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5. Performance Evaluation Criteria 5.1. Methodology
This requires gathering relevant data from the financial statements of banks and to conduct a comparative analysis of the results. Complete data on bank especially AGIB in The Gambia was not readily available from the bank. Therefore, most of the data used in this research is collected from the Central Bank of the Gambia (CBG). Data is compiled from income statements and balance sheets of the chosen banks. The use of financial ratio in measuring bank performance is common in research works. This study is therefore aimed at conducting an empirical analysis and to use financial ratios to determine the performances of selected Islamic and Conventional banks both in The Gambia and UK. Four major banks which include three Conventional banks and one Islamic bank are selected in The Gambia. Moreover, four banks which include two Islamic and two Conventional banks are selected in the UK. Data for banks in the UK each year is collected from their annual reports (Income and Balance Sheet Statements). Financial information from 2008/2009 to 2012 are used for the study. The names of the banks selected for the study are mention in table 8.
Table 8: Selected Banks for the Analysis
Country Name of Bank Period
The Gambia Arab Gambia Islamic Bank 2009-2012
Trust Bank Gambia Limited 2009-2012
Guaranty Trust Bank Gambia limited 2009-2012
Eco Bank Gambia Limited 2009-2012
United Kingdom Bank of London & Middle East plc. 2008-2012
Islamic Bank of Britain 2008-2012
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China Construction Bank UK ltd 2008-2012 British Arab Commercial Bank plc. 2008-2012
The criteria used to select banks for the study are thus:
Selected the only Islamic bank in The Gambia and compare it with a group of three Conventional banks. Trust Bank Gambia is chosen because it’s the only bank majority owned by Gambians. Guaranty Trust bank is chosen because out of the current Nigerian banks in existence, it is the first bank to be granted license to operate in The Gambian market by the CBG. Consequently, Eco Bank Gambia is selected for the study simply because it’s the only Pan African bank in the country and had over the years done well. In addition to these features, they are chosen owing to the fact that they are part of the dominant banks that contributed about 82% of total industry assets and loans (IMF Country Report No. 12/17 (2012)) which makes them systematically important banks.
The Islamic banks selected in the UK for this study are chosen because they are the best Islamic banks in the UK.40 Furthermore, China Construction Bank is chosen based on the fact that its parent company made it to the top 150 banks “worldwide ranked by asset sized”.41Moreover, British Arab Commercial Bank is chosen because it is one of the Conventional banks incorporated in the United Kingdom, a wholesale bank and a leading provider of trade and project finance for Arab markets.
The financial ratios selected to compare the performance of Islamic and Conventional banks are thus:
40 http://learnislam1.blogspot.tw/2011/06/best-islamic-banks-in-uk.html
41 http://www.cba.ca/contents/files/statistics/stat_bankranking_en.pdf
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Table 9: Financial Ratios Selected for the Study Liquidity Ratio:
Current Ratio
Cash to Deposit Ratio
Loan to Deposit Ratio
Profitability Ratio:
Return on Assets
Return on Equity
Financial Leverage ratio:
Debt-to-Asset ratio
5.2. Liquidity
Liquidity provides information about a firm’s ability to meet its short term obligations as and when they fall due. Liquidity is important for a firm’s survival, because its helps a firm avoid defaulting on its short term liabilities. When a company cannot collect cash or short term funds from its customers on a regular and timely basis, the company will soon experience financial distress. Therefore, the higher the liquidity of a bank, the greater its ability to meet its short term obligation. This is an indication that the bank is doing well. Consequently, liquidity problems can arise when a bank’s withdrawals significantly exceed its deposits over a short period of time (Samad and Hassan (2000)).
Several ratios are used by banks and other companies to measure liquidity, but in this study the following ratios will be used:
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5.2.1. Current Ratio (CR)
This is the ratio of current assets to current liabilities.
CR = Current Assets
Current Liabilities (1)
Typical values for current assets differ from firm to firm and from industry to industry. Short term creditors would prefer a higher current ratio since it will reduce their risk exposures.
Whereas shareholders would prefer a lower current ratio so that more of the firms short term assets are used to grow the business. When the current assets of a firm are more than twice its current liabilities, it is an indication that the company has enough cash to pay its short term debts. This is quite encouraging for the firm.42
5.2.2. Cash to Deposit Ratio (CDR)
This is the ratio of total cash balances against total deposits in a bank. Therefore too much of it can result to a bank losing profits, so most banks try not to hold too much, instead they try to find a balance in their positions. Furthermore, they cannot afford to hold less cash.
