Practice of Islamic Financial Management in Bangladesh: Evidence from
Islamic Banks
Serajul Islam
Associate Professor
Department of Business
Administration
International Islamic University
Chittagong
Kumira, Sitakunda,
Chittagong-4318, Bangladesh
E-mail Address:[email protected]
Mobile Number:
088-01711448142
Tania Sultana
Lecturer
Department of Business
Administration
International Islamic
University Chittagong
Kumira, Sitakunda,
Chittagong-4318, Bangladesh
E-mail Address:[email protected]
Received:January 1, 2018��������������� ������������������������������������������������������������������������������������������������������������������������Accepted:January 10, 2019��������������� ������������������������������������������������������������������������������������������������������������������Online Published:January 17, 2019
The growing
awareness of the systemic importance of Islamic banking and finance to the
development has prepared the ground for the work of upgrading the existing
Islamic banking practices. Hence, this study aims to evaluate the Islamic
Financial Management (IFM) practices of Islamic banks in Bangladesh. In line
with the objective of the study, several ratio analyses were conducted based on
ANNOVA test and the sample size includes 8 Islamic banks from 2007 to 2013.The
findings revealed that the Islamic banks in Bangladesh are homogenous; however,
they are not financially healthy when liquidity measurements are concerned.
Additionally, capital structure efficiency results revealed that most of the
Islamic Banks in Bangladesh are practicing debt-based financing rather than
equity. While the study has observed that the practices of IFM in Bangladesh
are promising, however, there are numerous challenges encroaching the industry.
Hence, immediate attention from the respective authorities, including
practitioners and policy makers are indeed vital.
Keywords:Islamic Banks, Islamic Financial Management,
Efficiency, Ratio.
In the recent era,
Islamic banking and finance becomes an important topic both in the academic literature
and among practitioners since it represents a new reality to the conventional
banking practices (Sundararajan &Errico,
2002; Khan & Ahmed, 2001). This is mainly due to the fact that
Islamic banking and finance aims to provide justice, honest and fairness to all
parties in any financial transaction by ensuring that their rights and dues are
preserved accordingly (Abu-Tapanjeh, 2009). Another major ethical component of
this system is that Islamic financial institutions (Islamic banks) are less
risky due to the elimination of interest-based transactions. As a result of this
uniqueness in Islamic banking and finance, it has progressed in many economies
during the last few decades, including Bangladesh.
Several researchers
have examined the reasons behind such spectacular growth of the Islamic banking
and finance industry. Such as, Iqbal, Aḥmad and
Khan (1998) found that the rapid growth in Islamic finance and banking in Muslim countries, and
around the world during the last twenty years is influenced by the introduction
of broad economic and structural reforms in financial systems, the
liberalization of capital movement, privatization, the global integration of
financial markets, and the introduction of innovative and new Islamic financial
products. Furthermore, Islamic banking instruments are also based on �trade
financing instruments� that is developed on mark-up arrangements fueled the
growth (Sundararjan&Erico, 2002; Fiennes, 2007;Akkizidis&Khandelwal, 2007; Khan & Bhatti,
2008).
However, criticisms
also raised related to Islamic banking and finance. For example, Fiennes (2007)
pointed out that Islamic banks are like conventional banks, they also have
similar characteristics, such as, credit risk, market risk, and operational
risks. Opponents of the Islamic banking and finance have argued that Islamic
banking instruments are riskier because their products and services are
relatively new compared to the conventional banking services. This is also
corroborated by the findings of Khan and Ahmed (2001); Sundararajan and Errico
(2002) that Islamic banks are facing a unique nature of risks due to a
particular structure of its balance sheets as the operational principles are
different compared to the conventional banking practices.
Additionally,
Mohiuddin (2004) also identified ten important constrains related to Islamic
banking and finance concept and its practices in the global arena. Among these
constrains, absence of Islamic administration in the state level, scarcity of
research outcomes on Islamic management, lack of research-based publications,
lack of integration of Islamic banking and finance curricula at the university
level, lack of ideal Islamic banking and finance organizations, and almost no
effort to combine the conventional and Islamic management.
Due to these
criticisms, it has led us to investigate on Islamic Financial Management (IFM),
which is one of the core elements in such banking system. While it is
notoriously difficult to precisely define what IFM is, however, it captures
almost all segments of Islamic banking and finance operations. Based on the
existing literature, IFM can be defined as a distinct social process consisting
of forecasting and Islamic planning, major investment and financing decisions,
coordination and control, dealing with Islamic financial markets, and risk
management designed to raise capital from proper sources allowed by Islamic
Shariah in order to minimize cost of capital and to invest the capital
optimally through the Islamic modes of investment in the feasible projects to maximize
stakeholders� benefits. From the definition, it is clear that all activities of
an organization and their day to day activities are included in the IFM.
The context of Islamic banking and finance in Bangladesh
is not different. Bangladesh is considered as one of the third largest Muslim
country in the world with around 160 million populations, of which 90 percent
are Muslim. The hope and aspiration of the vast majority of Muslim population
to run banking system on the basis of Islamic principle came into reality after
the OIC recommendation at its foreign ministers meeting in 1978 at Senegal to
develop separate Islamic banking system. After 5 years of that declaration, in
1983, Bangladesh established its first Islamic bank (Islami Bank Bangladesh
Limited-IBBL). Since then, the Islamic banking and finance industry has seen a
remarkable progress domestically.
Till today, there are eight full-fledged Islamic banks
out of 56 scheduled banks, six Islamic insurance companies out of 62 insurance
companies, and four Islamic non-banking financial institutions out of 33 are
found to be practicing IFM in Bangladesh. However, there are some additional
financial institutions as well that practices IFM in a limited scale in its
operation. Since IFM remains a lucrative solution to the conventional financial
system, this study mainly focuses on the practice of IFM in Islamic banks.
The rest of this paper is structured as follows. Section
two provides the data and methodology, section three analyses and discusses the
findings and finally section four concludes the study.
