Banking Is A Crucial Financial System

Published Date: 02 Nov 2017

Introduction

Banking is a crucial financial system in an economy. Modern economy is very much depends on the banking system because of increasing banking habits of people. It plays an important role in the development of the economy as money movement is mainly through banks. Banks are important aspects of any economic system, providing financial resources for industry, employment generation and development of not only financial system but also overall development of economy. Banks are crucial for the development of the economy and for the development of the industry.

Financial performance of banks guides to assess the banks policies towards various aspects , performance, efficiency & effectiveness in monetary terms. The effect of bank performance is shown in the banks return on equity, return on assets and return on investment, and profit earning. The results guide the stakeholders to assess financial viability and utilization of funds generates earnings. The assessment of performance includes net income from operating activities, profit before interest and taxes, profit after taxes and asset value. A complete analysis of bank performance must incorporate not only profitability aspects but also other measures like liquidity, leverage and efficiency. The performance analysis consists of efficient utilization of bank funds and other resources to maximize returns. The financial performance helps to analyse the overall success of the firm in particular time frame. The results can also be used to comare te other banks in the industry.

Effective finance management is vital in improving the profitability and stability of the organization. There are many studies which focused on the comparing the financial performance of Islamic and non Islamic banks. The study is carried out to evaluate the financial performance of commercial banks i.e, Islamic and non Islamic banks in Bahrain.

Research Overview

Commercial banks in Bahrain have undergone immense regulatory and technological changes. The entry of large foreign banks in the retail banking environment and the recent financial crisis is posing a tough competition for financial institutions in Bahrain. There is an increase in operating expenses due to regulatory requirements, technological and financial innovation. So the need was felt to make a thorough study of the performance of the banks in Bahrain with relation to its profitability, liquidity and credit quality. The purpose of the study is to evaluate the financial performance of banking sector of Bahrain.

Financial statements contain data which convey an understanding about some financial aspects of firm. It is necessary to understand the relationships among the elements of financial statements. Financial performance analysis are helpful to different interest groups like Management, Creditors, investors, employees, government and public in general. The liquidity, solvency, efficiency, leverage and profitability ratios and analysis are helpful to understand the total picture of the firm. Invetsors are interested in security of their funds along with solvency and profitability. Creditors are interested in the solvency position of the firm. Management is interested in efficiency and profitability. Govrenment is interested in the profitability along with tax liability of the firm. Public in general are interested in the profitability of the firm and the social contribution of the firm. Thus each interest holder is interested in one or other aspects of financial performance. In this context, analyzing and understanding financial performance becomes important. Comparative statements, common size statements, trend analysis and ratio analysis are commonly used to analyse the financial performance of the firm. It assists in decisions of various stakeholders.

Ratios are arithmetical expression of the relationship of one number and another. It helps to understand the strengths and weaknesses of firm. It’s the most powerful tool to analyse the financial performance .Liquidity, profitability, efficiency and leverage ratios are used to measure the different dimensions of bank performance. Regression and correlation analysis are also used to analyse the various performance indicators of bank performance in detail. The data analysis for correlations and regression is done using SPSS software.

Research Problem and significance

The present study is carried out to evaluate and analyse the financial performance of eight commercial banks situated in Bahrain ,that is Al baraka Islamic bank, Kuwait Finance House, Bahrain Islamic Bank, Bahrain Saudi Bank , BBK, National Bank of Bahrain ,Bahrain Development Bank and Ahli United Bank for the time period of 2001-2011. The present study is carried out to understand evaluate the relationship among the different dimensions of financial performance and independent variables. As an investor (depositors) or creditors point of view, it becomes important to study the financial performance of a bank. If the performance is not up to the standard then it would create a problem or can cause failure of a bank in near future. So from a safety point of view it is very necessary to study financial health and performance of any bank. The study mainly focuses on correlation and regression to determine the degree of relationship between dependent variables and independent variables at 5% significance level. The variables include profitability(ROA and ROE), efficiency( cost to income), liquidity(liquid assets to total assets), leverage (equity to total assets) and financial strength(capital adequacy).

Research questions and objectives

The present study is carried out to get answer to various issues such as to measure the financial performance of Bahrain banks, to evaluate the different dimensions by using varius ratios and to understand the degree of relationship among various attributes hrough different ststaistical tools like correlation and regression. The presnt study of commercial bank performance focuses on finding answer to questions like:

What the position is of banks in short term and long term solvency?

What is the efficiency of bank by taking the income and expenses?

What about return on the investment in Islamic and non Islamic banks?

What are the performance indicators of Islamic and commercial banks in terms of leverage and other aspects?

The present study focuses on fulfilling following objectives

To evaluate the operational and financial performance of selected commercial banks in Bahrain using financial tools

To understand the profitability and solvency position of selected commercial banks in Bahrain using ratio analysis

To test the predetermined hypothesis relating to the financial performance of the banks in Bahrain.

To understand the performance trend of various performance indicators

To understand the areas where improvement can be made

Research methodology

The present study of analysis of financial performance of selected commercial banks in Bahrain.

The financial performance analysis takes into account financial data with regard to different aspects of the firm. It involves computation of various ratios and interpretation of ratios in terms of different aspects. The present study uses various ratios like leverage, solvency, profitability and liquidity to achieve the objectives and to test the hypothesis.

Contribution to existing knowledge

Financial institutions are business enterprises which deal with monetary transactions which covers assets and liabilities. Banks are one of the important financial institutions in any economy. This sector is gaining importance in the present technological development era. Thus making a study on this sector is more relevant. The financial analysis of banks provides the performance of banks in general and Islamic and non Islamic banks in particular. The study surely contributes to the existing literature on bank performance analysis. The study helps the stakeholders to understand the different aspects of performance of commercial banks in Bahrain.

Chapter scheme:

The study consists of six chapters which are as follows

Chapter1- Introduction

This chapter gives the brief introduction to the study by providing the backdrop of the research that is being undertaken and also includes details about the Research Problem and significance, Research questions and objectives, Research methodology, Contribution to existing knowledge and Structure of the project.

