performance comparison between islamic and conventional
TRANSCRIPT
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Performance Comparison between Islamic and Conventional Banks:
Evidence from Palestine
Ra’fat T. Jallad1, Laui Antari2
1,2Department of Finance, An-Najah National University, Palestine
Abstract
The aim of this study is to analyze the differences in bank performance of Islamic and conventional
banks in Palestine, especially by using CAMEL approach (Capital Adequacy, Asset Quality,
Management Quality, Earning Ability and Liquidity Position) are included in the analysis. Twelve
banks (ten conventional and two Islamic) were considered over the period of 2011-2017. For each
of the five variables the mean value have been computed for each set of the banks and tests of the
differences have been constructed. Our results indicate that the capital to risk assets, debt to total
assets, return on assets, and cash to deposit of conventional banks are higher compared to Islamic
banks. The other variables, which include average loan quality ratio, assets growth, profit growth,
return on equity, cash to assets, and gap ratio are higher for Islamic banks compared with
conventional bank. The non-interest to total revenue ratio is the same result of two groups of banks.
The variables capital to risk assets, debt to total assets, asset quality ratio, asset growth, cash to
deposit, cash to assets, and gap ratio are found to be of statistical significance as opposed to non-
interest expenses to total revenue, profit growth, return on equity, and return on asset ratios which
found to be non-significant.
Keywords: Islamic Bank, Conventional Bank, CAMEL, bank performance
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الإسلامية والمصارف التقليدية: دليل من فلسطين المصارفمقارنة الأداء بين
للبنوك الإسلامية والتقليدية في فلسطين هدف هذه الدراسة إلى تحليل الاختلافات في الأداء المصرفي ت
الايراديةكفاية رأس المال ، جودة الأصول ، جودة الإدارة ، القدرة ( في التحليل CAMEL باستخدام منهج
. 2017-2011خلال الفترة ) عشرة بنوك تقليدية واثنان إسلامية(اثني عشر بنكا دراسة تتم). ومركز السيولة
الخمسة ، تم حساب القيمة المتوسطة لكل مجموعة من البنوك وتم بناء اختبارات لكل متغير من المتغيرات
تشير نتائجنا إلى أن رأس المال للمخاطرة في الأصول ، والديون إلى إجمالي الأصول، والعائد على . الفروق
خرى والتي تشمل المتغيرات الأ. البنوك التقليدية أعلى مقارنة بالبنوك الإسلاميةفي الأصول ، والنقد لإيداع
نسبة جودة القروض ، نمو الأصول ، نمو الأرباح ، العائد على حقوق المساهمين ، النقد إلى الأصول متوسط
غير الفائدة إلى الايرادات من نسبة أما . ةك التقليديو، ونسبة الفجوة أعلى بالنسبة للبنوك الإسلامية مقارنة بالبن
متغيرات الأصول الرأسمالية هذا، وقد كانت كلا من . مجموعتين من البنوكللإجمالي الإيرادات هي نفس النتيجة
للمخاطرة ، الدين إلى إجمالي الأصول ، نسبة جودة الأصول ، نمو الأصول ، النقد إلى الودائع ، النقدية إلى
نمو معدل رادات ، غير الفائدة إلى إجمالي الإي الايراداتمن أهمية إحصائية مقابل ذاتالأصول ، ونسبة الفجوة
وعليه، . ذات دلاله احصائيةالأرباح والعائد على حقوق الملكية والعائد على نسب الأصول التي تبين أنها غير
. تشير النتائج الى نتائج مختلطة فيما يتعلق في آداء البنوك الإسلامية مقارنة مع البنوك التقليدية
، الأداء المصرفي CAMELتقليدي، البنك الإسلامي، البنك ال:الكلمات المفتاحية
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1. Introduction
Islamic and conventional Banks in Palestine play an important role in the economic
development by transferring the financial resources from savings surplus units to savings deficit
units. The banking system in Palestine, which is supervised by the Palestinian Monetary Authority
March 2019 , there is 12 conventional banks and three Islamic Banks.
Islamic banks constitute about 18 percent of banking system, while conventional banks share the
rest 82 percent. The numbers of Islamic banks that are operating in Palestine territories West Bank
are 3Islamic Banks with 60 branches. Namely, Arab Islamic bank (AIB) which was established
since 1995, Palestinian Islamic bank (ISBK) that was established in 1997, Safa Bank that was
established in 2016, conventional banks consisting 12conventional banks with 277 branches
(PMA, 2017).