The history of Islamic banking and finance, as well as
IFM was not first started in Bangladesh; rather Bangladesh has adopted some of
the practices from different countries. Therefore, it would be useful to focus
on the development of Islamic banking and finance from the global perspective
through historical narratives. Hence, this section overview the existing
literature related to the objective of the study.
Islamic financial system, particularly Islamic banking
and finance is not a new concept rather existed since the initial and spreading
period of Islam. The evaluation of the Islamic banking can be classified into
three eras.
The first era began from the early years of Islam till
the period of Caliph ar-Rashedin. During this era, deposit/savings (safe
keeping of money and valuable items) and loan (qard) were exercised. For
example, the wealthy people used to keep their money and valuable items to the
most trustworthy person, Prophet Muhammad (p.b.u.h.) at that time. This is
because, the depositors would choose persons with honesty and sincerity in
keeping and returning their valuable items. Apart from these, the practicing of
barter (exchange goods or services for other goods or services without using
money) evidenced in the following Hadith narrated by Abu al-Minhal: �I asked
al-Bara bin Azib and Zaid bin Arqam about practicing money exchange. They
replied, �we are traders in the time of Allah�s apostle (p.b.u.h.) and I asked
Allah�s Apostle about money exchange. He replied, �if it is from hand to hand,
there is no harm in it,� otherwise it is not permissible�, (Khan, 1989, p-157).����
The second era started from the era of the caliphates
until the fall of the Uthmaniyah Empire. This era witnessed the continuation of
banking activities practiced in the early era. For instance, trading activities
carried out in Basrah (presently a city in Iraq) with cheque instead of money.
Although Islamic finance failed to expand during this period, however,
development took place in terms of legal maxim (fatwa) by Muslim jurists
pertaining to issues of financial transaction (muamalat), particularly those
involving usury (riba). Many renowned scholars (jurists/ ulama) established
their school of thought such as Imam al-Azam Abu Hanifah (698-7670), Imam Malik
ibn Anas (712-795), Imam Ahmad ibn Hambal (778-855) and al-Shafil (767-820)
during this phase. The views of these jurists, particularly on Muamalat, have
been used as a reference for taking any decision pertaining to Islamic
financial activities. This includes whether a conduct is lawful and in
accordance with Shariah principles or otherwise.
Finally, after the second phase, the revolutionary modern
era of banking and finance has started (Sudin&Nursofiza, 2009). In this
era, the first Islamic financial institution has been established in the Indian
subcontinent during the 1940s (Laldin, 2008). After that, an Islamic bank was
made in Pakistan in the 1950s. Further, the development of the Islamic
financial system started with the establishment of the Pilgrimage Fund known as
�Tabung Haji� of Malaysia, a first formal Islamic savings institution that
started in 1963 (Erol& El- Bdour, 1989). However, MitGhamr savings bank, an
experimental bank of Islamic banking in Egypt, was started in 1963, and paved
the way for the establishment of other Islamic banks in the region. The list of
Islamic banks in different countries with establishment year is in the
following Table 1.
Table 1:
List of Islamic Banks with Year of Establishment (1970s-1980s)
S.L. |
Name |
Country |
Year of establishment |
01 |
Nasser Social Bank |
Egypt |
1972 |
02 |
Islamic Development Bank |
Saudi Arabia |
1975 |
03 |
Dubai Islamic Bank |
United Arab Emirates |
1975 |
04 |
Faisal Islamic Bank of Egypt |
Egypt |
1977 |
05 |
Faisal Islamic Bank of Sudan |
Sudan |
1977 |
06 |
Kuwait Finance House |
Kuwait |
1977 |
07 |
Islamic Banking System International Holdings |
Luxembourg |
1978 |
08 |
Jordan Islamic Bank |
Jordan |
1978 |
09 |
Bahrain Islamic bank |
Bahrain |
1979 |
10 |
Dar al-Mal al-Islami |
Switzerland |
1981 |
11 |
Bahrain Islamic Investment Company |
Bahrain |
1981 |
12 |
Islamic International Bank for Investment and
Development |
Egypt |
1981 |
13 |
Islamic Investment House |
Jordan |
1981 |
14 |
Albaraka Investment and Development Company |
Saudi Arabia |
1982 |
15 |
Saudi-Philippine Islamic Development Bank |
Saudi Arabia |
1982 |
16 |
Bank Islam Malaysia Berhad |
Malaysia |
1983 |
17 |
Islamic Bank Bangladesh Limited |
Bangladesh |
1983 |
18 |
Islamic Bank International |
Denmark |
1983 |
19 |
Tadamon Islamic Bank |
Sudan |
1983 |
20 |
Qatar Islamic Bank |
Qatar |
1983 |
21 |
Bait Ettamouil Saudi Tounsi |
Tunisia |
1984 |
22 |
West Sudan Islamic Bank |
Sudan |
1985 |
23 |
Albaraka Turkish Financial House |
Turkey |
1985 |
24 |
Faisal Finance Institution Inc. |
Turkey |
1985 |
25 |
Al-Rajhi Company for Currency Exchange & Commerce |
Saudi Arabia |
1985 |
26 |
Al-Ameen Islamic and Financial Investment Corporation
India Limited |
India |
1985 |
Source: Haron&Shanmugam (1997)
First of all, the financial sector in Bangladesh is
classified into three broad categories based on regulation:
� Formal sector
� Semi-formal sector and
� Informal sector.
Among this financial sector, banking sector, which is the
major part of formal financial sector dominants other types of financial
institutions in the industry. Due to its significant effect in the economy of
Bangladesh, banking industry is highly regulated and monitored by the
Bangladesh Bank (BB), the central bank of Bangladesh. Though Bangladesh
inherited an interest-based banking system since its independence, the first
Islamic bank, Islami Bank Bangladesh Limited (IBBL), was established in 1983.
In 2017, out of 57 banks in Bangladesh, eight private commercial banks (PCBs)
operated as full-fledged Islamic banks and 16 conventional banks (including
three foreign commercial banks-FCBs) were involved in Islamic banking
activities through window Islamic banking.
