Background on Islamic Banking Example for Free

Since the 1970s, Islamic banking has emerged as a new reality in the international financial scene. Its philosophies and principles are however, not new, having been outlined in the Holy Qur'an and the Sunnah of Prophet Muhammad (p.b.u.h) more than 1,400 years ago. The emergence of Islamic banking is often related to the revival of Islam and the desire of Muslim to live all aspects of their live in accordance with the teachings of Islam. The Islamic Banking System (IBS) is defined as a banking system whose principles underlying its operation and activities are founded in Islamic or Shariah rules. The main factor that distinguishes Islamic banks from conventional banks is that all transactions are administered without involving elements of interest or Riba'. The principles objective of the establishment of Islamic banking is to cater the needs of Muslims in banking transactions. The success of the Islamic bank in catering the deposit and credit needs of clients proved that Shariah principle were still applicable and could be adopted by modern-day business. In Malaysia, split Islamic legislation and banking regulations exists side-by-side with those for the conventional banking system. The legal basis for the establishment of Islamic banks was the Islamic Banking Act (IBA) which came into effect on 7 April 1983. The IBA provides Central Bank of Malaysia (BNM) with powers to supervise and regulate Islamic banks, similar to the case of other licensed banks. The Government Investment Issue (GII), which are government securities issued based on Shariah principles. As the GII are regarded as liquid assets, the Islamic banks could invest in the GII to meet the prescribed liquidity requirements as well as to invent their surplus funds. The first Islamic bank established in the country was Bank Islam Malaysia Berhad (BIMB) which commenced its operations starting from 1 July 1983. In line with its objectives, the banking activities of the bank are based on Shariah principles. After more than a decade in operations, BIMB has proved to be a practicable banking institution with its activity expanding rapidly throughout the country with a network of 112 branches. The bank was listed on the Main Board of FBM KLCI formerly known as Main Board of the Kuala Lumpur Stock Exchange on 17 January 1992. The long-term objective of BNM is to create an Islamic banking system operating on a parallel basis with the conventional banking system. However, similar to any banking system, an Islamic banking system requires three fundamental elements to qualify as a viable system, i.e.:- A large number of players; A broad variety of instruments; and An Islamic money market. In addition, an Islamic banking system must also reflect the socio-economic values in Islam, and must be Islamic in both substance and form. Recognizing the above, BNM adopted a step-by-step approach to achieve the above objective. The first step to spread the virtues of Islamic banking was to disseminate Islamic banking on a nationwide basis, with as many players as possible and to be able to reach all Malaysians. After a careful consideration of various factors, BNM decided to allow the existing banking institutions to offer Islamic banking services using their existing infrastructure and branches. The option was seen as the most effective and efficient mode of increasing the number of institutions offering Islamic banking services at the lowest cost and within the shortest time frame. Following from the above, on 4 March 1993 BNM introduced a scheme known as "Skim Perbankan Tanpa Faedah" (Interest-free Banking Scheme) or SPTF in short. In terms of products and services, there are more than 40 Islamic financial products and services that may be offered by the banks using various Islamic concepts such as Mudharabah, Musyarakah, Murabaha, Nai' Bithaman Ajil (Bai' Muajjal), Ijarah, Qardhul Hasan, Istisna' and Ijarah Thumma Al-Bai'. To link the institutions and instruments, the Islamic Interbank Money Market (IIMM) was introduced on 4 January 1994. In October 1996, BNM issued a model financial statement for the banking institutions