Chapter 2-Literature review

The chapter covers the literature on financial performance of banks in general and Islamic banks in particular from various studies that is already been undertaken by others.

Chapter 3- Research Methodology

The chapter covers the information on research methods used, sample used in the study, hypothesis, sources of data, tools and techniques of analysis and scope of the study.

Chapter 4-Discussion and results and findings

The chapter includes hypothesis testing results, correlation and regression analysis and findings of the study based on the analysis carried out.

Chapter 5- Conclusion and recommendations

The chapter contains the conclusion by giving the summary of the research work carried out and gives the recommendations based on the findings of the study.

CHAPTER 2

LITERATURE REVIEW

Introduction

The analysis of commercial bank performance is carried out by many researchers in different countries. The bank performance with regard to Islamic and conventional banks is done to understand their effectiveness. The researcher has taken into account various articles on bank performance in Bahrain and other countries of the world.

Turen (1996) study on performance of BIB and locally incorporated commercial banks in Bahrain and found that BIB has got profitability and lesser risk than other commercial banks. The BIB’s common stock risk return characteristics are compared to other twenty six stocks listed in Bahrain stock exchange. The study revealed that the rate of return with regard to BIB’s stock is higher than other banks along with lesser risk in commercial banking sector . The study shows that the least risky portfolio out of the total of 2268 possible five stock portfolios contains, with other four industry stocks, only BIB's stock as the commercial banking sector stock. The study also showed that the by using techniques of Islamic banks ,the other bankers can achieve above average performance at moderate risk level.

Wheelen (1998), states that right measurement of performance of organizations depends on their objectives like profitability, market share and cost reduction. Different firms may have different objectives. Thus one measurement tool may not be suitable for all organizations. Majority of the organizations choose the financial indicators such as Return on Equity(ROE), Return on Investment(ROI), earnings Per for measurement of their development and growth. Financial performance is considered as important performance indicator by most of the firms.

Bashir, (2000) studied on the determinants of Islamic banks performance in Middle Eastern countries such as Egypt, Bahrain, Jordan, Kuwait, Qatar, Sudan, Turkey and United Arab Emirates- from 1993 through 1998 used four parameters to measure the performance of banks. They are net non-interest margin (NIM), profit before tax to total assets (PBT/TA), Return on Equity, and Return on assets. The researcher used equity to assets ratio, loan to assets ratio, non-interest earning assets to total assets ratio, short-term funding to total assets, overhead to total asset ratio, total liabilities to total assets, and ownership in addition to bank’s size to measure the internal efficiency. The author also used macroeconomic environment, regulation and financial markets to measure the external environment. The study revealed that there is a positive relationship between Islamic banks performance and capital to assets and loan to assets ratios. The study also found that the foreign-owned banks are more profitable than their domestic counterparts.

Haron 2004; Al-Kassim 2007; Zantioti 2009 states that the performance of banks in terms of financial aspect is influenced by various internal and external environmental factors. Further they also found that Return on investment and Return on Equity are the primary indicators of profitability of banks.

Alkassim, (2005) in his study taken parameters like Return on investment , Return on Equity and Net Interest Margin, bank’s size, total equity to total assets (TE/TA), total loans to total assets (TL/TA), deposits to total assets, total expenses to total asset, and non-interest expense to total expense. The researcher found that, bank’s size reacts negatively with non Islamic banks’ profitability, but positively with Islamic banks. The Islamic banks performance is positively associated with total equity there is negative relationship with non Islamic banks. Total Expenses for conventional banks impact profitability negatively whereas Total Expenses for Islamic banks help profitability. The researcher also found that the profitability of non Islamic and Islamic banks are also assisted by non interest expense.

Burhonov 2006, Haron 2004,Al-kassim 2007 states that size of the bank, short term funding, loans , leverage ratio and owners equity are the internal factors that influence the bank performance along with external factors GDP per capita. The financial performance of Islamic banks are directly and positively related to debt and equity financing , that is the profitability of Islamic bank are also influenced by proportion of debt and equity. The study also found that there is positive correlation between profitability and leverage Bashir (2000).

Raquibuz Zaman and Hormoz Movassaghi (2001) in their work emphasized on the development of Islamic banking. Their study evaluated the different products and services provided by the Islamic banks. They found that the Islamic banks products and services is not according to the traditional Islamic principles and guidelines.

Haron (2004) states that profitability of Islamic banks are directly and positively related to their expenditure level. They also found that Islamic banks size has got positive and direct relation to the expenditure incurred but the size of the bank does not have positive relation to the profitability of the bank.

Chen et al(2005) in their study used frontier analysis by making use of DEA to evaluate the technical , locative and cost efficiency of 43 commercial banks in China during 1993 to 2000.They have used interest and non interest expenses like administrative expenses , interest for deposits and the price of capital. Non interest income , loans and deposits are used as output in the study. The study revealed that state owned large and smaller banks are more efficient than medium sized commercial banks in china. It is also found that technical efficiency dominates the locative efficiency in commercial banks of china.

Burhonov (2006) reveals that there is no evidence of correlation between the profitability of the banks and short term funding. He used regression analysis in his study which states that there is no evidence of impact of macro economic variables like GDP on the profitability of banks.

Alkassim (2007) states that there is positive relationship of return on total assets with total assets and total expenses of Islamic banks in GCC.

Zantioti (2009) in their work reveals that position of equity to total assets and macro economic factors like GDP have direct positive impact on the profitability of Islamic bank.

Noor Ahmed Memon (2007), points out that the Islamic banks act as one of the important aspect in the financial structure of any society. He further states that banks should not directly enter into areas like agriculture, trade, industry and commerce. It will be no value addition by the banks in this case. Thus they should focus on their core area and act as financial intermediary.

Usman et al (2009) made a study on the efficiency dynamics of banking system with reference to reforms effect of banking sector in Pakistan. The study was made on 20 commercial banks of Pakistan to measure their efficiency using Data Envelopment Malmquist Productivity Index of total factor productivity for the period of 1990- 2005.The index used in the study measures the total productivity change between two data points for a given period of time. The study results supported the study hypothesis that the reforms in financial sector in Pakistan improved the level of efficiency in banking sector.