The Islamic banks have continued to show strong growth
since its inception, as reflected by the increasing market share of the Islamic
banking sector in terms of assets, financing and deposits compared to the total
banking system. A brief analysis on the performance of Islamic banks is given
in Table 2. It is evident from the Table 2 that, total deposits of the Islamic
banks and Islamic banking branches and windows of the conventional banks stood
at BDT 1857.3 billion at the end of December 2016 which accounted for 20.79
percent of total deposits (BDT 8933.92 billion). Total credit of the Islamic
banks and the Islamic banking branches and windows of the conventional banks
stood at BDT 1647.0 billion at the end of December 2016 which accounted for
24.44 percent of total credit (BDT 6739.3 billion) of the banking system in
Bangladesh.
Table 2: The basic indicators of Islamic
banks in Bangladesh (BDT in Billion)
Particular |
Full-fledged Islamic Banks |
Window Islamic banks |
All Islamic Banks |
All banks |
||||
|
2016 |
2015 |
2016 |
2015 |
2016 |
2015 |
2016 |
2015 |
Number of banks |
8 |
8 |
16 |
16 |
24 |
24 |
57 |
56 |
Deposits |
1770.7 |
1552.2 |
86.6 |
89.4 |
1857.3 |
1641.6 |
8933.9 |
8033.5 |
Credits |
1565.0 |
1305.5 |
82.0 |
81.7 |
1647.0 |
1387.2 |
6739.2 |
5952.9 |
Investment deposit ratio %) |
86.3 |
83.2 |
84.2 |
75.6 |
86.7 |
82.7 |
71.85 |
70.98 |
Liquidity* |
113.6 |
133.4 |
3.0 |
3.1 |
116.6 |
136.5 |
1259.5 |
1234.1 |
* Excess (+)/shortfall (-): Conventional banks which have
Islamic banking branches and windows do not maintain Statutory Liquidity Ratio
(SLR) individually, but their head offices of the respective banks maintain a
combined SLR and liquidity position.��������
Sources: Bangladesh Bank
Islamic banks in Bangladesh receive deposit under two
principals:� a) Al-Wadeeah or current
account and b) Mudaraba or savings account. Under Mudaraba, most Islamic banks
have the following deposit scheme:
� Mudaraba Savings Deposits (MSD)
� Mudaraba Short Notice Deposits (MSND) and
� Mudaraba Term Deposits (MTD)
One of the uniqness of Islamic banking system is that
Islamic banks do not directly deal with money rather they run business with
money. The funds of Islamic banks in Bangladesh are mainly invested in the
following modes:
� Mudaraba;
� Musharaka;
� Bai-Murabaha (Murabaha to the purchase orders);
� Bai-Muajjal;
� Salam and parallel Salam;
� Istisna and parallel Istisna;
� Ijara;
� IjarahMuntahiaBittamleek (Hire Purchase);
� Hire Purchase MusharakaMutanaqisa (HPMM);
� Direct Investment;
� Investment Auctioning;
� Quard and
� Quard Hassan.
2.3. Issues and Challenges of IFM
Despite
having a considerable expansion in terms of number of IFI and its branches
along with the client based in most of the Muslim majority country, the sector
has encroached with several issues and challenges (few of them are highlighted
above) that have hindered the potential growth of the sector in Bangladesh.
Among some of the problems and issues facing by the
Islamic banking and finance industry and IFM in particular, Ather (2007)
highlighted several crucial issues. The issues are mostly related to managerial
functions, Islamic planning and organizing, Islamic management, motivation
under Islamic management and control system and, regulatory and legal aspects. Iqbal, Aḥmad and Khan (1998) classified
challenges of Islamic Banking in two ways; Islamic banking institutional
aspects and Islamic Banking operational aspects. Challenges of institutional
aspects are as follows:
� Islamic banks suffer from the lack of institutional
support. Building a proper institutional set up is most serious challenge for
the Islamic finance.
� Lack of appropriate legal framework and supportive
policies
� Lack of effective supervisory framework
� Lack of Accounting Standards Boards for Islamic finance
practicing companies
� Lack of equity institutions
� Establishment of organised secondary financial markets
� Necessity to have a market for short term placements of
funds
Usmani
(1998) has highlighted the problems of Islamic banking and identified three
types of important challenges; i) capital budgeting, ii) financing and iii)
working capital management. On the other hand, Akkas (2008) categorized
challenges into two ways; i) macro operational challenges and ii) micro
operational challenges. Problems related with macro operation are:
liquidity and capital, valuation of banks assets, credit creation and monetary
policy, financial stability, the ownership of banks, lack of capital market and
financial instruments, insufficient legal protection. In contrast, problems
related to micro operation of Islamic banks are increased cost of information,
control over cost of funds, mark-up financing, excessive resort to the murabaha
mode, utilization of interest rate for fixing the profit margin in murabaha
sales, financing social concern, lack of positive response to the requirement
of government financing.
On top of that, there are few other issues that have
hindered the growth of the IFM practices in most of the countries including
Bangladesh. Firstly, in the era of globalization and rapid development, there
is still a lack of sufficient infrastructures for Islamic trade financing on an
international basis. This is significantly important as the international trade
has gained momentum in most of the developing countries both in terms of import
and export. As a result of this, the Islamic banking requires competitive
financial products and services to cater the growing demand of
exporters/importers in a majority of the Muslim countries and, Bangladesh in particular.
Secondly, the practices of
Islamic banking and finance, and IFM in particular require conformity of both
the national conventional laws and Shariah rules. Without the cooperation of
these both institutions that implement these two types of laws in a country,
achieving the expected growth in the esteemed sector would not be possible.
However, it is observed that these two segments of the government in majority
of the cases are in non-conformity, hence raising several issues and challenges
to practically implement in the country.
Third, Islamic banking
and finance is part of the financial sector of a country, hence, corporate
sector plays an important role in this context. Similarly, there should be
coexistence of both the Islamic banking and finance along with the corporate
sector for sustainable development of an economy. However, it is understood
that the corporate sector in Bangladesh is still rather poor, and no adequate
supports are given to this industry in an aim to promote IFM in the country.