Islamic banks offer many important financial products and services that offer substitute solutions
to conventional ones. Islamic banks operates according to the Shari’ah principles and are
supervised by Shari’ah supervisory board, which watches that operations and financing of the
Islamic Bank to make sure that it complies with Shari’ah rulings. Islamic banking operations are
based on profit loss sharing based Mudaraba, Musharaka contract, etc. (Siraj, Pillai, & Banking,
2012).
The recent acquisition of the Islamic banks by their conventional counterparts raises the question
of the motivation of these acquisitions. This study aims to answer a broad question of whether the
performance of Islamic banks is substantially different from the conventional banks.
1.1. Research Problem
The main research problem of this paper is find out whether Islamic Banks in Palestine are more
or less efficient than their conventional counterparts. In other words, is there performance
difference between Islamic and Conventional banks that could for an acquisition motivation?
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1.2. Objectives of the Study
This study aims to pinpoints the main areas of performance differential among the Islamic and
conventional banks in Palestine and highlight the main area where each group excel. This main
objective is further divided into five sub-objectives following CAMEL approach.
1.3. Significance of the Study
The significance of this research stems from its contribution towards understanding the reality of
Islamic banks in Palestine and providing clearer picture of regarding Islamic banks performance
2. Literature Review
A number of studies have investigated the financial performance comparison between
conventional and Islamic banks: (Abusharbeh, 2011; Ahmad, Nazam, Maqbool, & Adeel, 2017;
Ansari & Rehman, 2011; Hawaldar, Rahiman, Rajesha, KR, & Sciences, 2017; Iqbal, 2001; Siraj
et al., 2012; Wasiuzzaman & Nair Gunasegavan, 2013; Zeitun & Journal, 2012).
Financial ratio analysis is one of the tools which have been used extensively in literature to measure
and compare performance of banks (Akkas, 1994; Elyasiani et al., 1994; Sabi, 1996; Saleh and
Zeitun, 2006; Samad, 1999; Samad and Hassan, 2000; Spindler, 1991).Samad (2004) carried out
study while comparing Islamic and conventional banks in Bahrain for the years 1991-2001. The
result of the study shows that credit performance of both types of banking is different however,
there is not much difference between profitability and liquidity. Another study conducted by Srairi
(2010) performed cost and profit efficiency analysis by using stochastic frontier approach. The
study was carried out by analyzing 71 commercial banks in GCC countries from the year 1999 to
2007. The results reveal that conventional banks are more efficient than Islamic banks.
Previous studies have suggested that there is statistical significant difference in mean Capital
adequacy between the Islamic banks (Wasiuzzaman & Nair Gunasegavan, 2013), on the other
hand, some studies have suggested that the Islamic banks have a better capital adequacy indicators
than conventional banks (Jaffar, Manarvi, & Research, 2011), (Ahmad et al., 2017).
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The Islamic bank has almost the same (loan loss ratio) performance of conventional banks in assets
quality indicator (Jaffar, 2011), (Wasiuzzaman & Nair Gunasegavan, 2013). There is a significant
difference between Islamic and conventional bank in term of asset quality (Wasiuzzaman & Nair
Gunasegavan, 2013). On the other hand, there is an insignificant difference between two groups
of banks in the term of credit risk (Ibrahim, 2016).
Although Islamic bank growth over time, conventional banks still better in the term of
management efficiency (Jaffar,2011). As well, conventional banks have higher revenue growth
than Islamic banks, but lower profit growth due to the higher loan provision (Siraj et al., 2012).
Although Islamic banks have better profit growth than conventional bank (Ahmad et al., 2017;
Alzghoul, 2015; Blasig, 2017; Usman, Khan, & Science, 2012), there is a significant difference
between Islamic and conventional banks in term of management efficiency (Wasiuzzaman, 2013),
Johnes, Izzeldin and Pappas (2014) study found that conventional banks have better management
than Islamic banks
Some studies suggested there is no significant difference between Islamic and conventional banks
in term of ROA, ROE (Abusharbeh, 2011; Saleh & Zeitun, 2007; Wasiuzzaman & Nair
Gunasegavan, 2013). on the other hand, some of the study suggests there are significant difference
between Islamic and conventional banks in the term of Earning ability (Usman, Khan, & Science,
2012).
The conventional banks better than Islamic banks in term of earning ability (Jaffar,
Manarvi, & Research, 2011). ROA for Islamic banks better than conventional banks, while ROE
for conventional banks better than Islamic banks (Alzghoul, 2015).