David A Grigorian states that Singaporean banks are far ahead than its counterpart Bahrain banks and high level competition exist among the banks from other countries in the study region, that is Bahrain. They further states that Bahrain banks are operating in par with competitor banks like Singapore banks in the regions like Quatar and UAE.

Ahmad A.(2010) in his work , has taken the qualitative measurement of performance of banks. They found that, qualitative measurements indicates that quality of products, profitability and productivity are highly ranked by the employees as compared to other indicators. The bankers are focusing not just on financial aspects but also on qualitative aspects in terms of their performance. Ultimately, qualitative aspects provide the way for financial benefits for any organization. The study also found that performance and operation of Islamic banks in Pakistan earned lot of importance with recognition among the people.

Mohammad Hassani (2010) in his work addressed the challenges and issues faced by the Islamic banks operating in Iran.

Hameeda Abu Hussain and Jasim Al-Ajmi (2011),in their study focused on the risk management strategies of banks operating in Bahrain.He stated that banks in Bahrain have acquaintance towards the risk management strategies. He also revealed that risks in banking like liquidity, credit and operational are faced not only by non Islamic banks but also Islamic banks. The risk management strategies adopted by Islamic banks are significantly different from the non Islamic banks. He also stated that Islamic banks are more prune towards various risks than non Islamic banks.

Kaleem (2000) evaluates the Islamic and non Islamic banks of Malaysia performance in before and after global financial crisis 1997-98 with data for the period of January 1994 to 1999. The study concludes that Islamic banks are more capacity to withhold crisis compare to its counter parts , that is conventional banks because f its nature of business of linking assets to transactions.

Kassim and Majid (2010) made a study to find out the evidences on the impact of financial shocks ,that is 1997 and 2007 financial crisis, on the Islamic banks vis-à-vis the non Islamic banks in Malaysia. There is mixed evidences on the effect of macroeconomic shocks on the Islamic and non Islamic banks. The researcher used descriptive statistics , the results of this indicate that Islamic banks are more resilient to the financial crisis. The results of IRF analysis state that Islamic banks responded significantly to macro economic shocks in non crisis and 2007 crisis periods. The results of VDA suggests that Islamic and non Islamic bans are vulnerable to financial shocks.

Beck et al (2010) in his study analysed the Islamic and non Islamic banks performance in the light of recent global financial crisis by focusing on the parameters like efficiency, quality of assets, business orientation and stability in various countries taking information from at four banks. The researcher found that there is more cost efficiency in Islamic banks compare to non Islamic banks in a broad cross country sample. The study also found that non Islamic banks are more cost efficient than Islamic banks in the sample countries with the existence of both Islamic and non Islamic banks. However , non Islamic banks operate in the countries with more market share of Islamic banks are cost efficient but stability is less in the same case. The study also states that more capitalization of Islamic banks and this extra capital and higher liquidity reserves explain the better performance of slamic banks during the recent crisis.

Hassan and Dridi (2010) in their study compare the performance of Islamic banks and non Islamic banks in recent financial crisis fy focusing the effect on growth of assets and credit, profitability and external ratings in cluster of countries with existence of both Islamic and non Islamic banks. The study reveals that there is no similarity of the effect of crisis on Islamic and non Islamic banks. Some Islamic banks with less effective risk management strategies affected their profitability in 2009 compared to non Islamic banks. The credit and asset growth of Islamic banks are better than non Islamic banks in 2008-09 , which contributed to the economic and financial stability. The external rating agencies re assessment of Islamic banks risk was more favourable.

Beck et al (2010) in their study taken the comparative analysis of Islamic and non Islamic banks during financial crisis by focusing on the effect of financial crisis on efficiency, stability, business orientation in countries on data of at least 4 banks. The study states that Islamic banks more cost efficient than non Islamic banks in broad cross country sample. On the other hand non Islamic banks are more cost efficient and less stable than Islamic banks in countries with a higher market share of Islamic banks. The study also found that more capiatlisation with Islamic banks and because more capital and reserves there is better performance of Islamic banks in recession.

The study aims to fill the gap by invetsing empirically the effect of recent global crisis towards the performance of banks of non Islamic banks in Bahrain. Like other GCC banks , Bahrain banks also not directly exposed to structured and securitized financial products(Ellaboudy 2010).Thus banks in Bahrain are generally less affected by recent global crisis than other emerging countries. The availability required financial resources for Bahrain and other GCC countries along with economic policies taken by the government of Bharain helped in reducing the effect of recent financial recession(Ellaboudy, 2010).

Kumbirai and Webb (2010), studied the performance of South Africa’s commercial banks the period 2005-2009. The study showed that the overall bank performance in terms of profitability, liquidity, and credit quality has been improving since 2005 up to and including 2007. The banks aggressively increased their loan portfolios, sound and effective credit risk management policies to attract the public. There is decrease in nonperforming loans. The bank performance decreased during 2008- 2009 because of global bank crisis. The study discovered that the illiquidity levels in the South African commercial banks have reached extreme levels. Even though there were some problems in banking environment in South Africa, the banks managed itself during the global economic slowdown. The banks’ low leverage, high profitability, and limited exposure to foreign assets and funding made them to be strong in the banking industry. The study also revealed that there are significant differences in profitability performance for the period 2005-2006 and the period 2008-2009. There were no statistically significant differences observed between bank performance during the two periods in terms of liquidity and credit quality.

Khrawish (2011) made research on the different attributes of performance with regard to commercial banks for the time period from 2000 to 2010 in Jordon. The researcher used time series analysis on cross sectional bank level data for the period of 10 years that is 2000-2010 in Jordon. The researcher found that the different attributes of performance of commercial banks are one of the aspect of characteristics of bank. The researcher has used the Pooled Ordinary Least Squares to study the impact of internal and external factors on the bank performance. The study results revealed that there is significant and positive relationship for various attributes of commercial banks like Return on assets and size of the bank, total assets and total liabilities, net interest margin and exchange rates and total equity and total assets and there are negative relationship among the attributes of commercial banks like Return on assets and annual growth rate for GDP and inflation rate. The research also found that there are significant and positive relationship between Return on equity and the size of the bank, total assets and total liabilities, net interest margin and exchange rates and total equity and total assets negative relationship among the attributes of commercial banks like Return on equity and annual growth rate for GDP and inflation rate.