Fourth, surprising enough, although the majority of the people in Bangladesh
are Muslim and the country�s economy is booming in the recent decade as well as
considerable size of the Islamic banking and finance industry, unfortunately,
there is no Islamic capital market exist as of yet. However, countries like
Malaysia have its own Islamic capital market (Oseni&
Hassan, 2012).
Fifth, since the history of Islamic banking and finance
is not old and still in its beginning/growth stage in most of the Muslim countries
including Bangladesh, there is a lack of professionals that are conversant with
IFM. Due to the shortage of the professionals, the sector experienced
significant turbulence in its growth path. In a seminal work recently in Dhaka,
one of the authority in a think tank reported that �To ensure true benefit from
Islamic banking practices, we need to concentrate more on the concept and need
to develop human resources with adequate knowledge of Islamic banking� (The
Financial Express, 2018).�
Sixth, the successful and effective Islamic banking and
finance practices requires that both the supplier and creditor of a loan
contract uphold the rules and regulations prescribed for the financial
transaction. However, a bitter truth is that, there are a mounting of loan
defaulters, at least, 230,000 in Bangladesh as of 2018, reported by the
country�s finance minister that dry out funds from the financial industry
(Dhaka Tribune, 2018). This is also a great obstacle for the industry to
perform efficiently and progress well in their operation.� Lastly, as described initially, the Islamic
banking and finance sector has a lack of supportive institutions and
instruments, which is considered as an important determinant to promote IFM
practices in the country.
3.1 Data
Since the focus of the thesis is to analyse the various
dimensions of IFM practices in Islamic Banks in Bangladesh, the study explored
several databases and online resources to identify the population at the first
hand. Then, the study screened through each and every institution before
choosing them in the analysis. Basic rules were imposed while selecting the
sample, such as, whether the institution has an annual report, which year it
was established and also the availability of the basic institutional data.
After the careful assessment, the study ended up with seven full-fledged
Islamic banks currently operating in Bangladesh and they meet the imposed
criteria. They are, Islami Bank Bangladesh Limited, ICB Islamic Bank Limited,
Al-ArafahIslami Bank Limited, Social Islami Bank Limited, ShahjalalIslami Bank
Limited, Export Import Bank of Bangladesh Limited, First Security Islami Bank
Limited and Union Bank Limited
Since, all the Islamic banks and insurance companies were
taken as the sample for the study, thus, we have sufficient confidence that the
sample size chosen has covered the full population. The study covered the
annual reports of the sample companies for 7 years, which is basically a
longitudinal dataset, from 2007 to 2013.Collecting data from the secondary
source was not an easy process for this study. However, the important sources
of secondary data include annual reports of the selected Islamic Banks and
Islamic insurance companies. To validate and standardized the data, both the
hard and soft copy of annual reports of Islamic banks and Islamic insurance
companies for cross checking to minimize the errors. Hence, the study believes
that a very good quality of dataset has been used in the analysis. Hence, the
findings and policy implications derived from the analysis are believed to be
consistent and robust.
The data and information collected and
processed manually to make it workable in software such as SPSS 20.0. The study
used various statistical techniques. Analysis of Variance, known as ANOVA, is a
statistical technique used to analyse the differences among group means in a
sample more specifically, the one-way ANOVA to analyse the differences of
various financial performance of Islamic banks. The following section will
provide a brief description of the performance assessed in the study.
To examine the performance among Islamic
banks, the study looked at several financial aspects, such as working capital
management efficiency, capital structure efficiency, capital budgeting
efficiency, and overall IFM operating efficiency in line with the definition of
the IFM. To analyse the performance, each of the criteria employed several
other sub-categories to have a better statistical result. To capture working
capital management efficiency, current ratio, quick ratio, cash ratio and receivables
turnover are used. Then, the study analyses capital structure efficiencies of
the Islamic banks by using the Debt Ratio. After that, focusing on capital
budgeting efficiency, the study relied on Fixed Asset Turnover Ratio. The last
aspects of IFM�s operating efficiency and effectiveness are measured by several
profitability ratios, namely, Profit Margin Ratio (PMR), Return on Assets (ROA)
and Return on Equity (ROE).
Table 3 shows the result of current ratio of Islamic banks in Bangladesh
and the comparison among them using ANOVA. The findings show that on average Al
ArafahIslami Bank Limited (AAIBL) maintains the highest current ratio (1.51)
over the year 2007 to 2013 followed by Islami Bank Bangladesh Limited (IBBL)
(1.42) and ICB Islami Bank Limited (ICBIBL) (1.28).
The mean current ratio of the seven selected Islamic banks (1 ≤
�≤1.51) shows that short term solvency of the banks is quite
satisfactory. All the Islamic banks seem to have reasonably enough liquid
assets with the exemption of Export Import Bank of Bangladesh Limited (EXIM)
bank. Hence, it is highly likely that the Islamic banks are capable of settling
their financial obligations and, thus avoid experiencing financial distress.
The findings of the results
are in line with Olson and Zoubi (2008), which suggested that Islamic banks
hold more cash relative to deposits and less relative to assets than
conventional banks. The standard deviation (ơ) lies from 0.02 to 0.66.
