Current performance of Islamic bank around the world - Dissertation Example

?Current performance of Islamic bank around the world After the financial crisis that has been experienced by the traditional banking industry, focusof everyone has been shifted towards Islamic banks (Willison, 2009). With the growing success of Islamic banks, number of Islamic countries have been considering to shift their banking sector to Islamic banking sector and the policies and regulations would be governed by Islamic teachings (Johnes, Izzeldin, and Pappas, 2009). Islamic financial institutions including Islamic banks have been growing in different parts of the world including countries like Iran, Sudan and several others and all these countries are practicing Islamic banking using Islamic laws. However, some countries such as Indonesia, Bangladesh, Egypt, Malaysia and Jordan are offering the services of Islamic banking through traditional banking services. In some countries like Pakistan, there are banks that are operating in accordance with the Islamic laws and at the same time there are some banks that are practicing conventional banking and at the same time some of their branches are offering Islamic banking services. Not only there has been an increasing trend of Muslim majority countries practicing Islamic banking products but certain Western countries including United Kingdom, United States and Australia have been also observing an increasing trend in regard to the Islamic banking. Although the industry of Islamic banking is still growing and an emerging industry, but in different parts of the world this industry has been achieving very high profits unlike United Kingdom. However in countries like Pakistan, Bangladesh, Bahrain this industry has been growing. In Pakistan, Islamic banks have reported a profit of 5.7 PKR which is approximately 59% of the total market share in the year 2011 (The News, 2012).). In Bahrain, Islamic banking industry is also one of the fasted growing industries of the countries and still there are several opportunities in the countries (Laxman, 2011). In addition to this, Islamic banking industry is showing good progress and is giving tough time to traditional banks in several other western countries. Financial performance of Islamic financial institutions in UK United Kingdom and particularly London has been considered as an important market place by investors and in this part of the world; both Islamic and non-Islamic banks have invested. Initially Islamic banks started their services in London by offering simple products like house financing however with the passage of time the quality of products as well as the complexities involved increased (Ainley, Mashayekhi, Hicks, Rahman, and Ravalia, 2007). after analysing different opportunities for profits and growth, number of Islamic banks invested in United Kingdom and tried to capitalise on these opportunities. Some of the most prominent names of Islamic banks in UK are: Islamic Bank of Britain HSBC Amanah Lloyds TSB The products and services offered by Islamic banks are not only for Muslims but for non-Muslims as well and this is one of the reasons why it has become highly famous in UK despite of the challenges it faces. However recently the performance of the Islamic bank has not been satisfactory and the opportunities that every one identified had not been capitalised by these Islamic banks. This is one of the reasons why one of the leading Islamic banks, Islamic bank of Britain had to be bailed out in the year 2010 by Qatar after several successive years of losses. After the financial crisis, the Islamic banks in United Kingdom have suffered a lot. Lloyds Islamic bank also removed its investment from United Kingdom as they did not see bright future in the country (Goodway, 2010). Islamic Bank of Britain which has been able to make a name in the United kingdom is also losing its customers. in 2009, the Islamic bank had lost almost 50,000 customers as the total loss of the bank increased to ?9.5 million from ?5.9 million. Considering the situation of the bank, IBB had to raise additional capital of 2009. Then in 2010, the bank had to be bailed out with ?20 million (Goodway, 2010). Islamic Bank of Britain is also analysing to reduce its expenses and cut back the growth plan of the company and it would also reduce its branches and employees so that the losses of the bank can be minimised (Goodway, 2010). Profitability Ratios In order to analyse the financial performance of Islamic banking firms in United Kingdom, the researcher has selected one of the leading Islamic banks of the country, Islamic Bank of Britain. The profitability ratios of the bank do not show a positive image. The poor performance of the bank can be shown from its financial ratios. Some of the main ratios that have been shown in the table below: Ratios 2010 2009 Change Operating Income Margin 124.8% 132.5% -5.87% Net Profit/ Loss Margin -619.1% -784.7% 21.10% Fixed Assets Turn Over 0.584 0.406 43.61% Total Assets Turn Over 0.0060 0.0058 2.93% Return On Assets -3.72% -4.59% 18.79% Return On Equity -31.01% -56.46% 45.06% Earnings per share -0.63 -1.8 65.00% Dividends Per Share 0 0 - (Islamic Bank of Britain, 2010). The financial ratios of the bank show that the operating income has reduced slightly by 6%. However the major concern for the management of the bank is regarding the net profit rather than the operating profit. The net profit margin shows negative profits and therefore the bank is suffering from losses. Although the net loss of the bank has been reduced in the year 2010 by 14.4% but still the amount of loss for the bank is immense and therefore it has become difficult for the bank to survive and sustain. This is one of the reasons why the bank had to be bailed out. Return on equity and return on assets also do not show good results as the return on equity is 31% in the year 2010 and in 2009 it is 56% which is very high. Return on assets is 3.7% and 4.6% in 2010 and 2009 respectively. Earnings per share of the bank has improved from a loss of 1.8 pence to 0.63 pence. However still the company is in loss despite of the improvements that it has achieved in revenues, operating margin, operating profits, and net income in the last year. The bank has not paid dividends to its shareholders in both the years. In addition to this, the management also does not plan to pay dividends to its shareholders in near future and therefore it would influence the share price of the stock of Islamic banks. With the growing opportunities of Islamic banks around the world, it is important for the management of Islamic banks operating in United Kingdom to analyse their performance and their strategies and how they are approaching the market and consumers. Also the products and offerings of the banks in UK need to be analysed and compared with the offerings of Islamic banks in other parts of the world particularly in regions where they are earning high profits. Goodway, N (2010). Struggling Islamic Bank of Britain is bailed out with ?20m by Qatar. London Evening Standard. Available at [Accessed 7 May 2012] Laxman. (2011). ‘Islamic Banking industry in Bahrain is one of the fastest growing sectors.’ Opalesque Islamic Finance Briefing, available from http://www.opalesque.com/IslamicFinance_Briefing/?p=12652 [Accessed 8 April 2012] Global Research (2007). Bahrain Banking Sector Report: competitive banking environment. Kuwait: Global Investment. Available from http://www.globalinv.net/research/Bahrain-Banking-062007.pdf [Accessed 8 April 2012] The News. (2012). Islamic Banking industry’s profit crosses Rs. 10bn mark.’ Available from http://www.thenews.com.pk/Todays-News-3-99996-Islamic-banking-industry%E2%80%99s-profit-crosses-Rs10bn-mark [Accessed 8 April 2012] Ainley, M., Mashayekhi, A., Hicks, R., Rahman, A, and Ravalia, A. (2007). Islamic finance in the UK: regulation and Challenges. London: The Financial Services Authority. Available from http://www.fsa.gov.uk/pubs/other/islamic_finance.pdf [Accessed 8 April 2012] Willison, B. (2009). ‘Technology trends in Islamic investment banking.’ Islamic Finance News, vol. 6, no. 9. Johnes, J., Izzeldin, M., and Pappas, V. (2009). Efficiency in Islamic and conventional banks: a comparison based on financial ratios and data envelopment analysis. Available from http://www.gulf1bank.com/PDF/Efficiency%20of%20Islamic%20and%20Conventional%20Banks%20in%20GCC%20-%20full%20paper.pdf [Accessed 8 April 2012] Islamic Bank of Britain. (2010). Annual Report and Financial Statements. Available from http://www.islamic-bank.com/GetAsset.aspx?id=fAA1ADUANAB8AHwAVAByAHUAZQB8AHwAMAB8AA2 [Accessed 8 April 2012] Read More