Islamic Banking Resilience During Financial Crises

This assignment investigates the performance and resilience of Islamic banks in comparison to conventional banks during global financial crises. It explores various aspects, including business models, efficiency, stability, and the impact of macroeconomic factors like oil prices on bank profitability. The analysis draws upon research papers, case studies of specific Islamic banks in the UAE, and comparative insights into their governance practices.

Running head: FINANCIAL MANAGEMENT
Financial management
Name of the student
Name of the university
Author note

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Abstract
This is a study which will analyse the impact of the global economic crisis on the banks in
United Arab Emirates. The study will aim to highlight the profitability of the banks after the
global economic crisis. The four banks that are taken in to account belong to two categories,
Islamic and conventional banks. The banks that will be analysed to identify the profitability
are Dubai Islamic Bank, Sharjah Islamic Bank, Abu Dhabi Commercial Bank and
National Bank of Abu Dhabi. Dubai Islamic Bank was the bank who implemented the
principles of Islam in the all the practices of the organization. Thus, it can be concluded from
the analysis of the study that the impact of the global economic crisis of the conventional
banks have been huge and their return on investment have been hampered significantly.
However, the data suggest that there has been negligible impact of the global economic crisis
on the Islamic banks. Moreover, they have been able to provide stability to the macro
economic environment of the country. Thus, from the data it is suggested that the
conventional banks should rely less on debt for financing purposes. Moreover, the result
suggest that the Islamic banks are more profitable than the conventional banks. The return on
investment of the Islamic banks are stable and while there is lot of fluctuation in the ratios in
both the commercial banks. However, the bank that has been mostly impacted is the National
Bank of Abu Dhabi whose performance has decreased significantly over the years. Moreover,
the equity multiplier for the organization is too high which suggest that there the organization
highly dependent on debt for financing.

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Table of Contents
Introduction................................................................................................................................3
Statement of the problem...........................................................................................................4
Research Questions....................................................................................................................4
Objectives...................................................................................................................................4
Hypotheses.................................................................................................................................5
Literature review........................................................................................................................5
theoretical literature...................................................................................................................5
Dubai Islamic Bank..................................................................................................................12
Results and analysis.................................................................................................................19
Conclusion................................................................................................................................19
References................................................................................................................................20

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Introduction
This is a study which will analyse the impact of the global economic crisis on the
banks in United Arab Emirates. The study will aim to highlight the profitability of the banks
after the global economic crisis. The four banks that are taken in to account belong to two
categories, Islamic and conventional banks. The banks that will be analysed to identify the
profitability are Dubai Islamic Bank, Sharjah Islamic Bank, Abu Dhabi Commercial Bank
and National Bank of Abu Dhabi. Dubai Islamic Bank was the bank who implemented the
principles of Islam in the all the practices of the organization. It is one of the largest Islamic
bank in the United Arab Emirates (Dubai Islamic Bank ,2017). The organization being a
public joint stock company is listed in the Dubai Financial Market. The organization is
involved in both international and local partnerships and has a network of 200 branches in
Pakistan. The banking license of the organization was received from the Central Bank of
Jordon to work as a financial institution of Islamic nature. Sharjah Islamic Bank is also
bank which has implemented the Islamic principles in the banking system of their
organization (Sharjah Islamic Bank, 2017). The headquarter of the bank is in Emirates and
has been converted in to an Islamic bank in the year of 2004. On the contrary, the Abu Dhabi
Commercial Bank has been established as a public shareholding listing organization and had
limited liability. However, the government of Abu Dhabi holds 65% of the shares of the
company (ADCB, 2017). The rest of the funds of the organization is held by individuals and
financial institutions. The bank is a joint company which provides services in the field of
commercial, retail, merchant, investment, fund management and brokerage. National Bank
of Abu Dhabi is one of the largest lender bank in the United Arab Emirates and the market
capitalization of the bank is one of the largest. The headquarters of the bank is in Abu Dhabi
and is situated in the main financial district in Abu Dhabi. There is diversity in the portfolio
of the bank and provides services such as corporate, retail, investment and wholesale banking