This finding suggests that variations of current ratios of the Islamic banks
are reasonably lower over the seven years periods. One important finding
emerged from this table is that,
on the basis of current ratio, there is no sign of difference among the Islamic
banks. These suggest that Islamic banks in Bangladesh are homogeneous and
performing in a similar pattern when current ratio is considered.��
Table 3: Current ratios of Islamic banks in
Bangladesh
Banks |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
Mean |
STDEV |
AAIBL |
1.01 |
1.01 |
1.00 |
1.36 |
2.58 |
2.30 |
1.33 |
1.51 |
0.66 |
EXIM |
0.65 |
0.86 |
1.08 |
1.12 |
1.12 |
1.11 |
1.10 |
1.00 |
0.18 |
IBBL |
1.48 |
1.40 |
1.37 |
1.50 |
1.45 |
1.38 |
1.37 |
1.42 |
0.05 |
FSIBL |
-- |
1.20 |
1.12 |
1.12 |
1.15 |
1.16 |
1.14 |
1.15 |
0.03 |
SIBL |
1.01 |
1.22 |
1.25 |
1.22 |
1.24 |
1.21 |
1.21 |
1.19 |
0.08 |
SJIBL |
1.24 |
1.24 |
1.23 |
1.23 |
1.27 |
1.27 |
1.23 |
1.24 |
0.02 |
ICBBL |
1.42 |
1.37 |
1.36 |
1.28 |
1.33 |
1.13 |
1.10 |
1.28 |
0.12 |
ANOVA |
|||||||||
|
Sum of Squares |
Df |
Mean Square |
F |
Sig. |
||||
Current ratios of the sample banks |
Between Groups |
.000 |
6 |
.000 |
.000 |
1.000 |
|||
Within Groups |
196.000 |
42 |
4.667 |
|
|
||||
Total |
196.000 |
48 |
|
|
|
Source:
Author�s calculation.
Table 4 displays the quick ratio of Islamic
banks in Bangladesh and the comparison among them. It is found that the mean
quick ratio of Al ArafahIslami Bank Limited (AAIBL), ShahjalalIslami Bank
Limited (SJIBL), Social Islami Bank Limited (SIBL), First Security Islami Bank
Limited (FSIBL), ICB Islami Bank Limited (ICBIBL), Islami Bank Bangladesh
Limited (IBBL), and Export Import Bank of Bangladesh Limited (EXIM) Bank Ltd
are 2.68, 0.87, 0.77,0 .49, 0.22, 0.17 and 0.10 respectively. The results
suggest that most of the Islamic banks have less ability to use their quick
assets or near cash assets to retire their liability. This is because they are
applying restricted policy of quick asset investment. Standard deviations of
quick ratio for the banks lies between 0.09 and 3.22 indicate that variations
are relatively lower. However, the findings may also reveal that
all Islamic banks are
not in a healthy financial position in
terms of quick ratio. No difference is found among the Islamic banks in
Bangladesh based on ANOVA results.
Table
4: Quick ratios of Islamic Banks in Bangladesh
Number of banks |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
Mean |
STDEV |
AAIBL |
0.09 |
0.23 |
0.17 |
4.15 |
0.36 |
7.27 |
6.49 |
2.68 |
3.22 |
EXIM |
0.06 |
0.08 |
0.12 |
0.01 |
0.01 |
0.23 |
0.19 |
0.10 |
0.09 |
IBBL |
0.25 |
0.18 |
0.18 |
0.16 |
0.17 |
0.16 |
0.12 |
0.17 |
0.04 |
FSIBL |
-- |
0.14 |
0.14 |
0.23 |
0.07 |
1.18 |
1.16 |
0.49 |
0.53 |
SIBL |
3.82 |
0.28 |
0.30 |
0.26 |
0.26 |
0.25 |
0.21 |
0.77 |
1.35 |
SJIBL |
5.48 |
0.16 |
0.01 |
0.01 |
0.11 |
0.14 |
0.14 |
0.87 |
2.04 |
ICBBL |
0.25 |
0.26 |
0.25 |
0.22 |
0.17 |
0.19 |
0.23 |
0.22 |
0.03 |
ANOVA |
|||||||||
|
Sum of Squares |
Df |
Mean Square |
F |
Sig. |
||||
Quick ratios of the sample banks |
Between Groups |
14.535 |
6 |
2.422 |
.833 |
.551 |
|||
Within Groups |
119.194 |
41 |
2.907 |
|
|
||||
Total |
133.729 |
47 |
|
|
|
Source: Author�s calculation
Table 5 provides the cash ratio of Islamic
banks in Bangladesh and the comparison among them using ANOVA. The results find that AAIBL is in the top position among the Islamic
banks in Bangladesh based on the mean cash ratio (1.73) followed by SIBL (0.59)
and SJIBL (0.38) respectively. The average cash ratios (0.08 ≤
�≤1.73) suggest that Islamic banks in Bangladesh maintain low amount of
cash and cash equivalents to meet their current liabilities. Their standard
deviations (vary from 0.02 to 2.09 over the seven years periods) reveals that
the banks are bearing high risk in short-term solvency. The results also
support the findings of Olson and Zoubi (2008) who argued that Islamic banks
have more cash relative to deposits. Like the current and quick ratios, sampled
Islamic banks in Bangladesh have no variation in cash ratio, thus, no
significant different among the Islamic banks. This may mean that all Islamic
banks may have high risk, according to ANOVA results.
Table
5: Cash ratios of Islamic Banks in Bangladesh
Banks |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
Mean |
STDEV |
AAIBL |
0.01 |
0.13 |
0.08 |
3.20 |
0.09 |
4.25 |
4.35 |
1.73 |
2.09 |
EXIM |
0.01 |
0.01 |
0.01 |
0.10 |
0.13 |
0.17 |
0.13 |
0.08 |
0.07 |
IBBL |
0.10 |
0.16 |
0.15 |
0.13 |
0.12 |
0.10 |
0.09 |
0.12 |
0.03 |
FSIBL |
-- |
0.05 |
0.12 |
0.09 |
0.09 |
0.10 |
0.08 |
0.09 |
0.02 |
SIBL |
3.70 |
0.07 |
0.07 |
0.01 |
0.09 |
0.12 |
0.09 |
0.59 |
1.37 |
SJIBL |
2.17 |
0.09 |
0.01 |
0.03 |
0.13 |
0.13 |
0.11 |
0.38 |
0.79 |
ICBBL |
0.09 |
0.09 |
0.09 |
0.11 |
0.11 |
0.10 |
0.10 |
0.10 |
0.01 |
ANOVA |
|||||||||
|
Sum of Squares |
Df |
Mean Square |
F |
Sig. |
||||
Cash ratios of the sample banks |
Between Groups |
5.799 |
6 |
.966 |
.736 |
.623 |
|||
Within Groups |
53.820 |
41 |
1.313 |
|
|
||||
Total |
59.619 |
47 |
|
|
|
Source: Author�s calculation
Table 6 shows the receivable
turnover of Islamic banks in Bangladesh and the comparison among the islamic
banks using ANOVA test. The results show that AAIBL (on average 16.83)
manitains high receivable turnover compare to other islamic banks in bangladesh
over the period 2007 to 2013. A part from AAIBL, IBBL (10.61) and EXIM (9.19)
banks having reasonably good receivable turnover. This reflects that AAIBL,
IBBL ans EXIM banks can use their assets efficiently. On the other hand, FSIBL (0.5), SIBL (1.57),
SJIBL (0.65), and ICBIBL (0.81) maintain low value of receivable turnover
indicating that these banks are providing more credits to their clients without
managing credits in an efficient manner. Thus, it is necessary for FSIBL, SIBL,
SJIBL and ICBIBL to reduce the laxity while managing receivable in particular.