participating in the SPI requiring the banks to disclose the Islamic banking operations (balance sheet and profit and loss account) as an additional item under the Notes to the Accounts. As part of the effort to streamline and harmonize the Shariah interpretations among bank and Takaful companies, BNM established the National Shariah Advisory Council on Islamic Banking and Takaful (NSAC) on 1 May 1997 as the highest Shariah authority on Islamic banking and Takaful in Malaysia. The conceptual development of Islamic banking gained momentum after the mid-1940s. Islamic scholars such as Qureshi (1946), Ahmad (1952), Uzair (1995), Maududi (1961), Al-Arabi (1996), Siddiqi (1967), and Al-Sadr (1974) made significant contributions to the evolution of the Islamic banking model. Islamic banking has made steady progress over recent decade. In recent years it has emerged as the fastest-growing segment of global finance. There has been an unprecedented growth and deepening of Islamic banking products - Sukuks or Islamic bonds, Takaful or Islamic insurance services, equity funds, hedge funds, assets and wealth management, risk and liquidity management, real estate and corporate finance. In contrast, conventional banking has been established much longer than Islamic banking. In terms of experience and product choices conventional banks are more advanced. Conventional banking is based on a pure financial intermediation model, whereby banks mainly borrow from savers and then lend to enterprise or individuals. They make profit from the margin between the borrowing and lending rates of interest. They also provide banking services, like letters of credit and guarantees. A proportion of their profit comes from the low-cost funds that they obtain through demand deposits. Conventional banks are prohibited from trading and their shareholding is severely restricted to a small proportion of their net worth. Standard Chartered Bank Malaysia Berhad (SCBMB) is a member of the Standard Chartered Group was established in Malaysia in 1875 when its first branch opened for business at Downing Street, Penang. The bank was locally incorporated as a Standard Chartered bank Malaysia Berhad on 29 February 1984. As Malaysia's first bank with over 130 years of history, SCBMB employs more than 5,000 employees within its Malaysian operations which covers more than 30 branches across the country, a global market shared service centre, a wholly owned subsidiary - Price Solutions which markets its retail financial products, an offshore facility in Labuan. SCBMB leads the way through product innovation, consistent and strong growth performance and sustainability initiatives. It provides a comprehensive range of financial products and services including retail, Islamic and wholesale banking for individuals, small and medium-sized enterprise, as well as corporate and institutions. Malayan Banking Berhad (Maybank) is Malaysia largest financial services group and has a strong regional presence in South East Asia. Maybank aim to maximize value for their shareholders by staying diversified across geography and business units and capturing growth opportunities in high growth markets. Malayan Banking Berhad or also known as Maybank Group is the leading financial services provider in Malaysia catering the needs of consumers, investors, entrepreneurs, non-profit organizations and corporations. The Group, which has expanded international, has the largest networking among Malaysian banks of over 1,750 branches and offices in 14 countries, employing 40,000 workers and serving over 18 million customers. This study are been carried out to examine and analyze the experience with Islamic banking of Bank Islam Malaysia Berhad (BIMB), in order to evaluate the Islamic bank's performance in comparison with the Conventional banks in Malaysia, in this case are Standard Chartered Bank Malaysia Berhad (SCBMB) and Malayan Banking Berhad (Maybank) through financial ratios and tested by Descriptive Statistics and ANOVA by using Minitab version 15.0. This study is performed to measure the performance of BIMB, SCBMB and Maybank for the period of 10 years ranging from 2000 until 2009.

