Comparative Analysis of Islamic Finance Banks' Financial Ratios

This report provides an analysis of Islamic finance, focusing on the financial performance of Islamic banks. It begins with an introduction to the topic, highlighting the use of traditional ratio analysis in scrutinizing the performance of these banks. The discussion section delves into the application of various financial ratios, such as Loan to Deposit ratio (LTD), Loan to Assets Ratio (LTA), and others, to assess the financial health of Islamic banks. The report acknowledges that while conventional ratios can be used, those related to interest rates are not applicable due to the absence of interest-based transactions in Islamic banking. It also examines the differences between Islamic and conventional banks, including the absence of interest rates, the introduction of Islamic tax, and the avoidance of economic activities involving domination and speculation. The conclusion reiterates the applicability of conventional ratios, excluding those using interest data, for evaluating Islamic banks' financial performance.

Running head: ISLAMIC FINANCE
Islamic Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Conclusion:................................................................................................................................3
References:.................................................................................................................................4

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Introduction:
Investors can use the traditional ratio analysis for scrutinising the performance of
Islamic Finance banks, there is little difference between the financial structure of
conventional banks and Islamic banks. The interest factors are not accommodated in the
operations of Islamic banks, which will require to eliminate the financial ratios that is
associated with interest rate ratios.
Discussion:
The traditional ratio analysis provides a great help for analysing the performance of
the Islamic banks, as they analyse their actual financial performance. However, the financial
ratios related to interest rates cannot be used for analysing the performance of the Islamic
banks, as they do not include interest rates in the operations. The ratios used for analysing the
performance of Islamic banks are Loan to Deposit ratio (LTD), Loan to Assets Ratio (LTA),
Total Equity to Total Assets ratio (EQTA), Deposit to Total Assets (DTA) ratio, Cost to
Income ratio (COTIN), Operating expenses to Total Assets (OPEXTA) ratio and Operating
Income to Total Assets (OPINTA) ratio. Ashraf, Rizwan & L’Huillier (2016) mentioned that
with the help of financial ratios investors are able to detect the financial performance of the
banks and make adequate investment decisions. The identified financial ratios can help in
detecting the financial performance of Islamic banks by utilising the ratios of conventional
banks. On the other hand, Doumpos, Hasan & Pasiouras (2017) criticises that Islamic
banking does not use all the relevant financial ratios that is used in analysing the financial
performance of Conventional banks.
Moreover, the financial performance of Islamic banking companies can be detected
with the help financial ratios such as Return on assets, Return on equity, Profit expense ratio,

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net profit margin, earnings per share, profit per branch, loan to deposit ratio, loan to asset
ratio. The major difference between the Islamic and conventional banks is the absence of
interest rate transactions, introduction of Islamic tax, avoidance of economic activities
involving domination and speculation (Masud, Hossain & Rekha, 2016). Therefore, the
financial ration used for analysing the performance of conventional banks that can be used for
evaluating the performance of Islamic banks, as majority of the operations are similar. The
accommodation of total assets, equity, expense ratio and net profit of the Islamic banks is
derived in similar ways, as conventional banks. However, the financial ratios are not enough
for detecting the performance of Islamic banks, as it lacks adequate measure for analysing the
actual performance of the banks. For instance, during the economic crisis the financial
position of Islamic banks were considered to be stable in comparison to conventional banks.
This difference in performance is not detected by the standard financial rations used for
analysing the conventional banks (Khediri, Charfeddine & Youssef, 2015).
Conclusion:
After analysing the relevant theories and academic papers, it could be identified that
current conventional ratios can be used for analysing the financial performance of Islamic
banks. However, the ratios using the interest data cannot be used in analysing the
performance of Islamic banks, as the banks does not have any kind of interest measures.

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References:
Ashraf, D., Rizwan, M. S., & L’Huillier, B. (2016). A net stable funding ratio for Islamic
banks and its impact on financial stability: An international investigation. Journal of
Financial Stability, 25, 47-57.
Doumpos, M., Hasan, I., & Pasiouras, F. (2017). Bank overall financial strength: Islamic
versus conventional banks. Economic Modelling, 64, 513-523.
Khediri, K. B., Charfeddine, L., & Youssef, S. B. (2015). Islamic versus conventional banks
in the GCC countries: A comparative study using classification techniques. Research
in International Business and Finance, 33, 75-98.
Masud Rana, M., Hossain, K., & Rekha, R. S. (2016). Profitability and liquidity of
conventional banking and Islamic banking in Bangladesh: A comparative
study. IJAR, 2(9), 318-327.