2.1. Banking sector in Palestine
As of March 2019, there are 15 Banks of which 12 are conventional and 3 are Islamic banks. The
banking sector has experienced persistent improvement and development throughout the years
galvanizing its strength and capacity to endure risks and political and economic fluctuations and
cope with them. Hence, this sector’s indicators indicate growing asset base and improving quality,
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building provisions, increasing banks’ capacity to cope with expected and unexpected risks and
keeping delinquency rates at bay and other indicators, registered improvement (PMA, 2017).
Showed a 11.6 percent increase in the sector’s total assets compared to 12.7 percent at the end of
2016 to USD 15,850.2 million. The increase influenced by the increase in the key components of
the assets (and liabilities) in the banks’ consolidated balance sheet. On the liabilities side (money
sources), data shows that the relative importance of the customer deposits increased to 75.6 percent
of the total available money sources compared to 74.7 percent at the end of 2016. On the other
hand, the relative importance of the PMA’s and banks’ deposits drop to 7.2 percent (3.8 percent
for PMA, 1.3 percent for banks outside Palestine, and 2.1 percent for banks in Palestine) compared
to 8.0 percent (4.5 percent for PMA, 1.1 percent for banks outside Palestine, and 2.4 percent for
banks in Palestine). Equity maintained importance at 11.9 percent while there is a slight drop of
5.3 percent compared to 5.4 percent in the same period in the relative importance of the rest of the
liabilities.
On the assets side (using available funds), data shows that the relative importance of direct credit
portfolio share increase to 50.6 percent of the total use of funds available to banks in 2017
compared to 48.4 percent at the end of 2016. The cash share rose to 10.9 percent compared to 7.0
percent due to increase in shekel surplus. Alternatively, shares of balances at PMA and banks
dropped to 24.7 percent (9.0 percent for PMA, 2.3 percent for banks in Palestine, and 13.4 percent
for banks outside Palestine) compared to 30.1 percent (9.2 percent for PMA, 2.4 percent for banks
in Palestine, and 18.5 percent for banks outside Palestine). Investments and securities’ portfolio
share dropped to 7.6 percent compared to 8.5 percent. Fixed assets maintained stability of their
important at 3.5 percent. Other assets’ share rose to 2.7 percent compared to 2.4 percent in the
same period. Banks maintained approximately 22.2 percent of their total assets as cash and
deposits in Palestine compared to 18.6 percent at the end of 2016. They also maintained 13.4
percent as balances outside Palestine compared to 18.5 percent. Banks increased using funds in
credit to 50.6 percent compared to 48.4 percent, which was a positive sign of the efforts and
measures of PMA in cooperation and coordination with the banking sector leading to stimulating
the banking sector’s role in local economy. On the other hand, using funds by banks for investment
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and securities dropped to 7.6 percent compared to 8.5 percent in the same period, affected by the
economic situation and the political instability dominating Palestine, which had negative impact
on investment decisions. Banks also increased what they maintain as fixed assets and other assets
to 6.2 percent compared to 6.0 percent of their total assets in the same period.
2.2. Theoretical framework
In terms of liquidity the Islamic bank is better than conventional and significant difference (Ahmad
et al., 2017; Alzghoul, 2015; Ansari & Rehman, 2011; Blasig, 2017; Jaffar, Manarvi, & Research,
2011; Usman, Khan, & Science, 2012; Wasiuzzaman & Nair Gunasegavan, 2013), while (Ibrahim,
2016) suggests that conventional banks better than Islamic banks in liquidity term.
CAMEL (Capital Adequacy, Asset Quality, Management Quality, Earning Ability and Liquidity
Position) provides a suitable framework for identifying the main performance indicators. The five
performance dimensions should provide a comprehensive and accurate picture of bank
performance. This framework is illustrated in the following exhibit.
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Accordingly, the research hypothesis have been developed as follows:
H1: There is no significant difference in Capital Adequacy of Islamic and conventional banks.
H2: There is no significant difference in Asset Quality of Islamic and conventional banks.
H3: There is no significant difference in Management, Quality of Islamic and conventional banks.
H4: There is no significant difference in Earning Ability of Islamic and conventional banks.
H5: There is no significant difference in Liquidity of Islamic and conventional banks.
H6: There is no significant difference in the Sensitivity of Islamic and conventional banks.
