Ratio ( CDR ) =

It indicates the sum of money in a bank should hold a per centum of the entire sum of money for their client have paid into the bank and do certain that they will be able to take their money out of the bank if they want to retreat. A high CDR shows that the bank is more liquid in plus to heighten depositors ‘ trust to the bank.

degree Celsiuss ) Current Asset Ratio ( CAR ) =

It determines the proportion of current plus investing to entire plus investing. A high ratio shows that a bank has more liquid assets while the lower ratio is a mark for illiquidity as more of the assets are long term in nature.

2. Hazard and Solvency Ratios

a ) Debt Ratio =

It indicates that gives a bank position how the fiscal strength of a bank along with the possible hazards to pay its debt. The debt ratio greater than 1 shows that a bank has greater debt and hazard than an plus.

B ) Time Interest Earned Ratio =

It measures how many times a bank can cover its involvement charges on a pretax footing and forestall a bank confronting bankruptcy. A higher ratio can explicate that a bank has paid excessively much debt with net incomes that could be invested or used for other undertakings for output greater returns.

degree Celsius ) Debt Equity Ratio ( DER ) =

It indicated that a bank ‘s plus lessening or loan are non refunding bank capital provides protection against those loan losingss. A lower ratio is a good mark for the bank because the bank can absorb fiscal dazes.

vitamin D ) Equity Multiplier Ratio ( EM ) =

It is the 1 of the ways similar to debt direction ratio to demo a bank ‘s entire assets per dollar of shareholders ‘ equity. A higher ratio determines that the bank has borrowed more financess to change over into plus with the portion capital involve greater hazard for a bank.

3. Profitability Ratios

a ) Net Net income Margin =

It explains that how much net income a bank brand for every RM1 it generates in gross. The higher ratio is shown that the bank ‘s direction better than other rivals.

B ) Earning per Share ( EPS ) =

It serves as an index of a bank ‘s profitableness. The higher ratio at different clip in same bank is demoing that bank more efficient at utilizing its capital to bring forth income.

degree Celsius ) Tax return on Common Asset ( ROA ) =

It determines that how much earning were generated from puting capital ( assets ) . The higher the ratio represents the best public presentation for Bankss because it represents the bank is utilizing less investing change overing into more net income.

vitamin D ) Tax return on Common Equity ( ROE ) =

It measures that a bank ‘s profitableness by uncovering how much net income a bank generates with the money stockholders have invested. A high ratio gives result the bank a high growing rate.

vitamin E ) Net income to Entire Expenses ( PER ) =

It measures that a bank ‘s managerial efficiency. A high ratio show that a bank ‘s ability maintain higher net income with given disbursals.

degree Fahrenheit ) Tax return on Deposit ( ROD ) =

It is a complex fiscal modeling accomplishment and non normally used in fiscal coverage factor. When net incomes seem to worsen and recognition measured may be tightened, a bank that carry a batch of debt relation to capital or assets are more hazard during economic rising prices.

4. Efficiency Ratios

a ) Asset Utilization Ratio ( AU ) =

It indicated that the ability of a bank ‘s direction to do the best usage of its assets to bring forth net income. A high AU means more efficient direction but it shows the older equipment that has been significantly depreciated.

B ) Operating Efficiency Ratio ( OE ) =

It is used to analyze how good a bank is utilizing its plus and liability internally. A lower operating efficiency ratio is good for the bank which better managed and improved in operating efficiency and its stockholders besides can mention to the overhead efficiency ratio and overhead load.

degree Celsius ) Entire Asset Turnover =

It measures a bank ‘s efficiency at utilizing its assets in generating net income or gross. A bank with low net income borders tend to high plus turnover.

Secondary informations are used in this survey. In collect this information, this survey utilizing several methods as listed below. First, this survey utilizing the chief resource of the Siti Hasmah Digital Library in Multimedia University such as books, diaries, magazines and other paperss related to the survey. For case, this survey consists of 10 diaries about issues on Islamic banking and finance every bit good as 10 diaries about analysis on Islamic banking and finance public presentation. Those diaries are utile in the procedure of composing the literature reappraisal. Furthermore, papers method is used to get information from beginnings in the signifier of unpublished paperss or paperss that limited publications such as solution and recommendation to the issues on Islamic banking. Therefore, the paperss that unavailable in the library are used as mention for the survey.