Hidayat and Abduh (2012), studied on the effect of the changes in internal and external macroeconomic variables of Islamic banks performance in terms of financial aspects in Bahrain pre and post crisis. The study results showed that those independent variables are good predictor for Return on Equity and not Equity but not Return on Assets.

The Breusch –Pagan Lagrangian Multiplier and Haussman test stated that random effects model is better than pooled OLS and fixed effects model respectively. The random effects model states that the Islamic bank’s financial performance predictors are equity, total assets and overhead expenses. The study states that there is effect of crisis on Islamic bank performance.

Conclusion:

There are several studies on bank and their performance. Many studies are focused on comparing Islamic bank performance with conventional banks. There are studies with regard to impact of crisis on bank performance. There are studies with regard to risk levels of various banks. There are few studies on overall bank performance measurement.

CHAPTER- 3

RESEARCH METHODOLOGY

Introduction

The study intends to understand the bank performance both Islamic and non Islamic banks in Bahrain. The study focuses on different dimensions of measurement of performance. Profitability, efficiency and other parameters are taken to analyse the performance of Islamic as well as non Islamic banks in Bahrain. Research methodology is the crux of any research. An effective research requires the strong research methodology. It includes the description about data sources used, techniques used for analysis, sampling methods and scope of the study.

Purpose of Research

The purpose of research is understand, analyse or solve the business or social or individual problems. The present study is to understand the performance level of Islamic as well as non Islamic banks and is useful to stakeholders like investors, bankers and public in general. The study used qualitative and quantitative methods to study the research hypothesis.

Quantitative methods use numerical values and hypotheses are tested using statistical tools. Financial performance of banks in terms of profit , efficiency and capital adequacy is used in the sudy. Qualitative methods use variables and giving meaning to words.

Model development

Independent variables

1.cost to income ratio (efficiency)

2. Capital adequacy ( financial strength)

Leverage( equity to total assets)

Liquid assets (Liquid assets to total assets)

Dependent variables

Profitability

ROA –Return on assets

ROE-Return on equity

3.1 Data sources

The present study on bank performance of commercial banks in Bahrain uses primarily secondary data sources. Data sources have got two parts. One, primary and Secondary sources. Primary sources consist getting fresh information for the study through interviews and questionnaires. Secondary sources consist of collecting information from already available sources like journals, newspapers, articles and websites. The required data for the present study is taken from the financial statements of Albaraka Islamic Bank, Kuwait Finance House, Bahrain Islamic Bank, Bahrain Saudi Bank, BBK, National Bank of Bahrain ,Bahrain Development Bank and Ahli United Bank for achieving the research objectives which is already stated. The selected banks annual reports for the study period of 2001 to 2011 are used to evaluate performance of banks in Bahrain. The present study made use of secondary data sources like websites , print journals, magazines, e- journals and news papers are used to collect the required information.

3.2Techniques and tools of Data analysis

The present study made use of some statistical tools like trend analysis, ratio analysis, regression and correlation analysis to analyze the data collected from various sources. These statistical tools help the researcher and the stakeholders to interpret the data in effective manner. To investigate correlation between dependant and independent variable at 0.05 and 0.01 levels of significance Pearson Correlation is used. All the statistical calculations are done with the help of SPSS software package. Moreover some key ratios like profitability, leverage efficiency and leverage are calculated for understanding the financial performance of the banks in terms of various criteria’s like solvency, liquidity, profitability and quality of credit.

3.3 Hypothesis:

A test of hypothesis involves making a decision between null and alternate hypothesis in which one hypothesis is assumed to be true. The following hypothesis is taken into consideration regarding the study.

Null hypothesis is accepted if the correlation coefficient shows a significant positive relationship among the selected variables, but if the positive correlation is not significant alternative hypothesis is accepted.

Hypothesis used in the study are:

Hypothesis 1

There is impact cost to income (efficiency) on Return on Equity(profitability) of banks in Bahrain.

Hypothesis 2

There is influence of capital adequacy (financial strength) on ROA and ROE(profitability) of banks in Bahrain.

Hypothesis 3:

There is impact of leverage ratio on profitability (ROA and ROE) of banks in Bahrain.

Hypothesis 4:

There is positive correlation between customer deposits to profitability (ROE and ROA) of banks in Bahrain.

3.4 Testing Hypothesis:

ROA and interest income are the dependant variable which has an impact on the financial performance of the bank. The independent variables are total assets of the bank, asset utilization ratio which measures the asset management by the bank and the operational efficiency of the bank.

Correlation between the dependant and independent variables is calculated by analyzing the data for all the above variables from 2001-2011 to examine the influence of independent variables on the dependent variable. The above hypotheses are tested using techniques like regression and correlation.

Selection of Sample

For the study we have selected both Islamic and non Islamic banks as a sample. We used random sample and selected even banks as a sample for the study. The selected eight banks are: Albaraka Islamic Bank, Kuwait Finance House, Bahrain Islamic Bank, Bahrain Saudi Bank, BBK, National Bank of Bahrain, Bahrain Development Bank and Ahli United Bank. All these eight banks are leading banks with strong business history.

Study Period:

The study covered a period of ten years i.e. from the period 2001-2011. These ten years are event full year because during these ten years global economy experienced financial crisis and economic slowdown two times. Therefore, the study period is very significant. The study period will also help in understanding the complete picture of banks since it covers ten years.

Conclusion

The present study is descriptive in nature. It includes financial analysis. Te study is not survey based. It is analysed based on secondary data which is used from annual reports, articles from SSRN, Proquest and Emerald journals. Bank websites are also used. The study is conducted for ten years (2001 to 2011).The study has taken the quantitative measurement tool for understanding the bank measurement.