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facilities. The other services provided by the bank includes wealth management, brokerage,
Islamic Banking, leasing and property management (NBAD UAE, 2017).
The study will evaluate the ROE of the banks, ROA of the bank, Equity multiplier
and asset utilization ratio. The comparative study will facilitate in understanding the
profitability of each of the banks and the causes behind it.
Statement of the problem
The global economic crisis had profound impact on all the banks all around the world.
However, the impact of the global economic crisis was different in Islamic banks and
conventional banks. The principles these banks follow is different so the impact of the global
economy will be different on both type of the banks. The study will analyse the profitability
of each of the banks by analysing their return on investment, return on asset and equity
multiplier ratio. These values will highlight the impact of the global economic crisis on each
of the banks and how they have coped up with it.
Research Questions
 What is the impact of global economic crisis on the Islamic banks?
 What is the impact of global economic crisis on the conventional banks?
 What is the significance of the global economic crisis on the profitability of the
Islamic banks?
 What is the significance of the global economic crisis on the profitability of the
conventional banks?
Objectives
The study aims to identify the impact of the global economic crisis on the banks in
United Arab Emirates. The study has chosen two conventional banks and two Islamic banks
which will be analysed based on their return on investment, return on asset and the equity

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multiplier. The findings form the study will be able to validate the existing theories of
literature and will provide a better understanding of the topic.
Hypotheses
H0 – The global economic crisis has impacted the profitability of the banks in United Arab
Emirates
H1 – The global economic crisis has not impacted the profitability of the banks United Arab
Emirates
Literature review
The literature review is divide in to two parts one is the theoretical literature and the
other is the empirical literature. The theoretical literature review will illustrate the various
theories from different researchers and the empirical literature review will consist of the
calculated data of all the banks that have been taken in to account.
theoretical literature
Islamic banks have similar roles when compared to the Conventional banks. The
Islamic Banks are the main sponsors to production of information and therefore supports in
addressing the problem of asymmetric information. They also facilitate in the reduction of the
transaction costs and assists in diversification for investors and small savers. During
conducting the organizational business, Islamic Banks mitigate risks which arise from the
operational, liquidity and asymmetric information problem. The fundamental difference
between Islamic and Conventional Banks is that Islamic banks operate in harmony with the
guidelines of Shariah which is the Islamic legal code (Waemustafa & Sukri, 2015).

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The intermediation of the conventional banks is mainly based on debt and allows the
transfer of risk while the intermediation of Islamic banks have a contrasting character and is
based on assets which focuses of sharing of risk.
Risk transfer and Risk sharing
Conventional Banks Risk Transfer Islamic Banks Risk Sharing
The risk is transferred by the depositors to
the banks so that they can ensure that their
return is pre-specified.
The Islamic bank share the return and the
risk with the investors (profit sharing
investment account (PSIA) holders) and
there is no pre-specified return in this
context and the return will depend on the
performance of the bank.
The interest rate is independent of the return
and borrowers will have to pay it
irrespective of the return. The risks are
being transferred through credit default
swaps and securitization. The financing of
the organizations is based on debt.
The risk is shared in Musharakah and
Mudharabah contracts in Islamic banks.
Moreover, the sales contracts are conducted
in most of the contracts.
The level of risk sharing is different in the Islamic banks and according to the
standards step by the Islamic principles, the policies are similar to the conventional banking
system. However, there is a basic difference in the Islamic banking system that it does not
allow making investment in the instruments which are having adverse effect on the
conventional competitors which was the cause of the global economic crisis. However, the
economic crisis had impacted the both conventional banks and the Islamic banks but the
impact will have to be assessed based on certain criteria (Bourkhis & Nabi, 2013). The

