Continued discussion on conventional versus Islamic banks: combining financial ratios and efficiency

  • 151 Views
  • 27 Downloads

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License

Two different types of banking systems, Islamic and conventional, dominate the banking structure in Saudi Arabia. The purpose of this paper is to contribute to the ongoing debate as to which of the two is better. Using data for the period 2014–2018, the study compares Islamic and conventional banks. It combines traditional financial ratios, Return on Assets (ROA) and Return on Equity (ROE), with Data Envelopment Analysis (DEA) to perform a comprehensive analysis. In terms of ROA, the performance of conventional banks is better than that of Islamic banks, but in terms of ROE, vice versa. DEA results show that conventional banks are more efficient than Islamic banks. In fact, in terms of ROA and ROE, Al Rajhi Bank, an Islamic bank, is the best performer. But in terms of efficiency scores from DEA, Al Rajhi ranks seventh among all banks, while NCB, a conventional bank, ranks first. Issuing shares and utilizing funds in profitable options, such as loans and advances to increase net income, are the policy recommendations for Islamic banks to further improve. In addition, as the study finds no correlation between the ratio and efficiency scores, it proposes to use a combined measure of ratio analysis and efficiency analysis for a comprehensive assessment of bank performance.

view full abstract hide full abstract
    • Table 1. Return on assets
    • Table 2. Return on equity
    • Table 3. Efficiency scores
    • Table 4. Ranking of banks
    • Table 5. Correlation analysis
    • Conceptualization
      Mohammad Imdadul Haque
    • Investigation
      Mohammad Imdadul Haque
    • Project administration
      Mohammad Imdadul Haque
    • Supervision
      Mohammad Imdadul Haque
    • Validation
      Mohammad Imdadul Haque
    • Visualization
      Mohammad Imdadul Haque
    • Writing – original draft
      Mohammad Imdadul Haque
    • Data curation
      Mohammad Rumzi Tausif
    • Formal Analysis
      Mohammad Rumzi Tausif
    • Methodology
      Mohammad Rumzi Tausif
    • Software
      Mohammad Rumzi Tausif
    • Writing – review & editing
      Mohammad Rumzi Tausif