CHAPTER 4

RESULTS AND FINDINGS

DISCUSSION

Introduction

This chapter provides the findings of the data analysis and interpretation of the results. It gives information about the ratios like Return on assets, Return on equity, Capital adequacy, leverage and efficiency of islamic and non Islamic banks in Bahrain for ten years . It presents the results of the desciptive statistical analysis , Correlation and regession results are also presented to test the research hypothesis.

The various accounting ratios are used in the study to evaluate and analyse the performance of the profitability, leverage and efficiency of commercial banks. The statistical tools like correlation and regression are used to give more analysis of the data collected from various sources. The data analysis for correlations and regression is done using SPSS software.

ROA and interest income are the dependant variable which has an impact on the financial performance of the bank. The independent variables are total assets of the bank, asset utilization ratio which measures the asset management by the bank and the operational efficiency of the bank.

Correlation between the dependant and independent variables is calculated by analyzing the data for all the above variables from 2001-2011. The study is conducted to evaluate the impact of independent variables on dependent variable. The performance of banks can be measured in various parameters. The most important parameter in measuring the financial soundness or performance of banks is profitability ratios. The efficiency of banks are measured in terms of cost to income ratio. The liquidity is measured in terms of liquid assets to total assets proportion. The leverage is measured in terms of proportion of equity to total assets. Hypothesis is framed after looking into the various research carried out in the same field by different authors. Hypothesis is tested using tools like regression and correlation analysis along with mean, median and standard deviation. In this regard, ROA, ROE of eight selected banks are calculated for ten years. Return on assets is the comparison of net income and total assets. This shows the income generated by banks on its assets.

Analysis Return on Assets (ROA) of banks

The return on assets is a measurement tool that stakeholders like investors, banker’s etc use in order to evaluate profitability of any organisation. Return on assets is calculated by taking the net income of banks, over a study period, and then dividing that number by the assets of the company. The objective of this ratio is to determine how efficiently the bank is working with the assets that they have. The calculated return on assets is compared with the various other banks taken for the study.

Table 1 shows the return on assets of banks. Return on assets of selected eight banks is calculated for ten years (2001-2011).

Table 1: Analysis Return on Assets (ROA) of banks. (Figures in %)

 

ROA

 

AUB

BBK

NBB

BIB

BSB

BDB

KFH

AIB

2011

1.19

1.15

1.91

-2.07

0.94

0.15

1.24

0.22

2010

1.10

1.60

1.89

-4.24

0.60

0.49

1.81

0.47

2009

0.96

1.54

2.02

-2.13

-2.44

0.64

4.89

-2.91

2008

1.31

1.25

1.71

2.55

-2.95

3.31

3.58

0.21

2007

1.56

1.43

2.19

3.79

1.74

1.21

5.30

0.66

2006

1.24

1.94

2.20

3.00

1.64

0.71

1.42

-0.58

2005

1.37

1.95

2.04

2.31

1.41

0.68

7.50

0.70

2004

1.31

1.81

2.08

1.45

1.48

0.42

4.69

0.23

2003

1.39

1.77

1.81

1.08

1.19

-1.18

4.6

0.56

2002

1.16

1.65

1.75

1.00

-12.63

1.35

5.2

1.31

2001

1.18

1.50

1.69

1.41

2.01

1.26

4

1.25

Mean

1.25

1.6

1.94

0.74

-0.637

0.82

4

0.19

Median

1.24

1.6

1.91

1.41

1.19

0.68

4.6

0.47

Std. Deviation

0.16

0.26

0.18

2.49

4.3163

1.08

1.9

1.15

Min

0.96

1.15

1.69

-4.24

-12.63

-1.18

1.24

-2.91

Max

1.56

1.94

2.20

3.79

2.01

3.31

5.2

1.31

From the above table, it is clear that KFH has highest mean ROA compared to other banks. But recently, that is 2010 and 2011, there is decrease in ROA for KFH. BSB has least mean ROA compared to other banks. There is fluctuation in ROA in all the banks over the years. There is no clear cut increasing or decreasing trend in terms of ROA.BIB has negative ROA since three years(2011, 2010 and 2009).

The analysis for ROE(Return on Equity) of banks

Return on equity is calculated by taking the net income on the equity capital of banks. This helps the present shareholders and prospective shareholders to understand the capacity of bans to get return out of equity share capital. This is a useful tool for the investors to make decision on investment in the form of equity capital.

Table 2 shows the Return on equity of banks for the period of ten years from 2001-2011. This is another measurement parameter of profitability. Return on Equity is calculated using net income and equity capital.

Table 2: Analysis of ROE of banks (Figures in %)

 

ROE

 

AUB

BBK

NBB

BIB

BSB

BDB

KFH

AIB

2011

12.1

13.4

16.6

-17

3.9832

0.34

3.3

1.82

2010

10.7

16.3

16.3

-40

2.4123

1.19

3.2

3.17

2009

8.78

15.2

17.7

-14

-9.318

1.37

1.8

-15.74

2008

13

12.9

16

13.4

-13.06

6.07

16

1.18

2007

14.5

12.6

17.1

13.4

7.0299

1.98

28

4.32

2006

15.4

17.4

16.6

17.5

5.6777

2.9

28

-5.23

2005

12.7

16.9

14

11.4

3.2486

2.73

26

5.41

2004

10.6

16.3

16.2

7.76

5.8282

1.52

25

1.62

2003

9.97

18.7

15.1

6.63

4.902

-3.08

23

3.32

2002

7.57

17.4

14.1

5.83

-298.8

2.14

23

6.09

2001

8.58

14.7

13.8

7.44

13.433

2.92

21

5.96

Mean

11.3

15.6

15.8

1.15

-24.97

1.83

18

1.08364

Median

10.7

16.3

16.2

7.44

3.9832

1.98

23

3.17

Std. Deviation

2.5

2.02

1.33

17.4

91.125

2.2

10

6.4119

Min

7.57

12.6

13.8

-40

-298.8

-3.08

1.8

-15.74

Max

15.4

18.7

17.7

17.5

13.433

6.07

28

6.09

From the above table, it is clear that KFH has highest mean ROE compared to other banks. But recently, that is 2010 and 2011, there is decrease in ROE for KFH. BSB has least mean ROE compared to other banks. There is decrease in ROE in 2008 and 2009 for all the banks. This is due to recessionary trend in banking as well as other sectors all over the world. There in negative ROE for BIB for the last three years.