1.2 Differences between the Islamic Banking and Conventional Banking

One must refrain from making a direct comparison between Islamic banking and conventional banking. This is because Islamic banking and conventional banking are extremely different in many ways. The main difference is that Islamic Banking is based on Shariah foundation. Thus, all dealing, transactions, business approach, product feature, investment focus, responsibility are derived from the Shariah law, which lead to the significant difference in many part of the operations the conventional banking. The foundation of Islamic bank is based on the Islamic faith and must stay within the limits of Islamic Law or the Shariah in all of its action and deeds. The original meaning of the Arabic word Shariah is "the way to the source of life" and is now used to refer to legal system in keeping with the code of behavior called for by the Holly Qur'an. Among the governing principles of an Islamic bank are: The absence of interest-based (Riba') transactions; The avoidance of economic activities involving domination (Zulm); The avoidance of economic activities involving speculation (Gharar); The introduction of an Islamic tax, Zakat The discouragement of the production of goods and services which contradict the Islamic value (Haram) On the other hand, conventional banking is essentially based on the debtor-creditor relationship between the depositors and the bank on one hand, and between the borrowers and the bank on the other. Interest is considered to be the price of credit, reflecting the opportunity cost of money. Islamic law considers a loan to be given or taken, free of charge, to meet any contingency. Thus in Islamic banking, the creditor should not take advantage of the borrower. When money is lent out on the basis of the interest more often that it leads to some kind of injustice. The first Islamic principle underlying for such kind of transactions is "deal not unjustly, and ye shall not be dealt with unjustly" [2:279] which explain why commercial banking in an Islamic framework is not based on the debtor-creditor relationship. The other principle pertaining to financial transactions in Islam is that there should not be any reward without taking a risk. This principle is applicable to both labor and capital. As no payment is allowed for labor, unless it is applied to work, there is no reward for capital unless it is exposed to business risk. Thus, financial intermediation in an Islamic framework has been developed on the basis of the above-mentioned principles. Consequently financial relationships in Islam have been participatory in nature.

REVIEW OF THE RELATED LITERATURE

2.1 Islamic Banking and Conventional Banking

In 1963, Islamic banking came into existence on an experiment basis on a small scale in a small town of Egypt. The success of this experiment opened the doors for a separate and distinct market for Islamic banking and finance and as a result, in 1970s Islamic banking came into existence at a moderate scale and a number of full-fledge Islamic banks was introduced in Arabic and Asian countries. Most of these Islamic banks were in Islamic countries. Having started on a small scale, Islamic banks and non-banking financial institutions are now operation even on more intensive scale. Today, Islamic banks are operating in more than sixty countries with assets base of over $166 billion and a marked annual growth rate of 10%-15%. In the credit market, market share of Islamic banks in Muslim countries has risen from 2% in the late 1970s to about 15% today. These facts and figures certify that Islamic banking is viable and efficient as the conventional banking. (Aggarwal and Yousaf 2000). Islamic banking is regarded as a fastest growing market, on the other side, it is not free from issues, problem, and challenges. Numerous studies have been performed since the inception of the modern Islamic banking and finance. Conceptual issues underlying interest free financing (Ahmad 1981, Karsen 1982) have been the prime focus of these previous studies on Islamic banks. It is hard to find enough coverage in the existing literature on the issues of viability of Islamic banks and ability to mobilize savings, pool risk and facilitate transactions (Hassan & Basher 2005). However, there are few studies that have focused on policy implications of eliminating interest payments. (Khan and Mirakhor 1987)