After measuring the fiscal public presentation between Bank Islam Malaysia Berhad with Hong Leong Bank Berhad, this survey discover some issues related to Bank Islam Malaysia Berhad and supply appropriate recommendations and solution to the bank ‘s direction to heighten the public presentation.

4. Analysis and Findingss

A ) Issues of Bank Islam Malaysia Berhad

Under liquidness public presentation, low degrees of liquidness can bespeak hapless direction or a demand for extra capital. The liquidness public presentation of Bank Islam Malaysia Berhad in the twelvemonth 2010 and 2011 was confronting a reduced tendency but the deceased was non excessively much. Although it maintains the public presentation within two old ages, but still holding some job if Bank Islam Malaysia Berhad has no taken any action. This may bespeak possible liquidness jobs for Bank Islam Malaysia Berhad in a tight recognition market in the face of a big depositor backdown or in instance of unexpected backdowns. In other word, Bank Islam Malaysia Berhad may run into liquidness deficit when depositors withdraw money and do non hold entree to support for short periods. In add-on, this may besides due to miss the hapless direction in Bank Islam Malaysia Berhad. The hapless direction which means the banker deficiency of professional cognition and accomplishments required for the altering organizational demands. In other word, Bank Islam Malaysia Berhad is non pull offing staff efficaciously and lead bank into a hapless civilization, productiveness and public presentation.

Furthermore for liquidness public presentation, a lower current ratio means that Bank Islam Malaysia Berhad may unable to pay current liabilities from the transition of current assets into hard currency. This will impact the client ‘s assurance degree toward Bank Islam Malaysia Berhad. As a consequence, Bank Islam Malaysia Berhad will confront an increased competitory and hard to pull investors in doing investing portfolio. Besides that, when a Bank Islam Malaysia Berhad fails to present expected benefits, clients will get down to surmise the efficiency of bank and altering the bank. For the direction, Bank Islam Malaysia Berhad is deficiency of fiscal control. The decreased in assets is due to hapless hard currency flow direction and deficiency of monitoring. In other word, Bank Islam has ill designed their fiscal direction systems. Therefore, it will bring forth unequal, wrong, prematurely, and irrelevant information to the clients. When this hapless direction occurs, it has straight affected the fiscal public presentation of Bank Islam Malaysia Berhad. This is why the liquidness public presentation of Bank Islam Malaysia Berhad is demoing inefficient and uneffective.

Continually, under hazard and solvency public presentation, Bank Islam Malaysia Berhad could n’t bring forth more net incomes in twelvemonth 2011 as compared with twelvemonth 2010. Although high purchase will increase the hazard, the decreasing in clip involvement earned ratio shows that Bank Islam Malaysia Berhad has paid less debt with net incomes. Overall, the hazard taken by Bank Islam Malaysia Berhad is non in high degree and the solvency still maintains in the same state of affairs. In other word, Bank Islam Malaysia Berhad is holding a moderate public presentation in the twelvemonth 2011. Based on the hazard and solvency ratios, there is a job at unstructured balance sheet by non fiting assets and liabilities. This is due to Bank Islam Malaysia Berhad ‘s inappropriate fiscal policy. In other word, the Bank Islam Malaysia Berhad is executing excessively conservative fiscal policy such as conservative investing scheme and deficiency of care of the banking system. The consequence is shown that Bank Islam Malaysia Berhad is going more aggressive in financing its growing with debt in twelvemonth 2011 comparison to the twelvemonth 2010. An increased debt equity ratio ( DER ) is a bad mark for Bank Islam Malaysia Berhad because the bank may unable to absorb fiscal dazes. Furthermore, an increased equity multiplier ( EM ) ratio of Bank Islam Malaysia Berhad determines that the bank has borrowed more financess to change over into plus with the portion capital involve greater hazard of the bank.