3. Data and Methodology
3.1. Data of the Study Secondary data have been obtained from Palestinian Monetary Authority (PMA) and individual
banks websites. The collected data are related to two local Islamic banks (Arab Islamic bank and
Palestinian Islamic bank), four local conventional banks (TNB bank, Bank of Palestine, Al-Quds
bank and Palestine investment bank) that are listed in Palestinian exchange market (PEX), and six
foreign conventional banks (Arab bank, Cairo Amman bank, Jordanian commercial bank, Jordan
bank, Housing bank, and Jordan Kuwait bank). The data for each bank have been collected over
the period from 2011 until 2017, in order to test the difference among these groups of banks. The
selected sample of study formed 80% of Palestinian banking industry operating in West bank. We
exclude (Al-safe bank, Jordan Ahli Bank, and Egyptian Arab Land Bank) from sample of study
due to limited of financial data during the study period.
3.2. Limitations of Study
There are two limitations identified during the sample data collection. First, the number of Islamic
banks is less than conventional banks. Second, the sample period for this research taken from the
year 2011 to 2017 and most of the information about SAFA Islamic bank was not available; also
we excluded Jordan Ahli Bank, and Egyptian Arab Land Bank from the sample due to data was
not available.
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3.3. Variables of the Study
The variables in the form of financial ratios selected based on their appearance in previous research
and mostly achieved significant results. The definitions of the group and subgroups variables
presented in Table 3. This study approaches an analysis of 11 financial ratios. These ratios grouped
under six diminutions by camels (Capital Adequacy, Asset Quality, Management Quality, Earning
Ability, Liquidity Position,).
4. Results and Analysis
The data collected analyzed to compare the financial performance of both the Islamic and
conventional banks. The analysis based on the 11 selected financial ratios, as these considered
important ratios used for measuring performances of the banks. The study of the banks’ financial
ratios for a limited period of 7 years from 2011 to 2017 conducted to ascertain which of the banks
performed better within the periods. The average of the ratios from each of the Islamic and
conventional banks for each year was calculated and compared for the variables evaluated in terms
of (Capital Adequacy, Asset Quality, Management Quality, Earning Ability,Liquidity Position, and
Sensitivity).
4.1. Capital Adequacy
4.1.1. Capital to Risky assets
The capital adequacy measured by the formula: capital (tire 1 + tire 2)/Risky Assets.
Table (4.1.1-1) Capital to Risky assets
type 2011 2012 2013 2014 2015 2016 2017 Mean S.D
CB 1.8245 0.7125 0.7078 0.7319 0.6750 0.6030 0.4796 0.8192 1.8467
IB 0.3257 0.2521 0.2539 0.2032 0.1690 0.1503 0.1647 0.2170 0.0682
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Table 4-1 shows the capital adequacy ratio of both Islamic and conventional banks in Palestine
from the period of 2011 to 2017. The table illustrates that the average capital ratio of Islamic banks
is less than the average capital ratio in conventional banks over the study period. Thus, results
prove that conventional banks are efficiently managing its capital to protect its depositors and
lenders.
4.1.2. Debt to Assets
The table below defines the total amount of debt relative to assets. The Islamic banks have a higher
average ratio than Conventional banks, that means the higher the degree of leverage and,
consequently, financial risk.
Table (4.1.2-1) Debt to Assets
type 2011 2012 2013 2014 2015 2016 2017 Mean S.D
CB 0.3334 0.3816 0.3665 0.3605 0.3958 0.4374 0.4636 0.3913 0.1348
IB 0.4678 0.5346 0.4815 0.5244 0.5787 0.6137 0.5849 0.5408 0.0818
4.1.3. Hypothesis Testing
A one way ANOVA is used to test the hypothesis, the p-value less than .05, which indicates that
null hypothesis is not accepted and concludes that there exist significant differences in the
movement of Average capital to risk assets ratio among Islamic banks and Conventional Banks.
Table (4-3) show that p-value is less than 0.05, we do not accept the null hypothesis and conclude
that there exist significant differences in the movement of Average debt to assets ratio among
Islamic banks and Conventional Banks.
Table (4.1.3-1) One way ANOVA: Capital Adequacy
Source of Variation df Sum of
Sq.
Mean
Sq.
Anova F-
test
Probability
Between Groups 1 5.6719 5.6719 44.29522 0
Within Groups 12 1.53657 0.12805
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Total 13 7.20847 0.5545
Between Groups 1 0.07827 0.07827 31.06068 0.0001
Within Groups 12 0.03024 0.00252
Total 13 0.10851 0.00835
4.2. Assets Quality
Loans quality ratio = Reserves for impaired loans/Gross loans in this case it is evaluated the weight
of total doubtful loans on gross loans. The reserve comprehends the total amount of impaired loans,
cumulated year after year.