2.2 Ratio Analysis

Kader & Asarpota (2007) applied financial ratio analysis to assess the performance of the Malaysian Islamic bank and UAE Islamic banks respectively. Similarly, to measure efficiency of Islamic banks in Bangladesh, Sarkar (1999) utilized banking efficiency model and claimed that Islamic banks can stay alive even within a traditional banking architecture in which Profit-and-Loss Sharing (PLS) modes of financing are less dominated. Sarkar (1999) further claimed that Islamic financial products have different risk characteristics and consequently different prudential regulations should be in place. Samad (1999) evaluated the relative efficiency position of the Islamic bank during 1992-1996, and compared it with the conventional banks in the country. His finding was that Bank Islam Malaysia enjoyed relatively higher managerial efficiency than the conventional banks. Samad and Hassan (2000) evaluated inter-temporal and interbank performance in profitability, liquidity, risk and solvency, and community involvement of an Islamic bank (Bank Islamic Malaysia Berhad (BIMB) over 14years for the period 1984-1997. The study is inter-temporal in that it compares the performance of BIMB between the two time period 1984-1989 and 1990-1997. This is not a new method (Elyasiani 1994). To evaluate interbank performance, the study compares BIMB with two conventional banks (one smaller and one larger than BIMB) as well as with 8 conventional banks. Using financial ratios to measure these performance and F-test and T-test to determine their significance, the results show that BIMB make statistically significance improvement in profitability during 1984-1997, however, this improvement when compared with conventional banks is lagging behind due to several reasons. This result is consistent with that of Samad (1999) and Hassan (1999). The study also revealed that BIMB is relatively less risky and more solvent as compared to conventional banks. These results also conform to risk-return profile that is BIMB is comparatively less profitable and less risky. Performance evaluation of BIMB indicates that it is more liquid as compared to the group of 8 conventional banks. Results of the primary data gathered by surveying 40% to 70% bankers identify that lack of knowledgeable bankers in selecting, evaluating and managing profitable project is a significant cause why Musharaka and Mudarabah are not popular in Malaysia. Abdus Samad (2004) in his paper examined the comparative performance of Bahrain's interest-free Islamic banks and the interest-based conventional commercial banks during the post Gulf war period 1991-2001. Using nine financial ratios in measuring the performances with respect to (a) Profitability, (b) liquidity risk, and (c) credit risk, and applying Student's t-test to these financial ratios, the paper concludes that there exists a significant difference in credit performance between the two sets of banks. However, the study found no major difference in probability and liquidity performances between Islamic banks and conventional banks. Kader and Asarpota (2007) utilized bank level data to evaluate the performance of the UAE Islamic banks. Balance sheets and income statements of 3 Islamic banks and 5 conventional banks in the time period 2000-2004 are used to compile data for the study. Financial ratios are applied to examine the performance of the Islamic banks in profitability, liquidity, risk and solvency, and efficiency. The results of the study show that in comparison with UAE conventional banks, Islamic banks of UAE are relatively more profitable, less liquid, less risky, and more efficient. They conclude that there are two important implications associated with this finding. First, attributes of the Islamic profit-and-loss sharing banking paradigm are likely to be associated as a key reason for the rapid growth in Islamic banking in UAE. Second, UAE Islamic banks should be regulated and supervised in a different way as the UAE Islamic banks in practice are different from UAE conventional banks. According to Munawar Iqbal (2001) there is a serious lack of empirical studies on Islamic banking. This research attempts to fill that gap to some extent. Using data for the 1990-1998 periods, several hypotheses and common perceptions about the practice of Islamic banking have been tested. The performance of Islamic banks has been evaluated using both trend and ratio analyses. For this purpose, some objective "benchmark" for various ratios has been developed for the first time. The performance of Islamic banks has also been compared with a 'control group' of conventional banks. It has been found that in general Islamic banks have done fairly well during the period under study. Studies which used financial ratio analysis have generally found, contrary to the earlier hypotheses, that Islamic banks are more efficient than conventional banks in terms of resource use, cost effectiveness, profitability, asset quality, capital adequacy and liquidity ratios than conventional banks (Iqbal 2001, Hassan and Bashir 2005). Commercial banks, however, have a more favorable operations ratio. (Hassan and Bashir 2005). According to Muhammad Jaffar and Irfan Manarvi (2011), the study examined and compared the performance of Islamic and conventional banks operating inside Pakistan during 2005 to 2009 by analyzing CAMEL test standard factors such as capital adequacy, asset quality, management quality, earning ability, and liquidity position. The financial data for the study was mined from the bank's financial statements existing on state bank of Pakistan website. A sample of 5 Islamic banks and 5 conventional banks were selected to measure and compare their performance. Each year the average ratios were considered, because some of the young Islamic banks in the sample do not have 5 years of financial data. CAMEL test which is a standard test to check the health of financial institutions was used to determine the performance of Islamic and conventional banks. The study found that Islamic banks performed better in possessing adequate capital and better liquidity position while conventional banks pioneered in management quality and earning ability. Asset quality for both modes of banking was almost the same, conventional banks recorded slightly smaller loans loss ratio showing improved loan recovery policy whereas, UNCOL ratio analysis showed nominal better performance for Islamic banks. Jill Johns, Marwan Izzeldin and Vasileos Pappas, examined efficiency in Islamic and conventional banks in the GCC region (2004-2007) using financial ratio analysis (FRA), Islamic banks are less cost efficient more revenue and profit efficient than conventional banks. Siti Rochmah Ika (2008) investigated whether the financial performance of Islamic banks in the period before fatwa is different from that in the period after fatwa. Furthermore, this study intends to examine the comparative financial performance of Islamic banks and conventional banks in the period both before fatwa and after fatwa. In evaluating bank's performance, this study used various financial ratios categorized as profitability, liquidity, risk and solvency, and efficiency. To determine the difference, this study used t-test. The result of this study indicates that, in general, comparison of financial performance of Islamic banks in the period before fatwa and after fatwa does not show statistically difference. Likewise, the result of interbank analysis also indicates that there is no major difference in performance between Islamic banks and conventional banks in the period both before fatwa and after fatwa. Studies which use financial ratio analysis have generally found, contrary to the earlier hypotheses, that Islamic banks are more efficient than conventional banks in terms of resources use, cost effectiveness, profitability, asset quality capital adequacy and liquidity ratios than conventional banks (Iqbal 2001, Hassan and Bashir 2005). Commercial banks, however, have a more favorable operations ratio (Hassan and Bashir 2005).