Thus the researcher can conclude that KFH stands first in terms of profitability followed by NBB. This is witnessed by ROA and ROE.

Cost to Income ratio:

The cost to income ratio is one of the primary financial measurement tools in valuation of banks. It gives a picture of relationship between the costs and income. The operating cost incurred in banks are administrative expenses and fixed expenses such as salaries and repair and maintenance expenses related to properties but does not include bad debts written off are taken into account to calculate this ratio. The ratio gives the stakeholders a clear picture the efficiency of banks. This ratio is used for improvement of net profit of the banks. This is also a useful tool in cost control. Lesser the ratio, the better is the bank position and vice versa.

The following table shows the cost to income ratio of selected eight banks for the period of ten years from 2001-2011. This measures the efficiency of banks.

Table 3 showing cost to income ratio (Figures in %)

 

Cost to Income

 

AUB

BBK

NBB

BIB

BSB

BDB

KFH

AIB

2011

68.35

73.36

62.12

75.57

64.52

78.38

58.14

91.18

2010

42.33

94.89

56.67

103.30

82.69

76.47

63.25

65.42

2009

78.77

60.23

57.14

70.12

92.86

63.08

68.35

102.86

2008

48.96

81.32

70.21

31.69

53.85

46.15

42.33

81.05

2007

76.47

78.77

46.15

33.15

47.78

48.28

78.77

73.36

2006

63.08

73.36

48.28

43.69

62.12

75.00

48.96

94.89

2005

46.15

81.32

75.00

42.98

56.67

93.75

86.31

60.23

2004

81.32

76.73

92.86

54.65

57.14

154.55

40.00

81.32

2003

76.73

93.75

53.85

58.90

70.21

76.47

50.00

76.73

2002

46.15

92.86

81.32

67.24

54.17

55.56

66.67

64.34

2001

48.28

53.85

76.73

58.46

29.63

56.53

67.63

60.58

Min

42.33

53.85

46.15

31.69

29.63

46.15

48.96

60.23

Max

81.32

94.89

92.86

103.30

92.86

154.55

86.31

102.86

Mean

61.50818

78.22182

65.48455

58.15909

61.05818

74.92909

60.94636

77.45091

Median

63.08

78.77

62.12

58.46

57.14

75

63.25

76.73

Std. Deviation

15.38607

13.11457

14.84366

20.84502

16.9535

30.17098

14.68073

14.42649

From the above table, it is clear that BBK has highest mean cost to income ratio compared to other banks. BIB has least mean cost to income ratio compared to other banks. KFH also got second least cost to income ratio among the banks taken for the study. There is increase in cost to income ratio in 2007.08 and 09 for some banks. This is due subprime crisis in banking industry.

Thus, with regard to efficiency of banks, BIB and KFH stands tall compared to other banks.

Table 4: Capital Adequacy ratio of banks (Figures in %)

Capital Adequacy Ratio (CAR), also known as Capital to Risk Weighted Assets Ratio (CRAR), is the measure of a bank's capital and is expressed as a percentage of a bank's risk weighted credit exposures. It is defined as the ratio of a bank's capital to its risk. The CAR determines a ability or capacity of bank to meet its short term liabilities and risks like operational risk and credit risk etc. The capital of bank acts as protection for potential losses. It also helps the depositors and creditors of the bank to determine the strength of the banks. Increase in ratio shows the better position of the banks and thus improves the confidence in banks.

Table 4 shows the capital adequacy of banks in Bahrain for the period of ten years from 2001-2011. Capital adequacy takes into account Tier 1 capital and Tier 2 capital to Risk weighted assets. This is the measurement parameter of financial strength.

 

CAR

 

AUB

BBK

NBB

BIB

BSB

BDB

KFH

AIB

2011

16

14.9

25.1

50.1

63.347

60.3

26

27.2

2010

14.1

18.6

22.9

23.2

55.678

57

22

23

2009

15.1

17.5

22.3

42.3

62.767

74.1

23

25.6

2008

13.8

20.1

19.3

45.1

42.733

110

18

20.1

2007

16.2

23.3

28.3

55.1

60.791

133

22

22.2

2006

14.8

24.1

28.7

30.7

86.256

41.3

24

25.33

2005

13.1

20.2

28

33.1

136.15

44.5

22

20.133

2004

20.3

25.7

27.3

28

63.796

54.8

24

22.156

2003

21.8

21

22.8

23.4

54.255

72.6

25

23.869

2002

19.7

15.6

22.8

22.6

9.0713

87.9

21

24.568

2001

20.2

20

19.7

23.7

27.06

113

20

25.668

Min

13.1

14.9

28.7

22.6

9.0713

41.3

18

20.1

Max

21.8

24.1

19.3

55.1

136.15

133

26

27.2

Mean

16.8

20.1

24.3

34.3

60.173

77.2

23

23.6204

Median

16

20.1

22.9

30.7

60.791

72.6

22

23.869

Std. Deviation

3.08

3.4

3.39

11.9

32.482

30.4

2.3

2.32184

From the above table, it is clear that BDB has highest mean Capital Adequacy ratio compared to other banks. AUB has least mean Capital Adequacy ratio compared to other banks. BSB and BDB has got maximum Tier1 and Tier 2 capital to risk weighted average assets compared to other banks with highest standard deviation. There is no specific trend of Capital Adequacy ratio for various banks.

Liquid assets total assets of banks

Table 5 shows the Liquid assets to assets of selected banks for the period of 10 years from 2001 to 2011. This is the measurement parameter of liquidity position. Liquidity position s very crucial for banks since it deals more with cash and cash related transactions. This ratio is useful in the hands of customers, bankers and regulators.