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indicators which can be used to identify the impact are bank lending, profitability, bank rating
and bank asset. Various studies suggest that the analysis of the profitability of the Islamic
banks are much better condition than the conventional banks. Beck, Demirgüç-Kunt &
Merrouche, (2013) states the impact of the crisis on the Islamic banks are worse than in other
countries. However, in some countries the losses faced by the Islamic banks are more than in
United Arab Emirates. The risk-taking factor for the Islamic banks were more so it was
expected that the losses incurred will be more but the scenario was opposite. The ratio of the
non-performing assets was higher among the Islamic banks than the conventional banks in
the country. The credit growth in the economy suggest that the credit growth was more for
the Islamic banks than the conventional banks. Thus, the Islamic banks were able to provide
stability to the market due to the growth in credit. The asset growth also shows a similar
scenario where the asset of the Islamic banks was expected to grow more than the
conventional banks. However, there was different situation in different countries and so there
is no uniformity in the opinion among the various researchers (Waemustafa & Sukri, 2016).
Comparative analysis of performance between conventional bank and Islamic banks
was completed amid the economic crisis for the State of Kuwait, Bahrain, Qatar, Oman,
Saudi Arabia, and United Arab Emirates. This examination utilized six proportion
investigations what's more, found that Islamic managing an account endured more amid the
money related emergency worldwide as far as capital proportions, use and profit for normal
value while regular banks endured more as far as return by and large resources and liquidity.
The examination by Hesse & Poghosyan, (2016), studied the impacts of the worldwide
budgetary emergency in 2008 and 2009 against Islamic and ordinary saving money in a few
nations including Kuwait, Bahrain, Malaysia, Qatar, Jordan, Saudi Arabia, UAE and Turkey.
Consequences of the investigation demonstrated that Islamic banks were influenced in an
unexpected way than ordinary banks within the worldwide monetary emergency. The

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gainfulness factor had helped Islamic saving money by lessening the unfavourable impacts of
the worldwide monetary emergency.
Liquidity is a vital factor in guaranteeing stability in a banking organization. It
assumes a critical part in liquidity hazard in existing monetary emergency. The investigation
by (), who made examination amongst Islamic and regular keeping money amid the
worldwide budgetary emergency in 2007-2008 in Malaysia took into account three markers;
productivity, liquidity and credit chance of saving money organizations (Ajmi et al., 2014).
The example was taken from 2006 to 2010 and was categorized into some time recently,
amid also, after the monetary emergency. The discoveries uncovered that Islamic saving
money was less presented to liquidity hazard when contrasted with regular saving money
amid the money related emergency. A study was likewise directed in Turkey to survey the
security of Islamic and regular saving money area in the worldwide money related emergency
from 2006 to 2011. The study utilized yearly examination slant towards productivity,
liquidity, hazard and proportion of advantage amount of traditional and Islamic saving
money. The outcomes demonstrated that Islamic keeping money was more steady than
ordinary banks as far as gainfulness, capital ampleness and liquidity for the period under
audit, counting amid the 2008 worldwide money related emergency (Rosman, Wahab &
Zainol, 2014).
The Banking System that performed better during the Financial Crises of 2008
As stated by (Kapan & Minoiu, 2013), due to the recent global financial crisis the
traditional banks got affected in a bad way all across the world. Even though the Islamic
banks also got influenced by this global financial crisis, but their performance at the time of
this crises was recorded better the traditional banks. On further research it was found that the
Islamic banks had to suffer in the areas of capital ratio, leverage and return on equity