There is no significant difference in receivable turnover among the Islamic
banks in Bangladesh based on the ANOVA results. This suggests that Islamic
banks in Bangladesh are homogenous and maintaining the same receivable turnover
ratio pattern except for few banks.�
Table 6: Receivables Turnover of Islamic Banks in
Bangladesh
Number of banks |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
Mean |
STDEV |
AAIBL |
21.82 |
12.04 |
12.77 |
20.72 |
33.95 |
3.97 |
12.56 |
16.83 |
9.63 |
EXIM |
0.61 |
18.52 |
10.97 |
13.67 |
10.38 |
7.32 |
2.87 |
9.19 |
6.17 |
IBBL |
7.11 |
10.93 |
5.14 |
15.90 |
22.71 |
6.85 |
5.64 |
10.61 |
6.53 |
FSIBL |
-- |
0.36 |
0.94 |
1.47 |
1.68 |
1.43 |
1.55 |
1.24 |
0.50 |
SIBL |
5.32 |
0.96 |
1.16 |
0.74 |
1.20 |
0.96 |
0.68 |
1.57 |
1.66 |
SJIBL |
0.10 |
0.06 |
0.73 |
1.22 |
1.04 |
0.87 |
0.51 |
0.65 |
0.45 |
ICBBL |
0.05 |
0.5 |
0.51 |
0.49 |
0.37 |
0.63 |
3.11 |
0.81 |
1.03 |
ANOVA |
|||||||||
|
Sum of Squares |
Df |
Mean Square |
F |
Sig. |
||||
Receivable turnover of the sample banks |
Between Groups |
1757.232 |
6 |
292.872 |
.848 |
.540 |
|||
Within Groups |
14153.00 |
41 |
345.195 |
|
|
||||
Total |
15910.23 |
47 |
|
|
|
Source: Author�s calculation
Overall,
it may be reasonably good to argue that the Islamic banks in Bangladesh are
homogenous, however,� they are not
financially healthy when liquidity measurements are concerned. Similar with the
study of Olson and Zoubi (2008), Islamic banks have enough cash in their hand
but not able to utilise their assets in an efficient way except for AAIBL, IBBL
and EXIM banks. This indicates that working capital management of Islamic banks
in Bangladesh is not at the optimum level if conventional parameters are considered.
Table 7
shows the results of total debt ratio of Islamic banks in Bangladesh and the
comparison among the Islamic banks using ANOVA test. The findings show that the
average debt ratios over the period of 2007 to 2013 of AAIBL, EXIM, IBBL, FSIBL,
SIBL, SJIBL, and ICBIBL banks are 85%, 91%, 94%,
94%, 89%, 92% and 118% respectively. Interestingly, the results revealed that
most of the Islamic Banks in Bangladesh are practicing debt-based financing
rather than equity-based financing.Thus, the leverage
attributes for an Islamic bank are the same as those for a conventional bank. This can be explained by
the several factors. Firstly, a lack of autonomous body to oversee the Shariah
compliance of Islamic banks in Bangladesh. Secondly, there is no separate
regulatory and institutional systems for Islamic banking practice who can share
the experience and promote truly innovative, competitive and Shariah based
Islamic banking practice in Bangladesh (Khan & Bhatti, 2008). In addition
to capital structure, there is no significant difference among the Islamic
banks in Bangladesh as of ANOVA results.