In footings of profitableness public presentation, the Bank Islam Malaysia Berhad is demoing hapless public presentation on standards of profitableness within two old ages. This job is happening when decreased in net income or increased assets such as high purchases of fixed assets or hapless aggregation of history receivable. Bank Islam Malaysia Berhad is non making good and requires pull offing its concern activities suitably in the approaching old ages. The latest fiscal statement shown that are holding less net income as compared to the twelvemonth 2010. In other word, it has straight affected the profitableness public presentation of the Bank Islam Malaysia Berhad and consequence in reduced profitableness ratios. The decreased in profitableness ratios are due to the decelerating down of domestic economic system in the twelvemonth 2011 and therefore investors are non traveling to do any investing in the bank. Besides that, the Bank Islam Malaysia Berhad ‘s net net income is at the unfavorable state of affairs due to non-performing loans. Bank Islam Malaysia Berhad was unable to roll up back the money will do unprofitable. The reduced in net incomes per portion ( EPS ) demoing that Bank Islam Malaysia Berhad is less efficient at utilizing its capital to bring forth income and this may take down down the portion value and portion monetary value of the bank in the secondary market.

However, it is of import to observe that there are many factors can act upon profitableness ratios, including alterations in gross revenues, volume, or disbursals, every bit good as the rival or the direction. Particularly for gross revenues, a diminution in demand due to alter in engineering, societal tendencies and environment will straight impact the bank gross revenues. Furthermore, a cyclical alteration in the market besides negatively affects demand, for illustration, unemployment and rising prices. When the economic system is a downswing and people are unemployed, he or she will non put money and instead withdrawn out all the hard currency due to the rising prices of goods and services. This will give an impact to the Bank Islam Malaysia Berhad because of the gross revenues is diminishing. When the bank can non last from this sort of state of affairs, it will confront a amalgamation and acquisition from another bank.

Last but non rent, efficiency ratio is used to analyze how good a company uses its assets and liabilities internally. From the consequence shown that, overall efficiency ratios are somewhat dropped, this shows Bank Islam Malaysia Berhad is less efficiency within two old ages. The low efficiency ratios may bespeak hapless direction of the company ‘s assets. This is due to the decreasing in entire runing income while the entire plus is kept increasing. Furthermore, low productiveness degrees and lower plus use rates are besides due to runing inefficiency. If a company can bring forth more gross revenues with fewer assets it has a higher turnover ratio which tells it is a good company because it is utilizing its assets expeditiously. While the decreased in efficiency ratios means that Bank Islam Malaysia Berhad is non efficient in runing their concern in the twelvemonth 2011. This is due to the deceasing in both runing income and disbursals. Lastly, Bank Islam Malaysia Berhad faced the deficit of skilled peoples in their organisation. This job will give a serious impact to Bank Islam Malaysia Berhad if their employee still lacks of concern cognition or hapless experience.

B ) Performance of Bank Islam Malaysia Berhad

1. Liquid Performance

In footings of liquidness, there are three types of ratios, which are the current ratio ( CR ) , hard currency sedimentation ratio ( CDR ) , and current plus ratio ( CAR ) .

a ) The current ratio ( CR ) of Bank Islam Malaysia Berhad had somewhat decreased from the twelvemonth 2010 to 2011. In twelvemonth 2011, the current ratio bead somewhat by 0.03 compared to the twelvemonth 2010.

B ) The hard currency sedimentation ratio ( CDR ) of Bank Islam Malaysia Berhad shows continuously increased from the twelvemonth 2010 to 2011. The hard currency sedimentation ratio increased by 0.04 in twelvemonth 2011 compared to the twelvemonth 2010.

degree Celsius ) The current plus ratio ( CAR ) of Bank Islam Malaysia Berhad had somewhat decreased from the twelvemonth 2010 to 2011. In twelvemonth 2011, the current plus ratio decreased by 0.03 compared to the twelvemonth 2010.