Table 5: Liquid assets total assets of banks (Figures in %)

 

Liquid assets to Total assets

 

AUB

BBK

NBB

BIB

BSB

BDB

KFH

AIB

2011

4.70

2.90

9.24

2.76

4.48

0.34

17.83

2.79

2010

3.29

8.15

14.72

2.18

2.90

0.68

12.36

0.24

2009

6.65

12.8

2.18

2.64

8.15

1.03

14.00

0.52

2008

9.24

14.88

2.64

3.19

11.03

6.18

12.87

-0.65

2007

14.72

12.90

2.90

3.73

7.22

3.17

13.23

0.56

2006

2.18

3.29

8.15

2.18

4.70

2.94

15.89

0.07

2005

2.64

6.65

6.18

2.64

3.29

1.53

12.8

0.31

2004

13.23

2.18

3.17

3.42

6.65

2.96

14.88

1.13

2003

15.89

2.64

4.70

2.60

11.28

5.46

12.90

0.79

2002

14.88

2.18

3.29

2.28

9.24

5.40

13.67

0.63

2001

12.90

2.64

6.65

3.02

14.72

6.15

14.22

0.73

Min

2.64

2.18

2.18

2.18

2.90

0.34

12.36

-0.65

Max

15.89

14.88

14.72

3.73

14.72

6.15

17.83

2.79

Mean

9.12

6.473636

5.801818

2.785455

7.605455

3.258182

14.05909

0.647273

Median

9.24

3.29

4.7

2.64

7.22

2.96

13.67

0.56

Std. Deviation

5.397644

4.939634

3.790994

0.507885

3.72627

2.228164

1.623074

0.846842

From the above table it can be concluded that there is variations with regard to liquidity position of the banks. KFH bank has got highest liquidity compared to other banks. AIB bank has got least liquidity compared to other banks. There is decreasing trend of liquid assets to total assets position for BDB. There is increasing trend of assets to total assets position for AIB. But BIB ahs got stability in its liquidity position compared to other banks.

Total equity to assets of banks

Table 6 shows equity to assets of banks for the period of ten years from 2001-2011. This is the measurement parameter of leverage position. This helps the bank o decide about increasing its equity capital position of banks.

Table 6 : Equity to total assets of Islamic banks (figures in %)

 

Equity to Total assets

 

AUB

BBK

NBB

BIB

BSB

BDB

KFH

AIB

2011

61.26

22.86

43.38

12.07

23.63

42.63

22.86

16.83

2010

24.42

23.38

25.45

10.70

24.85

40.74

23.38

18.54

2009

25.92

24.17

24.31

15.41

26.17

46.86

24.17

18.09

2008

43.38

42.63

24.42

19.04

22.61

54.49

26.54

10.04

2007

25.45

40.74

25.92

28.41

24.72

61.26

21.61

12.20

2006

24.31

46.86

22.86

17.16

28.84

24.42

21.72

13.95

2005

22.86

54.49

23.38

20.21

43.38

25.92

24.72

14.79

2004

23.38

25.92

24.17

18.72

25.45

27.91

27.33

19.82

2003

24.17

43.38

24.85

16.29

24.31

38.24

38.06

23.50

2002

23.63

25.45

26.17

17.17

4.23

43.08

99.44

26.81

2001

24.85

24.31

22.61

18.99

14.96

44.63

99.32

27.36

Min

22.86

22.86

22.61

10.70

4.23

24.42

21.61

10.04

Max

61.26

54.49

43.38

28.41

43.38

61.26

99.44

27.36

Mean

29.42091

34.01727

26.13818

17.65182

23.92273

40.92545

39.01364

18.35727

Median

24.42

25.92

24.42

17.17

24.72

42.63

24.72

18.09

Std. Deviation

12.03859

11.6572

5.834656

4.625801

9.390081

11.52485

30.18801

5.681204

There is stability in equity to total assets position for AUB except for the year 2008 and 2011. The same stability is maintained for NBB except for the year 2011. There is decreasing trend with regard to equity to total assets position of KFH. BDB has got highest mean equity to total assets ratio compared to other banks. BIB has got least mean equity to total assets ratio compared to other banks.

Customer deposits to total assets of banks

Table 7 shows the Customer deposits to total assets of banks for the period of ten years from 2001-2011. This is the measurement parameter of leverage position.

Table 7 : Customer deposits to total assets of Islamic banks (figures in %)

 

Customer Deposits to Total assets

 

AUB

BBK

NBB

BIB

BSB

BDB

KFH

AIB

2011

5.40

7.87

4.43

5.46

5.3

5.37

6.92

6.65

2010

6.15

7.63

2.81

5.40

5.9

4.96

7.31

6.02

2009

5.25

4.43

2.97

6.15

6.6

5.46

7.87

2.35

2008

4.43

2.81

5.40

7.31

6.4

5.40

7.63

1.62

2007

2.81

2.97

6.15

4.48

6.6

6.15

7.42

3.36

2006

2.97

7.87

5.25

2.90

5.6

5.25

4.17

4.43

2005

7.87

7.63

3.32

8.15

4.5

3.32

4.13

2.81

2004

7.63

5.40

7.89

4.22

3.7

5.04

4.22

2.97

2003

7.87

6.15

7.63

5.63

3.7

5.23

5.63

9.19

2002

7.63

5.25

7.87

6.23

3.2

5.22

6.23

7.68

2001

3.32

3.32

7.63

6.4

2.9

5.89

6.11

8.19

Min

2.81

2.81

2.81

4.22

2.9

4.96

4.13

1.62

Max

7.87

7.87

7.89

8.15

6.6

5.89

7.87

9.19

Mean

5.575455

5.575455

5.575455

5.666364

4.945455

5.208182

6.149091

5.024545

Median

5.4

5.4

5.4

5.63

5.3

5.25

6.23

4.43

Std. Deviation

2.006845

2.006845

2.006845

1.456944

1.399545

0.716642

1.438899

2.627723

From the table, it is clear that there is minor difference in mean Customer Deposits to Total assets of various banks with range of 4.945455 to 6.149091. There is highest mean Customer Deposits to Total assets for KFH compared to other banks. There is least mean Customer Deposits to Total assets for AIB compared to other banks. Based on the figures in the table, it can be concluded that all the banks are having almost similar Customer Deposits to Total assets position with some minor differences.