Table
7: Total Debt ratios of Islamic Bank in Bangladesh
Number of banks |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
Mean |
STDEV |
AAIBL |
0.93 |
0.93 |
0.92 |
0.58 |
0.79 |
0.89 |
0.92 |
0.85 |
0.13 |
EXIM |
0.92 |
0.93 |
0.92 |
0.89 |
0.89 |
0.90 |
0.89 |
0.91 |
0.02 |
IBBL |
0.94 |
0.94 |
0.94 |
0.95 |
0.94 |
0.93 |
0.93 |
0.94 |
0.01 |
FSIBL |
-- |
0.92 |
0.94 |
0.94 |
0.95 |
0.96 |
0.96 |
0.94 |
0.01 |
SIBL |
0.67 |
0.94 |
0.91 |
1.00 |
0.89 |
0.91 |
0.91 |
0.89 |
0.10 |
SJIBL |
0.95 |
0.92 |
0.92 |
0.91 |
0.93 |
0.93 |
0.91 |
0.92 |
0.01 |
ICBBL |
0.77 |
0.77 |
0.77 |
1.31 |
1.42 |
1.57 |
1.65 |
1.18 |
0.40 |
ANOVA |
|||||||||
|
Sum of Squares |
Df |
Mean Square |
F |
Sig. |
||||
Total debt ratios of the sample banks |
Between Groups |
26.723 |
6 |
4.454 |
1.076 |
.393 |
|||
Within Groups |
169.764 |
41 |
4.141 |
|
|
||||
Total |
196.487 |
47 |
|
|
|
Source: Author�s calculation
Table 8 displays the
findings of fixed asset turnover ratio of Islamic banks in Bangladesh and the
comparison among the Islamic banks using ANOVA test. The result suggests that
the performance of EXIM bank (8.78) in terms of fixed asset turnover ratio is
higher than other Islamic banks in Bangladesh. With the exception of ICBIBL,
all the Islamic banks somehow utilise their fixed assets to generate income,
but unefficeintly as the ratios are not up to the mark while considering conventional
benchmark. It indicates that islamic banks in bangladesh are facing capital
budgeting problem. The findings are different with the study of Bellalah (2013)
who studied on Islamic banks in Pakistan found on average the fixed asset
turnover ratio is 20%. Additionally, since the Islamic banks are homogenous in
Bangladesh, the ANOVA test did not find any signIslamic bankscant difference
among the Islamic banks.�
Table
8: Fixed Asset Turnover Ratio of Islamic Banks in Bangladesh
Number of banks |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
Mean |
STDEV |
AAIBL |
3.58 |
3.17 |
3.41 |
4.92 |
4.47 |
1.99 |
1.97 |
3.36 |
1.12 |
EXIM |
9.51 |
8.58 |
8.33 |
12.71 |
8.45 |
12.32 |
1.55 |
8.78 |
3.68 |
IBBL |
0.95 |
1.44 |
1.00 |
1.25 |
1.46 |
0.80 |
0.70 |
1.09 |
0.30 |
FSIBL |
-- |
1.03 |
1.99 |
2.10 |
1.62 |
0.96 |
0.81 |
1.42 |
0.56 |
SIBL |
0.29 |
0.80 |
1.12 |
1.24 |
0.89 |
1.22 |
0.76 |
0.90 |
0.33 |
SJIBL |
0.47 |
14.24 |
3.29 |
2.40 |
1.97 |
1.53 |
0.91 |
3.55 |
4.81 |
ICBBL |
0.05 |
0.05 |
0.05 |
0.05 |
0.02 |
0.06 |
0.24 |
0.07 |
0.07 |
ANOVA |
|||||||||
|
Sum of Squares |
Df |
Mean Square |
F |
Sig. |
||||
Fixed asset turnover ratios of the sample
banks |
Between Groups |
39.945 |
6 |
6.658 |
.480 |
.819 |
|||
Within Groups |
568.817 |
41 |
13.874 |
|
|
||||
Total |
608.763 |
47 |
|
|
|
Source: Author�s calculation
Table 9 summarises the
results of profit margin of Islamic banks in Bangladesh and the comparison
among the Islamic banks using ANOVA test. The results find that the average
profit margins (�) of AAIBL, EXIM Bank Ltd, IBBL, FSIBL, SIBL,
SJIBL, and ICBIBL are 4.57%, 2.13%, 38.64%, 44%, 53 %, 13.30% and 5.20%
respectively. Interestingly, SIBL is performing
higher that other Islamic banks over the period of 20017 to 2013 based on
profit margin. Besides, FSIBL and IBBL are in a good profitable position after
SIBL while EXIM, AAIBL and ICBIBL are not in a satisfied position. Thus, the
results suggest that most of the Islamic banks in Bangladesh are facing
high-operating cost due to the inefficiency of managerial skills and
inefficient utilisation of resources (Gitman, 1994).
Table
9: Profit margin ratios of Islamic Banks in Bangladesh (in percentage)
Banks |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
Mean |
STDEV |
AAIBL |
3.69 |
4.87 |
4.11 |
2.22 |
5.55 |
5.88 |
5.7 |
4.57 |
1.33 |
EXIM |
2.18 |
1.67 |
2.39 |
3.55 |
1.89 |
1.68 |
1.56 |
2.13 |
0.69 |
IBBL |
29.65 |
39.56 |
48.52 |
51.97 |
52.08 |
48.28 |
0.45 |
38.64 |
18.66 |
FSIBL |
-- |
62.46 |
43.53 |
45.58 |
36.48 |
39.03 |
37.63 |
44 |
0.10 |
SIBL |
31 |
57 |
59 |
57 |
57 |
52 |
60 |
53 |
0.10 |
SJIBL |
11.41 |
16.84 |
15.04 |
21.79 |
9.73 |
9.92 |
8.36 |
13.30 |
4.83 |
ICBBL |
26.7 |
26.88 |
33.12 |
22.98 |
-59.63 |
-16.24 |
2.62 |
5.20 |
33.41 |
ANOVA |
|||||||||
|
Sum of Squares |
Df |
Mean Square |
F |
Sig. |
||||
Profit margin ratios of the sample banks |
Between Groups |
1329.407 |
6 |
221.568 |
.590 |
.736 |
|||
Within Groups |
15392.342 |
41 |
375.423 |
|
|
||||
Total |
16721.749 |
47 |
|
|
|
Source: Author�s calculation
Table 10 shed lights the results of return on
assets of Islamic banks in Bangladesh and the comparison among the Islamic
banks using ANOVA test. The findings show that on average the return on assets (ROA) of Islamic banks in bangladesh are
between -0.08 to 1.95. SJIBL (1.95) has the highest ROA ratio followed by EXIM
(1.76) and AAIBL (1.70). On the other hand, ICBIBL (-0.08) has the lowest ROA
ratio. The outcome indicates that ICBIBL is facing systematic financial crisis.
The standard deviations (0.02≤ơ≤1.18)
indicate that the variations of the ROA are in the tolerance level over the
period of 2007 to 2013. The overall ROA results are similar with the study of
Nabi et al. (2015) who found that ROA of the Islamic banking industry in
Bangladesh was 0.89 compared with the overall banking industry of 0.90 in
2013.Based on the ROA, there is no significant difference among the Islamic
banks in Bangladesh in ANOVA test.