PROBLEM DEFINITION AND OBECTIVES OF THE STUDY

3.1 Problem Definition

Islamic and conventional bank was different from each other from many aspects in which the Islamic bank have to follow the Shariah rules, while the conventional bank have no constraint in their transactions and day to day operation. Besides that, conventional bank offered high interest rate to the customers. Many are skeptical about Islamic bank's performance. There are several reasons for this. First, Islamic banks are non-conventional financial institution since interest is the corner stone of conventional banks. Second, Islamic banks operate under dual-constraints. While operating as a commercial bank, Islamic banks obey not only conventional business laws of the land, but also the Islamic laws. They have to sacrifice many profitable investment opportunities because those are not permitted under the divine laws of Islam. Given the afore-mentioned scenario, how has Islamic bank in Malaysia performed as compared to its counterparts in the banking sector?

3.2 Objectives of the Study

The present study attempts to examine, analyze and compare the performances of Islamic bank and two conventional banks in Malaysia in terms of the following: Profitability; Liquidity; Risk and solvency; and Efficiency

SIGNIFICANCE, SCOPE AND LIMITATIONS OF THE STUDY

Significance of the Study

This study will provide information of the evaluation in terms of profitability, liquidity, risk and solvency and efficiency of an Islamic bank, Bank Islam Malaysia Berhad (BIMB) over ten years for the period ranging from 2000-2009. The study compares the performance of BIMB between the conventional banks of Standard Chartered Bank Malaysia Berhad (SCBMB) and Malayan Banking Berhad (Maybank). This research project provides useful information about the strength and weaknesses of the BIMB, SCBMB and Maybank, so that the BIMB, SCBMB and Maybank may improve its operation. The findings of this study show the performance of BIMB, SCBMB and Maybank for the period over the 10 years. Besides, this study also will provide useful information that can be used as a reference or guideline to help other researcher in conducting any similar research. The study focuses only on one selected Malaysian Islamic Bank and another two selected Malaysian Conventional Bank. These banks are Bank Islam Malaysia Berhad (BIMB), Standard Chartered Bank Malaysia Berhad (SCBMB), and Malayan Banking Berhad (Maybank).

Scope and Limitations of the Study

The presents study focuses on only three selected Malaysian Commercial Banks which comprise one Islamic bank and two conventional banks. These banks are Bank Islam Malaysia Berhad, Malayan Banking Berhad, and Standard Chartered Bank Malaysia Berhad included in the sample for the following reasons:

Bank Islam Malaysia Berhad (BIMB)

As the first Islamic bank in Malaysia As a leader in Islamic bank in Malaysia

Malayan Banking Berhad (Maybank)

As the largest financial service group in Malaysia. As a leader in banking industry over a 5 decades in Malaysia Largest networks among Malaysian banks over 14 countries.