𝑪𝑫𝑹 =𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑇𝑜𝑡𝑎𝑙 𝑐𝑎𝑠ℎ (2)
Cash plays an important role in the liquidity of a bank. However, holding a lower than necessary of cash reserves could lead to a distress and failure to meet short term obligations. Therefore, deposits trust to a bank is enhanced when the bank maintains a higher cash deposit ratio (Samad and Hassan (2000)).
42 http://www.netmba.com/finance/financial/ratios/
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5.2.3. Loan to Deposit Ratio (LDR)
This is the ratio between a bank’s total loans to its total deposits. The formula is equal to
𝑳𝑫𝑹 = 𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝐿𝑜𝑎𝑛 (3)
Generally when LDR ratio is lower than 1, it means that the bank uses its own deposits to make loans to its customers, without any outside borrowing. However, when a banks LDR is greater than 1, it implies that the bank borrows money and in turn used the money to lend to customers at higher interest rates, rather than relying on its own deposits. Banks may not be earning an optimal return when the ratio is too low. When the ratio is too high, the bank may lack liquidity to comply in meeting its short term obligations.43
5.3. Profitability
This is one of the most frequent financial measure of a firm’s success in generating profits. It is used to compute a firm’s bottom line and returns to its investors. Profitability determines the overall efficiency and performance of a bank. It measures the difference between revenues and cost. This study is going to use two variables to measure profitability. For these ratios, the higher the value, the more desirable it is for the firm. A higher ratio indicates that the bank is doing well and is good at generating profits, revenues and cash flows. The ratios are going to assess the ability of a firm to generate income after offsetting all its cost and expenses during a specific time period.
43 http://en.wikipedia.org/wiki/Loan-deposit_ratio
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5.3.1. Return on Assets (ROA)
This measures how efficient a firm uses its assets to generate profits. The formula is thus:
𝑹𝑶𝑨 = 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 (4)
ROA tell us what a firm can do with its assets. That is how much money they earn on each asset they control. Its shows how a firm can convert its assets into earnings. The higher the ratio, the better the performance of the firm. A lower ratio is an indication of managerial inefficiency in its use of assets to generate profits.
5.3.2. Return on Equity (ROE)
This measures the Rate of Return as a percentage of shareholders equity. ROE is defined as follows:
𝑹𝑶𝑬 = 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 (5)
ROE shows how well a firm uses shareholder’s funds to generate earnings growth. High ROE indicates better managerial performance. Therefore, the higher the ROE compared to the industry, the better for a firm.
5.4. Financial Leverage
This measures the solvency of the company. It also measures the extent to which a company uses long term debt. Companies with very high leverage ratios are usually considered to be at
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risk of bankruptcy. Financial leverage is not always bad because it can lead to an increase in return on shareholders’ investment.44
5.4.1. Debt-to-Asset Ratio (DAR)
Debt is a measure of total debt to total asset. This tells us how much a company depends on debt to finance assets. It also shows how much debt a company has on its balance sheet compared to its assets. The formula is thus:
𝑫𝑨𝑹 = 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 (6)
44 http://www.readyratios.com/reference/debt/#ref835
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important to use several ratios to do the analysis. My results of the analysis are indicated below.6.1.1. Liquidity
6.1.1.1. Current Ratio
Table 10: Current Ratio and Cash to Deposit Ratio
Figure 7: Current Ratio and Cash to Deposit Ratio (The Gambia)
The level of liquidity of AGIB during the financial crisis in 2009 indicates that Islamic bank was no better than its Conventional counterparts in terms of liquidity. However, the bank from 2009 to 2010 register growth in liquidity of 24.16% which is fairly more than growth of 0.02%,
Bank CR Average Average
YEAR 2009 2010 2011 2012 2009 2010 2011 2012
Arab Gambia Islamic Bank (AGIB) 0.96 1.19 1.07 1.19 1.10 0.22 0.27 0.15 0.15 0.20
2009 2010 2011 2012 2009 2010 2011 2012
CR Average CDR Average
CR and CDR
Arab Gambia Islamic Bank (AGIB) Trust Bank Ltd (TBL)
Ecobank Gambia Ltd (Eco)
Guaranty Trust Bank Gambia Ltd (GTB)