The relationship of profitability in Conventional Banks and Islamic Banks in UAE.
Table of Contents
Data sources 2
Explanation of variables used in the model. 3
Dependent variable 3
Independent variable 4
Explanation of independent variables 4
Regression analysis 5
The purpose of this assignment was to develop a working model that can used by potential investors to evaluate the performance of the banking sector in the UAE. This assignment focuses on the data sources used to collect the variables used in the modal and a regression analysis model and to compare between the profitability on conventional banks and Islamic banks.
The researcher collected from various secondary resources. Financial performance metrics for the five-year period between 2014 and 2018 for each bank were collected from their statement of financial position and income statement available in their website. Data on annual inflation and GDP growth rate of the United Arab Emirates were collected from excellent websites such as statistical and economic watch. The data used in this analysis covers the period between 2014 and 2018 for five banks in the UAE, the Five banks are Dubai Islamic bank, Sharjah Islamic bank, commercial bank , Emirates NBD and Noor bank. All these banks are true representation of the UAE financial sector. