Background Or Review Of The Literature Finance Essay

The chief purpose of this chapter is to present the old researches or surveies which were done on the subject of comparing the public presentations and efficiencies of Conventional Banking and Islamic Banking utilizing different tools and techniques of analysis.

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Background or Review of the Literature

There are many researches done in the same country sing the comparing of Conventional and Islamic banking in assorted different states. Some of the surveies done have been mentioned below:

Faisal A. Alkassim ( 2005 ) , did a research on profitableness of both the banking systems i.e. Conventional and Islamic in Gulf Cooperation Council ( GCC ) states. In his research 16 Islamic and 18 Conventional Bankss were taken and the information was gathered from Bankscope database. The survey was done for the old ages 1997 to 2004. For his arrested development analysis 9 variables were used. These variables were: Entire Loans to Total Assets, Entire Equity to Total Assets, Return on Equity, Return on Assets, Deposits to Total Assets, Non-Interest Expense to Total Expense, Total Assets, Entire Expense to Total Assets and Net Interest Margin. Performance wise, the consequences were rather similar to each other. The consequences for the GCC states were found out to be really similar to the consequences of the old research done by Ben Naceur ( 2003 ) for Conventional Bankss and Bashir and Hassan ( 2004 ) for Muslim Bankss. Furthermore, in footings of the relationship of entire assets with profitableness, it proved to be positive for Muslim Bankss whereas it was negative for Conventional Bankss. Profitability had a negative relationship with entire equity for the Conventional Bankss whereas, it was positive for the Islamic Bankss. For both the banking systems, entire loans showed a positive relationship.

Akhtar, et Al. ( 2011 ) , did a research in Pakistan between Conventional Banks and Islamic Banks by making a comparative survey to happen out the liquidness hazard direction between both the Bankss. This survey which was done comprised 4 old ages, which covered the period of 2006-2009. The significance of capital adequateness, Return on Assets, networking capital, Return on equity and size of the house with liquidness hazard direction between Islamic and Conventional Bankss in Pakistan was studied. For this research, a sum of 12 Bankss were selected of which 6 Bankss were Islamic and the other 6 were Conventional. The information was gathered from the several bank ‘s fiscal statements for the analysis. Harmonizing to the consequences, it was found out that for both the banking theoretical accounts, there was an undistinguished but a positive relationship between the networking capital and the size of house with the liquidness hazard. From the consequences, it was besides found that the Return on Assets for Muslim Bankss and the capital adequateness for the Conventional Bankss had a positive relationship at 10 % significance degree.

Saleh and Rami ( 2006 ) conducted a research on the public presentation of the Islamic banking in Jordan. The survey was done by choosing the first and 2nd Islamic Bankss of Jordan, Jordan Islamic Bank for Finance and Investment ( JIBFI ) , and Islamic International Arab Bank ( IIAB ) . Trials had been conducted on net income maximization, liquidness and capital construction. Based on the consequences of the analysis it was found out that these Bankss had an increased efficiency, and besides that they had an expanded their investings and activities across Jordan. It was besides found that both Bankss had significantly focused on the short-run investings instead than long-run investings. The survey besides revealed that the Bank for Finance and Investment ( JIBFI ) had increased loaning activities which resulted in higher profitableness than International Arab Bank ( IIAB ) . From the findings it showed that the Bankss have a high profitableness and a high growing in recognition installation.

Hassan and Hussein ( 2003 ) did a research in Sudan to find the efficiency of banking system for the period of 1992 to 2000. There were 17 Bankss involved in this survey for the research. The tools for analysis that were used in the survey were nonparametric Data Envelopment Analysis ( DEA ) and parametric ( cost and net income efficiency ) technique. These methods were used to analyze the 5 chief efficiency steps: cost, pure proficient, scale efficiency, proficient and allocative. The cost and net income efficiency was found out to be 50 % and 55 % severally for the period of 1992 to 2000. The recommendation provided by the research workers were that in order to increase the efficiency of the Bankss, managing and allotting of the inputs is to be handled in a better manner.

Thorsten, et Al. ( 2010 ) besides did a research comparing the Conventional Bankss and Islamic Bankss on the footing of efficiency, plus quality or stableness and the concern theoretical account. This research was done on a wide cross-country sample which included states like Bangladesh, Malaysia, Jordan, Egypt, Indonesia, United Arab Emirates, Turkey, to call a few. The information was gathered from Bankscope to analyse the period from 2005-2010. Loan-deposit ratio and two other indexs are used to compare the concern orientation between the Conventional Bankss and Muslim Bankss. The bank ‘s stableness was measured utilizing the z-score. On the footing of the analysis done, the research concluded saying that Islamic Bankss have higher capitalisation and higher liquidness militias. This has had a positive consequence on the Bankss overall public presentation as compared to the Conventional Bankss during the recent economic crisis.

