Conventional and Islamic Banks - Research Paper Example

Returns to Assets, Returns to Equity and Net Interest Margin have been identified as the ones which represent the profitability of a firm. The rationale behind the selection is that while the former two represent the yield to the firm, the last one of the three signify the margin between the revenue and expenses borne by the firm, which is broadly what profits mean.   Returns to Assets, Returns to Equity and Net Interest Margin have been identified as the ones which represent the profitability of a firm.

The rationale behind the selection is that while the former two represent the yield to the firm, the last one of the three signify the margin between the revenue and expenses borne by the firm, which is broadly what profits mean.   • Return on Assets (ROA) – Return on assets implies the yield per unit of asset owned by the firm. Higher the yield is, it is indicative of a highly productive asset endowment and thus, a robust financial position of the concerned firm. • Return on Equity (ROE) – Return on equity is almost similar to ROA.

The only difference is that while the latter implies the productivity per unit of asset, the former indicates that for each unit of stock being sold in the market. • Net Interest Margin (NIM) – Net Interest Margin is the difference between the interest earned by the banks out of credits advanced to the investors and the payments they are supposed to make to their creditors or the depositors. The greater than the margin is, higher will be the profits earned by the bank. Moreover, the greater the earnings are, higher will be the liquidity of the firm.

Thus, this particular ratio is responsible for the analysis of financial liquidity (solvency of the firm) as well as its profitability (Demirguc-Kunt, Laeven & Levine, 2003, p. 7).