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irrespective of their good performance during 2006-2009 in comparison with the
conventional banks. As per the Report of World Bank (Ashfaq, 2016), the comparison carried
out between the performances of the traditional banks and the Islamic ones at the time of the
financial crisis showed that even though both the forms of banks were influenced by the
crisis, the Islamic banks came out superior in terms of credit risk and liquidity reserves.
Therefore, it can be easily said the Islamic banks performed better than the convention ones
in the financial crisis.
A Dubai based mortgage provider, AMLAK, faced financial lie-down and their
Kuwait institute defaulted, in turn failing to issue their SUKUK. However, Islamic finance
continued in a relatively positive and sturdy manner, irrespective of the instability and the
misery of the overriding financial crisis. Generally, the admission of the financial crisis in the
Islamic capital market was not to happen because of a lot of reasons that included: the
Shariah not allowing the sale of debt against debt, and it is not possible for someone to be
selling the resources till the time the person is possessing the actual resources and it is
prohibited by Islam that risky and speculative transactions are carried out.
Additionally, in Islamic finance, lending is founded on capital backing and the
generally mortgage loans are presented in exchange of solid assets. In comparison, in
traditional baking the main agenda of present crises is simply due to huge amounts of loans
being granted by them minus any kind of collaterals. Inside the Islamic regulatory control
system, the investors are all conscious of both the risks and returns. As mentioned by Saif-
Alyousfi, Saha & Md-Rus, (2017), the result of the execution of profit and loss sharing
transactions is complete disclosure and clarity. Due to that there is better comprehension
experienced in market discipline, and because of that there is appearance of judicious control
over needless lending, which in turn improved the Islamic financial system.

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Islamic Bank performances at the time of Financial Crises 2008
The global financial crisis played a huge role in pushing the developed countries into
developing a fresh financial system that would be having eth capability of tackling the crisis
issue. The crisis made the developed nations lower their bank rates and that introduced a new
financial system that is completely founded on the Islamic principles of interest free financial
system. The capitalist system that failed after this financial crisis, was looking for a system
that would be solving the speculation issues and financial crisis inside the Islamic financial
system as an alternative (Mohamed, 2016). The capitalist system was extremely affected by
the harshness shown by the financial crisis, but still managed identifying the failure of risk
alleviations at different levels as the cause of the crisis. The capitalist economy was looking
for a system that is completely risk free.
Irrespective of different crisis and challenges, steady growth is seen in Islamic
financial institutions. Countries such as Bahrain, UAE and Malaysia are the hubs for Islamic
finance that are working towards the development of Islamic finances. The leading financial
centers of the world like Hong Kong, New York and Singapore make use of Islamic finance
simultaneously with traditional banking for the improvement in risk and liquidity
management. SUKUK bonds are key instances of Islamic finance growth (Gopalakrishnan &
Mohapatra, 2017).
As per Kapan & Minoiu, (2013), analyzing the competitive situation and traditional
Islamic financial system found that the Islamic banks are found to be less competitive in
comparison with the traditional banking system. Due to high capitalization, the Islamic banks
face less financial risk. They kept on showing more durability and flexibility in the face of

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the global financial crisis of 2007. Even the western banks profited from the Islamic banks in
the aftermath of the global crisis in the battle of tackling the crisis for the restoration of their
financial stability. Findings have suggested the Islamic banks being more capable of
controlling risk in comparison to traditional banks, with the help of better capital ratio,
principles free of Gharar and interest. Their finance is based on moral and ethical principles,
even proper checking and balance, working in the interest of everyone.

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Empirical literature
Dubai Islamic Bank
Return on Equity (ROE)=
Net Income/ Total Equity
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
0.000152159 0.014318
237
0.0143
18
0.0143
18
0.0143
18
0.0143
18
0.0001
52
0.0143
18
0.0143
18
0.0143
18
0.0143
18
Return on Assets
(ROA)= Net Income/
Total Assets
2007 2008 2009 2010 2011 2012 201
3
2014 2015 2016 2017
3.66055E-05 0.00268
8418
0.002
688
0.002
688
0.002
688
0.002
688
3.6
6E-
05
0.002
688
0.002
688
0.002
688
0.002
688
Equity Multiplier (EM)= Total Assets/ Total Equity
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
4 5 4 5 4 5 4 5 4 5 4

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National Bank of Abu Dhabi
Return on Equity (ROE)= Net Income/ Total Equity
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
164.26 146.26 -5.74 1.97 14.53 10.77 13.89 15.27 17.39 13.58 13.26
Return on Assets (ROA)= Net Income/ Total Assets
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
0.04 0.03 0.03 0.03 0.02 0.03 0.03 0.04 0.04 0.03 0.03
Equity Multiplier (EM)= Total Assets/ Total Equity
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
7 7 7 8 8 7 8 8 8 9 9
24,177 26,408 28,728 30,351 31,801 24,270 24,177 26,408 28,728 30,351 31,801