Regression Analysis

Regression Analysis technique is used to assess the relationship between a dependent variable and two or more independent variable. It helps in understanding how variation in independent variable has an impact on the value of the dependant variable. Regression analysis is carried out for different variables in each country using SPSS.

Hypothesis 1

There is impact cost to income (efficiency) on ROE (profitability) of banks in Bahrain.

Regression Model for ROE (profitability) on cost to income (efficiency):

Model Summary

R

R Square

Adjusted R Square

Std. Error of the Estimate

Change Statistics

Model

R Square Change

F Change

df1

df2

Sig. F Change

1

.165

.027

-.135

14.95703

.027

.169

1

6

.696

a Predictors: (Constant), cost to income

The above table is the Model Summary table which reports the strength of relationship between cost to income (efficiency) on ROE. The above table shows the R and R2 value. The value of R is 0.165. This value represents very low correlation but there is low degree of positive correlation. The R2 value refers to the coefficient of determination which indicates how much the dependent variable: ROE (profitability), can be explained by independent variable cost to income (efficiency).

Coefficients

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

Model

B

Std. Error

Beta

1

(Constant)

-13.849

46.184

-.300

.774

COI

.280

.683

.165

.411

.696

a Dependent Variable: ROE (profitability)

The above table, Coefficients, reveals the information of each predictor variable. This helps in predicting the ROE. It is evident from the table that both the constant and ROE do not contribute significantly to the model as the sig. Value is higher than 0.05. The B column under the Unstandardized Coefficients column states the regression equation as:

ROE (profitability)= -13.849+.280 (COI).

COI=cost to income

Thus hypothesis 1 is rejected as there is no significant impact of Cost to income on ROE at 95% confidence level.

Hypothesis 2:

There is impact of capital adequacy (financial strength) on ROA and ROE(profitability) of banks in Bahrain.

Regression Model for ROA (profitability) on capital adequacy (financial strength)

Model Summary

R

R Square

Adjusted R Square

Std. Error of the Estimate

Change Statistics

Model

R Square Change

F Change

df1

df2

Sig. F Change

1

.472

.223

.093

1.31935

.223

1.717

1

6

.238

a Predictors: (Constant), CAR

The above table is the Model Summary table which reports the strength of relationship between capital adequacy (financial strength) on ROA. The above table shows the R and R2 value. The value of R is 0.472. This value represents positive correlation and it is high degree of positive correlation. The R2 value refers to the coefficient of determination which indicates how much the dependent variable: ROA (profitability), can be explained by independent variable capital adequacy (financial strength).

Coefficients

Unstandardized Coefficients

Standardized Coefficients

T

Sig.

Model

B

Std. Error

Beta

1

(Constant)

2.280

.920

2.479

.048

CAR

-2.978E-02

.023

-.472

-1.310

.238

a Dependent Variable: ROA

The above table, Coefficients, reveals the information of each predictor variable. This helps in predicting the ROA. It is understood from the table that both the constant and ROA contribute significantly to the model as the sig. Value is less than 0.05. Thus there is impact of capital adequacy (financial strength) on the ROA (profitability) of banks. The B column under the unstandardised coefficients column states the regression equation as:

ROE (profitability)= 2.280+-2.978E-02 (CAR).

CAR=Capital adequacy ratio

Regression Model for ROE (profitability) on capital adequacy (financial strength)

Model Summary

R

R Square

Adjusted R Square

Std. Error of the Estimate

Change Statistics

Model

R Square Change

F Change

df1

df2

Sig. F Change

1

.646

.417

.320

11.57802

.417

4.295

1

6

.084

a Predictors: (Constant), CAR

The above table is the Model Summary table which reports the strength of relationship between capital adequacy (financial strength) on ROE. The above table shows the R and R2 value. The value of R is 0.417. This value represents positive correlation and it is high degree of positive correlation. The R2 value refers to the coefficient of determination which indicates how much the dependent variable: ROE (profitability), can be explained by independent variable

capital adequacy (financial strength).

Coefficients

Unstandardized Coefficients

Standardized Coefficients

t

Sig.

Model

B

Std. Error

Beta

1

(Constant)

19.406

8.072

2.404

.043

CAR

-.413

.199

-.646

-2.072

.048

a Dependent Variable: ROE

The above table, Coefficients, reveals the information of each predictor variable. This helps in predicting the ROE. It is evident from the table that both the constant and ROE contribute significantly to the model as the sig. Value is less than 0.05. Thus there is impact of capital adequacy (financial strength) on the ROE (profitability) of banks. The B column under the unstandardised coefficients column states the regression equation as:

ROE (profitability)= 19.406+-.413 (CAR).

CAR=Capital adequacy ratio

Thus hypothesis 2 is accepted as there is significant impact of capital adequacy (financial strength) on the ROA and ROE (profitability) of banks at 95% confidence level.

Hypothesis 3:

There is impact of leverage ratio on profitability (ROA and ROE) of banks in Bahrain.

Regression Model for ROA (profitability) on leverage ratio of banks in Bahrain

Model Summary

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

1

.575

.331

.219

7.78318

a Predictors: (Constant), ROA

The above table is the Model Summary table which reports the strength of relationship between leverage ratio on ROA. The above table shows the R and R2 value. The value of R is 0.575. This value represents positive correlation and it is high degree of positive correlation. The R2 value refers to the coefficient of determination which indicates how much the dependent variable: ROA (profitability), can be explained by independent variable leverage ratio of banks (Equity to total assets).

Coefficients

Unstandardized Coefficients

Standardized Coefficients

T

Sig.

Model

B

Std. Error

Beta

1

(Constant)

24.143

3.810

6.336

.001

ROA

3.656

2.124

.575

1.722

.136

a Dependent Variable: ETA

The above table, Coefficients, reveals the information of each predictor variable. This helps in predicting the ROA. It is evident from the table that both the constant and ROA contribute significantly to the model as the sig. Value is less than 0.05. Thus there is impact of leverage(equity to assets) on the ROA (profitability) of banks. The B