Standard Chartered Bank Malaysia Berhad (SCBMB)

As the first bank established in Malaysia. Leading the way of Asia, Africa and Middle East. The sample period for the study is only ten years which using yearly basis ranging from the year of 2000 until 2009. The data are analyzed in terms of performances for selected banks included in the samples by the Financial Ratio Analysis (FRA) approach and tested by using Descriptive Statistics and ANOVA by using Minitab version 15.0 only.

HYPOTHESES

Given the objectives of the study that have been highlighted in section 3.2, the study attempts the following null hypotheses. There are no significant differences in the statistical distributions of performances among the banks included in the samples which are BIMB, Maybank and SCBMB, in terms of: Profitability; Liquidity; Risk and solvency; and Efficiency

DATA AND EMPIRICAL METHODS

6.1 Data

According to the Subramanyam & Wild (2009) financial statement is a commonly used measure of managerial performance. Financial Statement analysis involves using the output of the standard business information system found in all businesses to judge the performance and riskiness at an instance or over time. A business may have other information systems for managers but all business must conform to generally accepted standards with their financial statements. In examining and comparing the performances of Islamic and conventional banks in Malaysia four banks are included in the sample. These banks are Bank Islam Malaysia Berhad, Bank Muamalat, Malayan Banking Berhad, and Standard Chartered Bank Malaysia Berhad while Bank Islam Malaysia Berhad and Bank Muamalat and Malayan banking Berhad are local commercial banks, Standard Chartered Bank Malaysia Berhad is a foreign bank. Two banks in this sample are listed on the Bursa Malaysia (i.e., Bank Islam Malaysia Berhad and Malayan Banking Berhad), whereas Bank Muamalat and Standard Chartered are not listed. Since the study would be based on ratio analysis, the data for the study are obtained from financial statements of the selected banks in the sample. The sample period of the study is only for ten years, ranging from 2000 to 2009.

6.2 Empirical Methods

6.2.1 Financial Ratio Analysis

Using financial ratios financial performances of banks in the sample are examined from four prospective; namely, profitability, liquidity, risk and solvency and efficiency ratios. Various indexes have been provided by financial management theories for measuring bank's performance. Using financial ratios is one of them. To measure performance, financial ratios have been used quite commonly and extensively in the literature. For example, bank regulators use financial ratios to evaluate bank's performance (Samad & Hassan 2000), Patnam (1983), Meister and Elyasiani (1988), Spindler (1991), Akkas (1994), Sabi (1996), and Samad (1999), Ali & Rami (2006) gave employed ratios for evaluating a bank's performance. In order to see how Islamic bank has performed in comparison with the conventional banks over 10 years, the study uses financial ratios for the bank's performance. These ratios are broadly categorized into four groups: (a) profitability ratios; (b) liquidity ratios; (c) risk and solvency ratios and (d) efficiency ratio.

6.2.1.1 Profitability Ratios

Generally, accounting profits are the difference between revenues and costs. Profitability is considered to be the most difficult attributes of a firm to conceptualize and to measure (Ross, Westerfield, and Jaffe 2005). These ratios are used to assess the ability of the business to generate earnings in comparison with its all expenses and other relevant costs during a specific time period. More specifically, these ratios indicate firm's profitability after taking account of all expenses and income taxes, the efficiency of operations, firm pricing policies, profitability on assets and to shareholders of the firm (Van Horne 2005). Profitability ratios are generally considered to be the basic bank financial ratio in order to evaluate how well bank is performing in terms of profit. For the most part, if a profitability ratio is relatively higher as compared to the competitor(s), industry averages, guidelines, or previous years' same ratios, then it is taken as indicator of better performance of the bank. In measuring profitability two financial ratios would be used: Return on assets (ROA) and Return on Equity (ROE).