Besides from hard currency sedimentation ratio ( CDR ) , the other two ratios are somewhat decreased. The increased in hard currency sedimentation ratios ( CDR ) shows that Bank Islam Malaysia Berhad has maintained big hard currency balances which have better liquidness place. This means clients able to take their money as they wanted easy. The decreased in current ratio because of the increasing of entire liabilities is more than the increasing sum of entire assets. The decreased in current plus ratio ( CAR ) means that Bank Islam Malaysia Berhad has more illiquid assets as more of the assets are long term in nature. In overall, the liquidness of Bank Islam Malaysia Berhad in the twelvemonth 2010 and 2011 is still maintained in good forms, since the liquidness ratios that decreased non excessively much.

2. Hazard and Solvency Performance

The bank ‘s public presentation of hazard and solvency between 2010 boulder clay 2011 are measured in debt ratio, clip involvement earned ratio, debt equity ratio ( DER ) and equity multiplier ratio ( EM ) .

a ) The debt ratio of Bank Islam Malaysia Berhad had somewhat decreased over the two old ages. In twelvemonth 2011, the debt ratio had decreased 0.33 % from the twelvemonth 2010.

B ) The clip involvement earned ratio of Bank Islam Malaysia Berhad shows decreased from the twelvemonth 2010 to 2011. The clip involvement earned ratio decreased by 1.2 in twelvemonth 2011 as compared to the twelvemonth 2010.

degree Celsius ) The debt equity ratio ( DER ) of Bank Islam Malaysia Berhad had greatly increased over the two old ages. In twelvemonth 2011, the debt equity ratio ( DER ) had increased 2.65 from the twelvemonth 2010.

vitamin D ) The equity multiplier ratio ( EM ) of Bank Islam Malaysia Berhad had somewhat increased from 2010 to 2011. The equity multiplier ratio ( EM ) increased by 0.8 in twelvemonth 2011 compared to the twelvemonth 2010.

From the ratios above, the big value of debt ratio shows larger sums of assets have been financed by debt. Despite the per centum of debt ratio had somewhat decreased in the twelvemonth 2011, but the overall per centum still in high value. The increasing in equity multiplier ratio ( EM ) shows that Bank Islam Malaysia Berhad was trusting more on debt to finance its assets in the twelvemonth 2011. This statement can be supported by the addition of debt equity ratio ( DER ) . As the debt equity ratio ( DER ) increasing by and large means that the Bank Islam Malaysia Berhad becomes more aggressive in financing its growing with debt in the twelvemonth 2011. Although a batch of debt used to finance increased operations, but Bank Islam Malaysia Berhad could n’t bring forth more net incomes in twelvemonth 2011 as compared with twelvemonth 2010. Although high purchase will increase the hazard, the decreasing in clip involvement earned ratio shows that Bank Islam Malaysia Berhad has a good ability to run into its debt duties. Overall, the hazard taken by Bank Islam Malaysia Berhad non in high degree and the solvency still maintains in the same state of affairs.

3. Profitableness Performance

The ratios used to mensurate profitableness public presentation are net net income border, net incomes per portion ( EPS ) , return on plus ( ROA ) , return on common equity ( ROE ) , net income to entire disbursals ( PER ) and return on sedimentation ( ROD ) .

a ) The net net income border of Bank Islam Malaysia Berhad had greatly increased over the two old ages. The net net income border increased by 2.81 % in twelvemonth 2011 as compared to the twelvemonth 2010.