Table (4.2-1) Credit Risk Reserve to total loan
Type 2011 2012 2013 2014 2015 2016 2017 Mean S.D
CB 0.0193 0.0192 0.0221 0.0194 0.0180 0.0155 0.0158 0.0185 0.0042
IB 0.0154 0.0151 0.0201 0.0153 0.0152 0.0151 0.0153 0.0159 0.0018
Average Loan quality ratio of Islamic banks was less than conventional bank from 2011 to 2017.
The ratio indicates conventional banks higher risk of bad loans and inclusion of more capital to
survive defaulted loans.
4.2.1. Testing of Hypothesis
A one way ANOVA used to test the hypothesis. The p-value less than 5% which indicates that null
hypothesis is not accepted and concludes that there exist significant differences in the movement
of Reserves for impaired loans to Gross loans ratio among Islamic banks and Conventional Banks.
Table (4.2.1-1) One way ANOVA: Assets Quality
Source of Variation df Sum of Sq. Mean Sq. Anova F-
test
Probability
Between Groups 1 2.25E-05 2.25E-05 5.207908 0.0415
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Within Groups 12 5.18E-05 4.32E-06
Total 13 7.43E-05 5.72E-06
4.3. Management efficiency
There are various ratios to check the management efficiency of banks. In this study we use non-
interest to total revenue ratio, asset growth “change in assets in a year”, and profit growth “change
in profits in a year” to find out management efficiency ratios of both banking systems (Öztorul,
2011)
4.3.1. Non interest to total revenue
Non-interest expenses to total revenue ratios measure management quality of Islamic and
Conventional banks; the mean Non-interest to total revenue ratio was 71.01% for Islamic banks
while 71.02% for Conventional banks.
Table 4.3.1-1 Non interest to total revenue
type 2011 2012 2013 2014 2015 2016 2017 Mean S.D
CB 0.6953 0.6552 0.6339 0.6555 0.7776 0.7773 0.7765 0.7102 0.2017
IB 0.8148 0.7794 0.6610 0.6928 0.6747 0.6626 0.6856 0.7101 0.0930
4.3.2. Asset Growth
Assets expand for all years except in 2014, and 2015 for two groups of banks; however the Islamic
banks have higher average of asset growth ratio than conventional banks 18.34%, 10.51%
respectively.
Table (4.3.2-1)Asset Growth
type 2011 2012 2013 2014 2015 2016 2017 Mean S.D
CB 0.1017 0.1096 0.1186 0.0807 0.0833 0.1239 0.1177 0.1051 0.1288
IB 0.0746 0.1639 0.2175 0.1926 0.1461 0.2095 0.2799 0.1834 0.0735
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4.3.3. Profit Growth
Profit expands for Islamic banks are higher than conventional banks 45.66%, 03.96% respectively.
Table (4.3.3-1) Profit Growth
type 2011 2012 2013 2014 2015 2016 2017 Mean S.D
CB 0.4539 -0.3051 0.2415 0.2788 -0.4104 0.0874 -0.0692 0.0396 1.0174
IB 0.0697 0.0876 2.2590 0.1673 0.2954 0.2260 0.0911 0.4566 1.2813
4.3.4. Testing of Hypothesis
A One way ANOVA is used to evaluate whether there exist significant relationship in the Non-
interest expense to total revenue, Asset Growth, and Profit Growth ratios between Islamic banks
and conventional banks. The above table illustrates that p-value for three ratios respectively are
0.9983, 0.009, and 0.2236, which means there is no significant relationship in the movement of
non-interest expense to total revenue and Profit Growth among Islamic banks and conventional
banks. On the other hand, there is significant relationship in the average of asset growth between
Islamic and conventional banks.
Table 4.3.4-1 One way ANOVA: Management
Source of Variation df Sum of
Sq.
Mean
Sq.
Anova F-
test
Probability
Between Groups 1 1.88E-08 1.88E-08 4.69E-06 0.9983
Within Groups 12 0.04808 0.00401
total 13 0.04808 0.0037
Between Groups 1 0.02148 0.02148 9.673268 0.009
Within Groups 12 0.02665 0.00222
total 13 0.04813 0.0037
Between Groups 1 0.60869 0.60869 1.646633 0.2236
Within Groups 12 4.43591 0.36966
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total 13 5.04461 0.38805
4.4. Earning Ability
We have used the return on assets (ROA) and the return on equity (ROE) ratios to measure earning
performance in the banking sector. A result of ROA shows greater financial performances of
conventional banks. On the other hand, a result of ROE reveals that Islamic banks are more
profitable than conventional banks. The results of these profitability ratios are consistent with
(Usman, Khan, & Science, 2012). However, ANOVA of all these profitability ratios also shows no
statistically significance difference at 5% significance level among means of both banking
systems. It concluded from ROE ratio that Islamic banks show more effectiveness and performance
as compared to conventional banks.