Hassan ( 2006 ) did a research on a panel of Bankss from all over the universe to happen out the efficiency of Islamic Bankss. The survey was done on the period from 1995 to 2001. The sample size for the research which was used to analyse was 43 Muslim Bankss from 21 Muslim states in the universe. Stochastic Cost Frontier ( SCF ) attack was used to cipher the cost efficiency. Alternate net income efficiency was used to cipher the net income efficiency. The 5 chief Data Envelopment Analysis ( DEA ) efficiency steps: cost, pure proficient, scale efficiency, proficient and allocative were correlated and computed against the conventional accounting measurings of public presentation. After analysing the consequences utilizing these tools, a decision was drawn that on an norm, Muslim Banks are comparatively less efficient as compared to Conventional Bankss in the staying portion of the universe. It was besides found out that Return on Equity and Return on Assetss are extremely correlated to these efficiency steps. These efficiency steps can in bend be used to mensurate the public presentation of Islamic Bankss by utilizing it together with the conventional accounting ratios.

A survey by Samad, A. ( 2004 ) in the same country was done in Bahrain. The research was chiefly looked upon the countries of recognition hazard, profitableness and liquidness. There were 9 different types of ratios which were used for the research. They were:

For Credit Risk – Equity to Net Loan Ratio, Total Impaired Loans to Gross Loan Ratio and Equity to Asset Ratio.

For Profitability – Tax return on Equity, Cost to Income Ratio and Return on Asset Ratio.

For Liquidity – Liquidity Assets to Deposit and Short-term Fund Ratio, Net Loan Deposit and Borrowing and Net Loans to Assetss.

A t-test was applied to the ratios for both the banking systems in Bahrain, Conventional and Islamic for the period of 1991 to 2001. From the consequences it was concluded that for liquidness and profitableness step, there is non much difference between the public presentations of both the banking systems in Bahrain. However, there was a important difference that was to be noted for their recognition public presentation.

Moin ( 2008 ) did a research comparing the public presentations of Islamic Bankss with Conventional Bankss in Pakistan. 5 Conventional Bankss of Pakistan were compared to the Meezan Bank Limited ( MBL ) , which is besides the first Islamic Bank of Pakistan. The period of survey was from 2003 to 2007. The chief country of survey for the research was hazard, profitableness and liquidness of the Bankss. The assorted different ratios used for the intent of survey were: Debt to Equity Ratio, Asset Utilization Ratio, Loan to Asset Ratio, Loan to Deposit Ratio, Return on Asset, Income to Expense Ratio and Return on Equity Ratio. F-test and t-test were used to happen the significance of differential public presentation. Harmonizing to the consequences of the trials, it was concluded that every bit compared to the Conventional Banks, MBL Islamic Bank was purportedly less efficient, less hazardous and less profitable. On the other manus, it was found that there was no difference between the two banking systems when it came to liquidness. It was besides pointed out by the writer that MBL Islamic Bank was bettering over clip.

Abdul-Majid et Al. ( 2010 ) did a research on a sample of Islamic and Conventional Bankss from 10 different states including Bahrain, Yemen, Bangladesh to call a few. The period of survey was from 1996 to 2002. In order to make the research, Output Distance Function Approach was used. They included the environmental influence like bank type, handiness of banking services and besides state ‘s macroeconomic conditions to obtain the efficiency steps. On the footing of their consequences, they concluded that Bangladesh, Bahrain and Malaysia recorded comparatively high degrees of efficiency. On the other manus it was found that Sudan and Yemen have a much higher inefficiency as compared to other states in the sample. The survey besides revealed that for the Conventional Bankss, the mean return to scale is much lower than that of Islamic Bankss.