Table
10: Return on assets of Islamic banks in Bangladesh
Banks |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
Mean |
STDEV |
AAIBL |
1.15 |
1.8 |
1.77 |
2.65 |
2.06 |
1.3 |
1.2 |
1.70 |
0.54 |
EXIM |
1.81 |
1.6 |
1.97 |
3.07 |
1.55 |
1.29 |
1.06 |
1.76 |
0.65 |
IBBL |
0.84 |
1.27 |
0.01 |
0.01 |
0.01 |
0.01 |
0.96 |
0.44 |
0.56 |
FSIBL |
-- |
0.38 |
0.68 |
0.86 |
0.64 |
0.59 |
0.47 |
0.60 |
0.17 |
SIBL |
1 |
1 |
1.24 |
2.39 |
2.72 |
2.75 |
1.67 |
1.54 |
1.18 |
SJIBL |
2.6 |
2.22 |
2.08 |
3.01 |
1.26 |
1.44 |
1.02 |
1.95 |
0.73 |
ICBBL |
-0.08 |
-0.08 |
-0.11 |
-0.07 |
-0.1 |
-0.07 |
-0.05 |
-0.08 |
0.02 |
ANOVA |
|||||||||
|
Sum of Squares |
Df |
Mean Square |
F |
Sig. |
||||
Return on assets of the sample banks |
Between Groups |
2.394 |
6 |
.399 |
.346 |
.908 |
|||
Within Groups |
47.297 |
41 |
1.154 |
|
|
||||
Total |
49.691 |
47 |
|
|
|
Source: Author�s calculation
The findings of return on equity of Islamic
banks in Bangladesh and the comparison among the Islamic banks using ANOVA test
are summarised in Table 11. Over the period of 2007 to 2013, the mean return on
equity (ROE) of AAIBL, EXIM Bank Ltd, IBBL, FSIBL, SIBL, SJIBL, and ICBIBL are
18.84%, 19.46%, 15.68%, 11.30%, 9.19%, 20.05% and -7% respectively. As
expected, the ROE of the banks is higher than the ROA. The low fluctuated
standard deviations (0.03≤ơ≤30.45)
of the ROE over the periods indicate the stability of ROE in the Islamic banks
in Bangladesh. With the exception of ICBIBL, overall Islamic banks are having
high return on equity ratio suggesting that
the resource management of the banks are both efficient and effective. The
results are similar withNabi et al. (2015) where they found that the average
ROE of Islamic banks in Bangladesh is 11.71 percent in 2013, which is higher
than that of the overall banking industry ROE of 10.70 percent in 2013.
Furthermore, the results of this study reveal that Islamic banks in Bangladesh
have ability to attract future investors. Based on the ANOVA result, no
significant difference of ROE is found among the Islamic banks in Bangladesh.
Table
11: Return on equity of Islamic banks in Bangladesh
Banks |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
Mean |
STDEV |
AAIBL |
17.05 |
24.7 |
24.1 |
20.01 |
18.34 |
14 |
14 |
18.84 |
4.42 |
EXIM |
23.03 |
21.98 |
25.22 |
27.86 |
13.87 |
12.97 |
11.31 |
19.46 |
6.62 |
IBBL |
13 |
19.02 |
16.93 |
19 |
17.42 |
13.42 |
11 |
15.68 |
3.19 |
FSIBL |
-- |
4.66 |
11.41 |
13.99 |
12.75 |
13.33 |
11.63 |
11.30 |
0.03 |
SIBL |
9 |
11 |
12.14 |
15.31 |
11.51 |
14.15 |
11.01 |
9.19 |
6.39 |
SJIBL |
18.89 |
23.56 |
25.1 |
30.71 |
13.8 |
17.01 |
11.25 |
20.05 |
6.81 |
ICBBL |
-35 |
-36 |
-46 |
23 |
24 |
12 |
07 |
-07 |
30.45 |
ANOVA |
|||||||||
|
Sum of Squares |
Df |
Mean Square |
F |
Sig. |
||||
Return on equity of the sample banks |
Between Groups |
126.441 |
6 |
21.074 |
.205 |
.973 |
|||
Within Groups |
4215.731 |
41 |
102.823 |
|
|
||||
Total |
4342.172 |
47 |
|
|
|
Source: Author�s calculation
5. Conclusion
For Islamic banking - it may be reasonably
good to argue that the Islamic banks in Bangladesh are homogenous; however,
they are not financially healthy when liquidity measurements are concerned.
This indicates that working capital management of Islamic banks in Bangladesh
is not at the optimum level if conventional parameters are considered.
Therefore, it is critical for the Islamic banks to manage their working capital
efficiently and they should increase the amount of working capital as much as
possible. �On the basis of working
capital management, no significant difference found among the sampled Islamic
banks.
From the evaluation of capital structure
efficiency, the results revealed that most of the Islamic Banks in Bangladesh
are practicing debt-based financing rather than equity-based financing. Thus,
the leverage attributes for an Islamic bank are the same as those for a
conventional bank. In addition to capital structure, there is no significant
difference among the Islamic banks in Bangladesh.
In case of capital budgeting efficiency, most
of the Islamic banks somehow utilise their fixed assets to generate income, but
inefficiently as the fixed asset turn over ratios are not up to the mark while
considering conventional benchmark. It indicates that Islamic banks in
Bangladesh are facing capital budgeting problem. Additionally, since the
Islamic banks are homogenous in Bangladesh, the result did not find any
significant difference among the Islamic banks.
The findings of overall Islamic bank
financial management�s operating efficiency suggest that most of the Islamic
banks in Bangladesh are facing high-operating cost due to the inefficiency of
managerial skills and inefficient utilization of resources. However, based on
the return on equity, it is suggested the resource management of the banks are
both efficient and effective and the earnings of Islamic banks are higher as
compared to their equity position. Similarly, no significance difference found
among the Islamic banks.
The study has put forward an important question by analyzing
IFM practices in Bangladesh and derived several conclusions based on the
findings. Best on the author�s knowledge, this study is one of the few that has
comprehensively investigated the issue from a single country perspective. While
the study has observed that the practices of IFM in Bangladesh are promising,
however, there are numerous challenges encroaching the industry. Hence,
immediate attention from the respective authorities, including practitioners
and policy makers are indeed vital. In that aspect, establishing an independent
regulatory authority to supervise and monitor the activities of Islamic should
be prioritized in the government agenda. This would ensure and create more
congenial infrastructure for the smooth functioning of IFM practices of Islamic
banks in Bangladesh.
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