Table (4.4-1) Return on assets
type 2011 2012 2013 2014 2015 2016 2017 Mean S.D
CB 0.0121 0.0099 0.0105 0.0120 0.0075 0.0078 0.0106 0.0100 0.0059
IB 0.0066 0.0077 0.0102 0.0100 0.0114 0.0117 0.0103 0.0097 0.0045
Table (4.4-2) Return on equity
type 2011 2012 2013 2014 2015 2016 2017 Mean S.D
CB 0.0923 0.0790 0.0843 0.0884 0.0672 0.0742 0.0854 0.0815 0.0601
IB 0.0465 0.0560 0.0795 0.0863 0.1061 0.1201 0.0962 0.0844 0.0429
Table 4.4-3 One way ANOVA: Earning Ability
Source of Variation df Sum of
Sq.
Mean Sq. Anova F-test Probability
Between Groups 1 3.91E-07 3.91E-07 0.112736 0.7428
Within Groups 12 4.16E-05 3.47E-06
total 13 4.20E-05 3.23E-06
Between Groups 1 2.86E-05 2.86E-05 0.074564 0.7894
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Within Groups 12 0.0046 0.00038
total 13 0.00463 0.00036
4.5. Liquidity
Table (4.5-1) Cash-to-assets
type 2011 2012 2013 2014 2015 2016 2017 Mean S.D
CB 0.5190 0.4796 0.4958 0.4995 0.4702 0.4315 0.4204 0.4737 0.1253
IB 0.3317 0.3771 0.4321 0.4000 0.3402 0.2974 0.3207 0.3570 0.0828
Table 4.5-2) Cash-to-deposit
type 2011 2012 2013 2014 2015 2016 2017 Mean S.D
CB 0.8441 0.7775 0.7739 0.7705 0.6978 0.6485 0.6262 0.7341 0.3580
IB 0.4290 0.4803 0.5596 0.5255 0.4280 0.3743 0.4116 0.4583 0.1117
Table 4.5-3One way ANOVA: Liquidity
Source of Variation df Sum of
Sq.
Mean
Sq.
Anova F-
test
Probability
Between Groups 1 0.04764 0.04764 26.50792 0.0002
Within Groups 12 0.02157 0.0018
total 13 0.06921 0.00532
Between Groups 1 0.26611 0.26611 50.3135 0
Within Groups 12 0.06347 0.00529
total 13 0.32958 0.02535
We have used the Cash-to-assets and the Cash-to-deposit ratios to measure liquidity performance
in the banking sector. A result of Cash-to-assets and Cash-to-assets ratios show greater financial
performances of conventional banks than Islamic banks. The results of these liquidity ratios are
consistent with (Wasiuzzaman & Nair Gunasegavan, 2013). However, ANOVA of two these
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liquidity ratios also shows no statistically significance difference at 5% significance level among
means of both banking systems.
5. Conclusions
The aim of this study was to analyze the financial performance differences between Islamic and
conventional banks in Palestine. Twelve banks (two conventional and ten Islamic) were considered
over the period of 2011-2017. Two stages of analysis performed. Average financial ratio computed
to understand the differences in financial performance of the two types of banks showed that the
Capital to risk assets, dept. to total assets, return on assets, and cash to deposit of onventional banks
was higher performance compared to Islamic banks. The other variables average loan quality ratio,
assets growth, profit growth, return on equity, cash to assets, and gap ratio were higher in
performance for Islamic banks. The non-interest to total revenue ratio was the same result of two
groups of banks.
To determine whether these differences were significant, independent F-tests carried out on each
variable. The variables capital to risk assets, dept. to total assets, asset quality ratio, asset growth,
cash to deposit, cash to assets, and gap ratio were found to be significant ,i.e. there were significant
differences in these values for Islamic and conventional banks. On the other hand, non-interest
expenses to total revenue, profit growth, return on equity, and return on asset ratios found to be
non-significant, i.e. there were non-significant differences in these values for Islamic and
conventional banks.
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