Ramanathan ( 2007 ) besides did a research on the efficiency of Bankss in Gulf Countries Cooperation ( GCC ) states. The sample used for his survey was 9 Bankss and the survey was done for the period 2000 to 2004. The tools which were used to analyse the informations were Malmquist Productivity Index ( MPI ) and Data Envelopment Approach ( DEA ) which was besides used in the research of Ariss et Al. ( 2007 ) . The consequences showed that all the GCC states in the sample showed a decrease in productiveness in footings of engineering alteration. However, in footings of MPI, during the period 2000-2004, four out of six GCC states which included UAE, Bahrain, Kuwait and Saudi Arabia registered a advancement. The highest growing in footings of MPI was recorded by Bahrain whereas ; the highest decrease in productiveness was recorded by Qatar.

Iqbal ( 2001 ) conducted a research in the 1990 ‘s comparing the public presentation of Conventional Bankss with the Islamic Bankss. The survey included different fiscal ratios chiefly, Liquidity Ratio, Deployment Ratios, Cost/Income Ratio and Capital Asset Ratio to compare the two banking systems. Besides to happen out the profitableness of banking systems, Return on Equity Ratio and Return on Asset Ratio was used. The survey had a satisfactory consequence in footings of profitableness for the Islamic Bankss. The Muslim Bankss were found to be more stable, more profitable and good capitalized as compared to Conventional Bankss. The survey besides revealed that for all the old ages in the survey, Islamic Bankss as a group outperformed the Conventional Bankss in all countries. However, among the Islamic Bankss, in footings of growing and public presentations there were differences recorded.

Brown ( 2003 ) besides did a research on Islamic Bankss mensurating their public presentations for the period 1998 to 2001. For the intent of this research, Bankss from 19 states which included Indonesia, Jordon, Yemen, UAE, Kuwait to call a few, were analyzed. Data Envelopment Analysis ( DEA ) was used to analyse informations from 14 states to execute a cost analysis on them. Return on mean Assets and Return on Average Equity were used to prove the profitableness of the Bankss. After executing these trial, the consequences concluded that the Bankss from Bahrain, Yemen, Saudi Arabia and Kuwait had shown the best in Return on Average Assets. By looking at short-run support and liquidness support to the clients, the liquidness was calculated for the Islamic Bankss. The best liquidness was shown by the Bankss in Bahrain whereas ; the Bankss from Kuwait and Tunisia showed the lowest liquidness step.

Yudistira, D. ( 2003 ) besides did a survey to happen out the efficiency of the Islamic Bankss. The sample for this research was 18 Muslim Bankss and the period for which the survey was done was from 1997 to 2000. The chief purpose for this research was to happen out the impact of the fiscal crisis on the efficiency of these Bankss. The tool which was used to analyse the information for happening out bank ‘s efficiency was the non-parametric Data Envelopment Analysis ( DEA ) . Based on the findings it was concluded that every bit compared to the Conventional Bankss, the inefficiency for the Bankss was every bit low as 10 % significance. It was besides concluded that even after enduring from the fiscal crisis of 1998-1999, the Islamic Bankss recovered really good in public presentation. From the survey it was recommended that amalgamations for Muslim Bankss should be encouraged as diseconomies of graduated table for little and average sized Muslim Bankss was recorded.

Kablan and Yousfi ( 2011 ) besides did an empirical survey to compare the efficiency of Islamic Bankss and Conventional Bankss in the states around the Earth which have Islamic banking. The survey was done for the period 2001-2008 to cipher the efficiency of the Bankss. Stochastic Frontier Approach was used for the survey along with gauging a Tobit theoretical account for the efficiency tonss. From the survey it was found that the efficiency degrees vary from part to part. The part which recorded the highest efficiency degree at 84.64 % was Asia. It was found that the Islamic Bankss from Pakistan and Malaysia showed a better consequence as they had adopted different steps of reform. It was found that the Islamic Bankss were non that affected from the recent sub-prime crisis. On the other manus it was besides concluded that on an mean the Conventional Bankss from the choice states of survey were more efficient against their Muslim opposite numbers.

Srairi ( 2010 ) conducted a research to compare the Islamic Bankss and Conventional Bankss in the Gulf Cooperation Countries ( GCC ) part on their cost and net income efficiency. The survey was done over the period 1997 to 2007. The sample for this survey was 71 Commercial Bankss who were tested on their cost and net income efficiency. They were subsequently used to compare the efficiency against their Muslim opposite numbers every bit good. Again for this survey besides Stochastic Frontier Approach was used to cipher the efficiency of the Bankss. Harmonizing to the survey and its findings it was concluded that the Bankss in the GCC part are non that efficient in commanding cost every bit much as they are at bring forthing net incomes. It was besides found that the Conventional Bankss are by and large more efficient than the Muslim Bankss in footings of cost and net income efficiency. Finally from the survey it was besides observed that higher loan activities have a negative consequence on the cost efficiency, but it besides increases the net income efficiency for the Bankss.