B ) The net incomes per portion ( EPS ) of Bank Islam Malaysia Berhad had greatly decreased from 2010 to 2011. The net incomes per portion ( EPS ) decreased by 5.63 sen in twelvemonth 2011 as compared to the twelvemonth 2010.

degree Celsius ) The return on entire assets ( ROA ) of Bank Islam Malaysia Berhad had somewhat decreased from 2010 to 2011. In twelvemonth 2011, the return on entire assets ( ROA ) had decreased 0.24 % from the twelvemonth 2010.

vitamin D ) The return on common equity ( ROE ) of Bank Islam Malaysia Berhad had greatly decreased over the two old ages. The return on common equity ( ROE ) decreased by 3.29 % in twelvemonth 2011 as compared to the twelvemonth 2010.

vitamin E ) The net income to entire disbursals ( PER ) of Bank Islam Malaysia Berhad had somewhat decreased from twelvemonth 2010 to 2011. In twelvemonth 2011, the net income to entire disbursals ( PER ) had decreased 0.02 from the twelvemonth 2010.

degree Fahrenheit ) The return on sedimentation ( ROD ) of Bank Islam Malaysia Berhad had somewhat decreased over the two old ages. The return on sedimentation ( ROD ) decreased by 0.01 in twelvemonth 2011 as compared to the twelvemonth 2010.

Besides net net income border, the full profitableness ratios decreased in the twelvemonth 2011. Overall, ROA is best to find the ability of bank direction to use the fiscal of bank and existent resources to bring forth net income. From the fiscal statement can see that the entire assets of Bank Islam Malaysia Berhad have increased but the net net income was lesser than earlier, which means Bank Islam unable to bring forth more net income with more investing. ROD has the positive relationship with ROA, as the ROA lessening, ROD besides lessening. Furthermore, ROD of Bank Islam Malaysia Berhad merely decrease somewhat, this shows Bank Islam Malaysia Berhad is seeking to keep in order to able to turn sedimentations into net net incomes efficaciously. For ROE has the same state of affairs as ROA, which the more money invested by stockholders non bring forth more net income. The computation shows the net net income border had increased, which means the net income of Bank Islam Malaysia Berhad is increased for every RM1 it generates in income received. From the statement, EPS of Bank Islam Malaysia Berhad was decreased. As the equity lessening, the income besides decreases, which means the bank is non really efficient at utilizing capital to bring forth income. PER is a usage to bespeak what extent bank is efficient in commanding its operating disbursals. Since PER is somewhat decreased in two old ages, this shows that Bank Islam Malaysia Berhad is less cost efficient and is doing lower net incomes. To reason, Bank Islam Malaysia Berhad shows the hapless public presentation on standards of profitableness within two old ages.

4. Efficiency Performance

The ratios used to mensurate the efficiency public presentation of Bank Islam Malaysia Berhad are plus use ratio ( AU ) , runing efficiency ratio ( OE ) , and entire plus turnover ratio.

a ) The plus use ratio ( AU ) of Bank Islam Malaysia Berhad had somewhat decreased from twelvemonth 2010 to 2011. The plus use ratio ( AU ) decreased by 0.01 in twelvemonth 2011 as compared to the twelvemonth 2010.

B ) The operating efficiency ratio ( OE ) of Bank Islam Malaysia Berhad had somewhat decreased over the two old ages. In twelvemonth 2011, the operating efficiency ratio ( OE ) decreased by 0.06 from the twelvemonth 2010.

degree Celsius ) The entire plus turnover of Bank Islam Malaysia Berhad had somewhat decreased from twelvemonth 2010 to 2011. In twelvemonth 2011, the entire assets turnover ratio decreased by 0.02 as compared to the twelvemonth 2010.

Asset use ratio ( AU ) is of import in steps of how good the bank using its assets in order to bring forth net incomes, which similar with return to entire assets ( ROA ) . Since AU is somewhat dropped, this shows Bank Islam Malaysia Berhad is less efficiency in between these two old ages. Although the disbursals of Bank Islam Malaysia Berhad had decreased, at the same clip the income of Bank Islam Malaysia Berhad besides dropped. Operating efficiency ratio ( OE ) is used to analyze how good the bank manages its resources to bring forth net incomes. A decreased in operating OE means that Bank Islam Malaysia Berhad is better managed and improved its resources to bring forth net incomes. Besides that, the entire plus turnover ratio had somewhat decreased. This means Bank Islam Malaysia Berhad is utilizing its assets less expeditiously to increase gross revenues. Since the AU and entire assets turnover decreased in the twelvemonth 2011, this implies that Bank Islam Malaysia Berhad shows the hapless efficiency public presentation within two old ages.