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Sharjah Islamic Bank
Return on Equity
(ROE)= Net Income/
Total Equity
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
0.037329593 0.03773
9408
0.03867
6129
0.037
739
0.038
676
0.037
739
0.038
676
0.037
739
0.038
676
0.045
143
0.047
497
Return on Assets (ROA)= Net Income/ Total Assets
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
0.007636 0.010110081 0.010189907 0.01011 0.01019 0.01011 0.01019 0.01011 0.01019 0.00640
9
0.00709
1
Equity Multiplier (EM)= Total Assets/ Total Equity
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
4.88848
4
3.73284
9
3.79553
3
3.73284
9
3.79553
3
3.73284
9
3.79553
3
3.73284
9
3.79553
3
7.04357
8
6.69820
5

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Figure 1
Source: As created by author

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Abu Dhabi Commercial Bank
Return on Equity (ROE)= Net Income/ Total Equity
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
18.26 22.33 23.19 22.14 19.4 15.56 9.91 8.44 -8.8 2.79 2.79
Figure 2
Source: As created by author
Return on Assets (ROA)= Net Income/ Total
Assets
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1.19 1.4 1.43 1.33 1.17 1.02 0.68 0.56 -0.55 0.16 0.16

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Figure 3
Source: As created by author
Equity Multiplier (EM)= Total Assets/ Total Equity
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
4.88848
4
3.73284
9
3.79553
3
3.73284
9
3.79553
3
3.73284
9
3.79553
3
3.73284
9
3.79553
3
7.04357
8
6.69820
5

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Figure 4
Source: As created by author

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Results and analysis
The result of the study suggests that the existing theories have been validated which
shows that the return on equity and the return on asset for the Islamic banks are unchanged
which means that the global economic crisis was unable to pout significant impact on the
performance of the Islamic banks. However, this is not the case for the commercial banks
which suggest that there is fluctuation in the return on investment and the return on asset
which shows that the commercial banks have been significantly impacted by global economic
crisis. Moreover, the equity multiplier for the commercial banks are high which suggest that
the banks are relying more on debts for financing purposes which increases the chances of
failure risk for them.
Conclusion
Thus, it can be concluded from the analysis of the study that the impact of the global
economic crisis of the conventional banks have been huge and their return on investment
have been hampered significantly. However, the data suggest that there has been negligible
impact of the global economic crisis on the Islamic banks. Moreover, they have been able to
provide stability to the macro economic environment of the country. Thus, from the data it is
suggested that the conventional banks should rely less on debt for financing purposes.
Moreover, the result suggest that the Islamic banks are more profitable than the conventional
banks. The return on investment of the Islamic banks are stable and while there is lot of
fluctuation in the ratios in both the commercial banks. However, the bank that has been
mostly impacted is the National Bank of Abu Dhabi whose performance has decreased
significantly over the years. Moreover, the equity multiplier for the organization is too high
which suggest that there the organization highly dependent on debt for financing.

20FINANCIAL MANAGEMENT
References
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causal relationships between Islamic stock markets and conventional financial
systems? Evidence from linear and nonlinear tests. Journal of International Financial
Markets, Institutions and Money, 28, 213-227.
Ashfaq, M. (2016). IMPACT OF GLOBAL FINANCIAL CRISES ON GLOBAL
FINANCIAL STABILITY AND NEED FOR AN ALTERNATIVE FINANCIAL
SYSTEM. Business Excellence, 10(2), 109.
Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking:
Business model, efficiency and stability. Journal of Banking & Finance, 37(2), 433-
447.
Bourkhis, K., & Nabi, M. S. (2013). Islamic and conventional banks' soundness during the
2007–2008 financial crisis. Review of Financial Economics, 22(2), 68-77.
Gopalakrishnan, B., & Mohapatra, S. (2017). Turning Over a Golden Leaf? Global Liquidity
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global financial crisis (No. 13-102). International Monetary Fund.
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