Rosly and Bakar ( 2003 ) did a research in Malaysia comparing the public presentations of Conventional Bankss with Muslim Bankss. The survey was done from the period when the operations of the Islamic Bankss started i.e. 1992 to 1999. There were different fiscal ratios used for the survey which included, Return on Deposit Ratio, Asset Utilization, Interest/Investment Margin Ratio, Return on Assets Ratio and Operation Efficiency Ratio. Since it is hard to mensurate how the Islamic Bankss get their initial capital for get downing the operations, Return on Equity Ratio was non included in the survey. From the findings, it was concluded that Return on Assets Ratio was higher in the Islamic Bankss as they were able to use the current operating expenses which are carried by the Conventional Bankss. The consequence besides showed that the Islamic Bankss which operate on recognition finance are extremely improbable to surpass the Conventional Bankss in efficiency.

Last, another research was done by Kader and Asarpota ( 2007 ) in United Arab Emirates ( UAE ) comparing the Muslim Bankss with the Conventional Bankss. The information that was used for the research purposes was collected from the several Bankss. The sample for this research was three Islamic and five Conventional Bankss and the survey was done from the period 2000 to 2004. There was different public presentation variables used in this survey like profitableness, hazard and solvency, efficiency, etc. From the findings of this survey it was showed that the in comparing to Conventional Bankss the Islamic Bankss are more efficient, less hazardous and more profitable in UAE. There were two major findings from this survey: First was that for the rapid growing of Islamic Bankss in the part were chiefly because of their Profit/Loss Sharing ( PLS ) system. The Second determination or recommendation was that the Islamic Bankss in UAE should hold a different ordinance and supervising as their operations are besides rather different from their Conventional opposite numbers in UAE.

From all the above researches done in the same country of comparing the public presentations of Conventional and Islamic Bankss it can be clearly seen that there is no individual method to mensurate the public presentation of both banking systems. It can besides be noted that even though there has been many cross-country researches which has included United Arab Emirates ( UAE ) in their sample of survey, but at that place has barely been any empirical survey which has been merely specific to Bankss in UAE.

This survey is hence of import as it will add value to the researches already done in the same country which have used different fiscal ratios to mensurate the public presentations. It is besides of import as there have n’t been many surveies that have been done on UAE Bankss after the planetary recognition crisis that affected the remainder of the universe every bit good as the market of UAE to a great extent. Therefore, this survey will demo how the Islamic Bankss and Conventional Banks have performed after the crisis. Besides this will be the first clip that the research will include the recent old ages ( 2008 to 2011 ) to mensurate the public presentations as remainder all the surveies have been restricted till the twelvemonth 2010 or before ( eg. Akhtar, et Al. 2011 ; Thorsten, et al.2010 ; Moin 2008 ; Kablan and Yousfi 2011 ; Srairi 2010 ) .

Hypothesis to be Tested for This Research

On the footing of all the above researches done comparing the efficiency of the Conventional Banks and Islamic Banks, 4 different hypothesis have been created for the intent of this survey. The hypothesis has been arrived at to demo the efficiency of both the banking systems in UAE. The full hypothesis will turn out the chief research inquiry as to which of the banking system has performed better during the old ages 2008 to 2011.

The 4 hypothesis are as follows:

Hypothesis 1

Null ( H0 ) : Conventional Bankss are more profitable than Muslim Bankss from old ages 2008 to 2011

Alternate ( H1 ) : Conventional Bankss are non more profitable than Muslim Bankss from old ages 2008 to 2011

Hypothesis 2

Null ( H0 ) : Conventional Bankss are riskier than Muslim Bankss from old ages 2008 to 2011

Alternate ( H1 ) : Conventional Bankss are non riskier than Muslim Bankss from old ages 2008 to 2011

Hypothesis 3

Null ( H0 ) : Conventional Bankss have more liquidness than Muslim Bankss from old ages 2008 to 2011

Alternate ( H1 ) : Conventional Bankss do n’t hold more liquidness than Muslim Bankss from old ages 2008 to 2011

Hypothesis 4

Null ( H0 ) : Conventional Bankss are more efficient than Muslim Bankss from old ages 2008 to 2011

Alternate ( H1 ) : Conventional Bankss are non efficient than Muslim Bankss from old ages 2008 to 2011

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