(a) Return on Assets (ROA)

Return on assets indicates the profitability on the assets of the firm after all expenses and taxes (Van Horne 2005). It is a common measure of managerial performance (Ross, Westerfield, Jaffe 2005). It measures how much the firm is earning after tax for each dollar invested in the assets of the firm. That is, it measures net earnings per unit of a given asset, moreover, how bank can convert its assets into earnings (Samad & Hassan 2000). Generally, a higher ratio means better managerial performance and efficient utilization of the assets of the firm and lower ratio is the indicator of inefficient use of assets. ROA can be increased by firms either by increasing profit margins or asset turnover but they can't do it simultaneously because of competition and trade-off between turnover and margin. ROA is calculated as follows: ROA = Net profit after tax Total Assets

(b) Return on Equity (ROE)

Return on equity indicates the profitability to shareholders of the firm after all expenses and taxes (Van Horne 2005). It measures how much the firm is earning after tax for each dollar invested in the firm. In other words, ROE is net earnings per dollar equity capital. (Samad & Hassan 2000). It is also an indicator of measuring managerial efficiency [(Ross 1994), Sabi (1996), Hassan (1999), and Samad (1998). By and large, higher ROE means better managerial performance; however, a higher return on equity may be due to debt (financial leverage) or higher return on assets. Financial leverage creates an important difference between ROA and ROE in that financial leverage always magnifies ROE. This will always be the case as long as the ROA (gross) is greater the interest rate on debt (Ross, Westerfiled, Jaffe 2005). Usually, there is higher ROE for high growth companies. ROE is calculated as follows: ROE = Net profit after tax Total Equity

6.2.1.2 Liquidity Ratios

Liquidity ratios measure the ability of the firm to meet its short term obligations, maintain cash position, and collect receivables. In general sense, the higher liquidity ratios mean bank has larger margin of safety and ability to cover its short term obligations. Measures of liquidity are: Loan to Deposit Ratio (LDR) and Loan to Asset Ratio (LAR).

(a) Loan to Deposit Ratio (LDR)

Loan to deposit is the most important ratio to measure the liquidity condition of the bank. Here, loan means the advances for the conventional banks and financings for the Islamic banks. Because Islamic banks are prohibited to extend loans and earn interest (Riba) and restricted to follow Islamic Shari'ah Principles while conducting their banking business operations so the only way the Islamic banks can utilize their deposits is to provide financings through different Islamic financial products. Bank with Low LDR is considered to have excessive liquidity, potentially lower profits, and hence less risk as compared to the bank with high LDR. However, high LDR indicates that a bank has taken more financial stress by making excessive loans and also shows risk that to meet depositors' claims bank may have to sell some loans at loss. LDR is calculated as follows: LDR = Loan Deposit

(b) Loan to Asset Ratio (LAR)

Like LDR, loan to assets ratio (LAR) is also another important ratio that measures the liquidity condition of the bank. Whereas LDR is a ratio in which liquidity of the bank is measured in terms of its deposits, LAR measures liquidity of the bank in terms of its total assets. That is, it gauges the percentage of total assets the bank has invested in loans (or financings). The higher is the ratio the less the liquidity for the bank. Similar to LDR, the bank with low LAR is also considered to be more liquid as compared to the bank with higher LAR. However, high LAR is an indication of potentially higher profitability and hence more risk. LAR is calculated as follows: LAR = Loan Asset

6.2.1.3 Risk and Solvency Ratio

This is a class of ratios that measures the risk and solvency of the firm. These ratios are also referred to as gearing, debt or financial leverage ratios. The extent to which a firm relies on debt financing rather equity is related with financial leverage. These ratios determine the probability that the firm default on its debt contacts. The more the debt a firm has the higher is the chance that firm will become unable to fulfill its contractual obligations. In other words, higher levels of debt can lead to higher probability of bankruptcy and financial distress. To measure risk and solvency of the bank, measures usually used are: Debt-Equity Ratio (DER).