5. Remarks and Recommendation

A ) Solution to the Issues

Bank Islam Malaysia Berhad can seek to follow emphasis proving and scenario analysis. This method is able to measure the bank capableness to bring forth sufficient liquidness under utmost conditions particularly unexpected big sedimentation backdown. Furthermore, the bank can besides understand good the bank liquidness state of affairs by utilizing this method. The bank can place the response of the portfolio during economic variables. Hence, this analysis should be carried out more regularly. In order to transport out this analysis swimmingly, the Bank Islam Malaysia Berhad must hold sufficient latest information sing the market. Besides this, the senior direction must besides pass on this scheme throughout the bank.

Human resource direction is highly of import in any administration. This is because forces can convey success to a house, but they can besides destruct a house. Bank Islam Malaysia Berhad can put up an abroad preparation programme for its staff. The bank can back up its possible staffs to take up related classs in order to smooth up their professional cognition and accomplishments required in the Islamic banking industry. Furthermore, the bank can besides seek to set up a field trip programme with other Muslim Bankss in our state or even overseas. Bank Islam Malaysia Berhad may direct its directors to fall in the field trip programme in order for them to larn the practical experience in the Islamic banking industry from other Muslim Bankss. The directors may convey new thoughts or better ways in pull offing Islamic bank.

Furthermore, Bank Islam Malaysia Berhad should reconstitute its fiscal direction. Sing the liquidness job, the senior direction of the bank can seek to increase its current assets and diminish its current liabilities. The direction can plan a new aggregation and payment policies. The mean aggregation period should be reduced in order to acquire more hard currency in manus therefore the bank wo n’t experience stress when the current liabilities come due. Besides this, the payment period should besides be reduced. This is because the bank can salvage a batch of involvement if the current liabilities can be settled every bit early as possible. By the manner, the recognition evaluation of the bank can besides be upgraded. This may increase its clients ‘ assurance.

Bank Islam Malaysia Berhad must reconstitute its fiscal policy in order to work out unstructured balanced sheet. The bank may seek to make a new investing scheme. Harmonizing to Shariah jurisprudence, wealth can non be kept as idle fund. The direction of the bank must be able to increase its assets and maximise its net incomes in the long-run every bit good as in the short-run in order to accomplish banking efficiency. Therefore, Bank Islam Malaysia Berhad should to the full use its assets in order to raise its net income. The bank should put through the Islamic fiscal instruments particularly Mudarabah ( Joint Venture ) , Musharakah ( partnership funding ) and Istisna’a ( Commissioned Manufacture ) . These fiscal instruments are used to finance concern undertakings, so they can convey much net income to the bank. Furthermore, the economic system can besides be stimulated by puting more on concern undertakings.

In add-on, Bank Islam Malaysia Berhad must heighten its recognition monitoring procedure. The direction should pay more attending on the monthly episodes. They must do certain all the monthly payments are on agenda. The clients ‘ hazard profile should be revisited if they are unable to settle the monthly payment. By heightening the recognition monitoring procedure, the non-performing loan can besides be reduced. Furthermore, they besides need to value the assets held from clip to clip in order to guarantee the value of the assets do non fall below the security screen degree. They have to look into the jobs and solutions if there is any uncommon thing has happened particularly fiscal and economic crisis that may act upon the value of assets earnestly.

Last but non least, Bank Islam Malaysia Berhad should analyze the factors that affect the public presentation of the bank. The direction has to come out schemes that can better the public presentation such as cost film editing. The bank must see carefully in cost film editing, since arbitrary film editing may likely convey bad impacts to the bank. The bank must cut the right costs in order to derive higher net income. Besides this, there are several tactics that different from traditional methods can be applied to better public presentation. The bank can direct discretional disbursement to merely those plans that add value alternatively of simply conserve hard currency and extinguish discretional disbursement. The bank besides needs to develop an accurate and meaningful prediction procedure alternatively of simply calculating more on a regular basis. By calculating accurately, the bank is able to understand good the fiscal and economic state of affairs in order to come out robust schemes

B ) Comparative Performance between Islamic and Conventional Banking for 2010-2011

The liquidness of a bank means its ability to pay off its short-run duties when they come due. When comparing Bank Islam Malaysia Berhad against Hong Leong Bank Berhad, it is clearly shown that both Bankss maintained same liquidness place. Despite the liquidness ratios of both Bankss do non fluctuate evidently, but Bank Islam Malaysia Berhad maintained more liquidness than the Hong Leong Bank Berhad due to the authorization of the bank in supplying warrant of depositors ‘ sedimentations and trust ( amanah ) . The high liquidness ratio of Bank Islam Malaysia Berhad is because the range of investing is limited by the Shariah. Bank Islam Malaysia Berhad is non permitted to put in improper investing such as intoxicant, chancing and related undertakings, even though these investings may be extremely profitable. Therefore, this limitation cause Bank Islam Malaysia Berhad to keep higher liquid assets. The consequence is shown in Table 2. In the twelvemonth 2010, the current ratio and current plus ratio ( CAR ) of Bank Islam Malaysia Berhad shown better liquidness place while a hard currency sedimentation ratio ( CDR ) is somewhat less than Hong Leong Bank Berhad. In twelvemonth 2011, the current ratio and hard currency sedimentation ratio ( CDR ) of Bank Islam Malaysia Berhad are somewhat less than Hong Leong Bank Berhad but its current plus ratio is somewhat higher than Hong Leong Bank Berhad. Since both Bankss ‘ liquidness public presentations are in good status, it means that both Bankss are able to run into its short term duties.

In footings of hazard and solvency public presentation between both Bankss, Bank Islam Malaysia Berhad is comparatively less hazardous and more solvent than Hong Leong Bank Berhad. In Table 2, all four hazard and solvency ratios ( debt ratio, clip involvement earned ratio, debt equity ratio and equity multiplier ratio ) of Bank Islam Malaysia Berhad are less than Hong Leong Bank Berhad over the two old ages. The low hazard and solvency public presentation of Bank Islam Malaysia Berhad is due to several factors. The first factor is Bank Islam Malaysia Berhad ‘s investings in authorities securities are much larger than Hong Leong Bank Berhad. Besides that, Bank Islam Malaysia Berhad has more equity capital compared to assets is another factor of less hazardous and solvent than Hong Leong Bank Berhad. High equity capital indicates that Bank Islam Malaysia Berhad has higher daze absorbing capacity to defy more loan or plus losingss.

The profitableness ratios are used to measure bank ‘s ability to bring forth net incomes as compared to its disbursals and other relevant costs. Obviously, Hong Leong Bank Berhad has public presentation better than Bank Islam Malaysia Berhad in term of profitableness public presentation. This determination can be seen from Table 2, Bank Islam Malaysia Berhad lags behind in footings of its profitableness ratios from the twelvemonth 2010 to 2011. The highest return on entire plus ( ROA ) and return on common equity ( ROE ) of Hong Leong Bank is due to the higher net funding and better plus quality that it has. The higher net incomes per portion ( EPS ) and net net income border of Hong Leong Bank Berhad mean that the bank is more efficient at utilizing its capital to bring forth income and more effectual in change overing gross into existent net income. The hapless profitableness public presentation is due to assorted factors. The first factor is Bank Islam Malaysia Berhad does non put widely in other investing because it need comply with Shariah regulation. Bank Islam Malaysia Berhad can merely put in undertakings that comply with Islamic jurisprudence. It can non put farther than this Shariah approved undertakings even if other undertakings may gain higher returns. The 2nd factor is the investing in authorities bond and securities are the chief beginnings of gaining for Bank Islam Malaysia Berhad. Unfortunately, this investing has gained a lower rate of return than other types of investing. Another factor is Bank Islam Malaysia Berhad need to supply the warrant of depositors ‘ sedimentations and trust ( amanah ) , therefore it need maintains more liquidness than Hong Leong Bank Berhad. A high liquidness place means that Bank Islam Malaysia Berhad is in a low hazard place but it besides tends to diminish profitableness.