(a) Debt to Equity Ratio (DER)

It is one of the tools to measure the extent to which firm uses debt. It measures ability of the bank capital to absorb financial shocks. In case, creditors default in paying back their loans or the asset values decrease bank capital provides shield against those loan losses. A bank with lower DER is considered better as compared to the bank with higher DER. DER is calculated as follows: DER = Total Debt______ Shareholder's Equity

6.2.1.4 Efficiency Ratios

These ratios measure how effectively and efficiently the firm is managing and controlling its assets. These ratios indicate the overall effectiveness of the firm in utilizing its assets to generate sales, quality of receivables and how successful the firm is in its collections, the promptness of payment to suppliers by the firm, effectiveness of the inventory management practices, and efficiency of firm in controlling its expenses. Higher value of these ratios is taken as good indicator which means firm is doing well. Ratios used to measure efficiency of the bank are: Asset Utilization (AU), and Income to Expense Ratio (IER).

(a) Asset Utilization (AU)

How effectively the bank is utilizing all of its assets is measured by assets utilization ratio. The bank is presumably said to using its assets effectively in generating total revenues if the AU ratio is high. If the ratio of AU is low, the bank is not using its assets to their capacity and should either increase total revenues or dispose of some of the assets (Ross, Westerfield, and Jaffe 2005). Total revenue of the bank in this study is defined as net spread before provision plus all other income. AU is calculated as follows: AU = Total Revenue Total Assets

(b) Income Expense Ratio (IER)

Income to expense is the ratio that measures amount of income earned per dollar of operating expense. This is the most commonly and widely used ratio in the banking sector to assess the managerial efficiency in generating total income versa controlling its operating expenses. High IER is preferred over lower one as this indicates the ability and efficiency of the bank in generating more total income in comparison to its total operating expenses. Total income in this study is defined as net spread earned before provisions plus all other income while the other expenses in the income statement are treated as total operating expense for the study. IER is calculated as follows: IER = Total Debt______ Total Operating Expenses

6.2.2 Analysis of Variance

The analysis of variance is a powerful and common statistical procedure in the social sciences. It can handle a variety of situations. The procedure also known as ANOVA is general technique that can be used to test hypotheses concerning means among two or more groups are equal, under the assumption that the sample populations are normally distributed. In statistics, analysis of variance (ANOVA) is a collection of a statistical model, and their associated procedures, in which the observed variance in particular variables is partitioned into components attributable to different sources of variation. In its simplest form ANOVA provides a statistical test of whether or not the means of several groups are all equal, and therefore generalizes t-test to more than two groups. ANOVAs are helpful because they possess an advantage over a two-sample t-test. Doing multiple two-sample t-tests would result in an increased chance of committing a type error. For this reason, ANOVAs are useful in comparing two, or three or more means. In this study, ANOVA is used to comparing means between the Bank Islam Malaysia Berhad, Malayan Banking Berhad and Standard Chartered Bank Malaysia Berhad. ANOVA will be calculated using Minitab version 15.0 program.

CONCLUDING COMMENTS

The present research project report is made up of seven chapters. Starting with chapter one, introduces the project, chapter two reviews of the related literature, chapter three identify the problem definition and objectives of the study, chapter four recognize the significance, scope and limitations of the study, chapter five cover the hypotheses of the study, chapter six discover the empirical methods of the study to be used, and chapter seven cover up the conclusion of the study. Under chapter 3 can be concludes as the performance of Islamic bank performed as compared to its counterparts, conventional banking in Malaysia. Moreover, this study has the target to achieve as listed in the objectives of the study. Finally, overall of this study reveals the important in using the results of the study, area of the study involved and the drawback in chapter 4. Since the accurate data are obtained and hypotheses have been constructing, the suggested methodology can be run to acquire the results of the study. As suggested in chapter 6, this study interested to look the comparative analysis between the Islamic bank and conventional banks in Malaysia. The simple financial analysis ratio and Minitab version 15.0 models as suggested above have willingness to recognize the performance between both types of banks which are Islamic bank and conventional bank.

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