Efficiency ratios are used to analyze how good a bank uses its assets and liabilities. From the Table 2, it can see that all three efficiency ratios of Bank Islam Malaysia Berhad which are plus use ratio ( AU ) , runing efficiency ratio ( OE ) and entire plus turnover ratio are better than Hong Leong Bank Berhad over the past two old ages. The good efficiency public presentation is due to several factors. First, Bank Islam Malaysia Berhad is efficaciously utilizing its assets to bring forth gross revenues gross. This means that Bank Islam Malaysia Berhad is good in increased its managerial effectivity. Second, the good efficiency public presentation of Bank Islam Malaysia Berhad is because of bank cut downing operating disbursals and increasing productiveness. In an attempt to maximise profitableness and the value of stockholders ‘ investing in bank, Bank Islam Malaysia Berhad has recognized the demand for greater efficiency in its operations. This means cut downing runing disbursals and increasing the productiveness of their employees through the usage of machine-controlled equipment and improved employee preparation.

6. Decision

So far, we have done descriptive and analyse ratios to run into the aims of our survey. The aims of our survey are to measure and compare the fiscal public presentation of an Islamic banking and a conventional bank for the twelvemonth 2010 to 2011 every bit good as to reexamine issues associating to Islamic banking and urge solutions. Fiscal public presentation steps were expressed in footings of four fiscal ratios categorized as liquidness, hazard and solvency, profitableness and efficiency.

From the findings on liquidness, the inter-temporal comparing shown that Bank Islam Malaysia Berhad is still maintained in good conditions, since the liquidness ratios that decreased non excessively much. In the inter-bank comparing, the consequence shown that Bank Islam Malaysia Berhad and Hong Leong Bank Berhad maintained same liquidness place. Despite the liquidness ratios of both Bankss do non fluctuate evidently, but Bank Islam Malaysia Berhad maintained more liquidness than the Hong Leong Bank Berhad due to the authorization of the bank in supplying warrant of depositors ‘ sedimentations and trust ( amanah ) .

In footings of hazard and solvency public presentation, it is shown that the Bank Islam Malaysia Berhad is taking less hazard and solvency still in a good status from the twelvemonth 2010 to 2011. Likewise, inter-bank analysis, Bank Islam Malaysia Berhad is comparatively less hazardous and more solvent than Hong Leong Bank Berhad because of the big investing in authorities securities and has more equity capital as compared to assets.

For profitableness public presentation, Bank Islam Malaysia Berhad has shown the hapless public presentation on profitableness within two old ages since the profitableness ratios decreased in the twelvemonth 2011. This job is happening when decreased in net income or increased assets such as high purchases of fixed assets or hapless aggregation of history receivable. To get the better of this job, Bank Islam Malaysia Berhad must reconstitute its fiscal policy. The bank may seek to make a new investing scheme. In the inter-bank comparing, Hong Leong Bank Berhad has public presentation better than Bank Islam Malaysia Berhad in term of profitableness public presentation. The hapless public presentation of Bank Islam Malaysia Berhad is due to investing restraint and limited beginnings of net incomes.

In footings of efficiency public presentation, Bank Islam Malaysia Berhad shows the hapless efficiency public presentation within two old ages. This is because of the bank faced the deficit of skilled peoples in their organisation. To work out this job, Bank Islam Malaysia Berhad can put up an abroad preparation programme for its staff. In the inter-bank comparing, nevertheless, the consequence shown that the Bank Islam Malaysia Berhad has public presentation better than Hong Leong Bank Berhad in footings of efficiency public presentation. This implies that Bank Islam Malaysia Berhad is efficaciously utilizing its assets to bring forth gross revenues gross every bit good as able to cut down operating disbursals and increase productiveness.

In finishing this study, we manage to acquire some basic cognition and information on the nature of public presentation for Islamic banking in Malaysia and unfastened Gatess for future survey and geographic expedition.

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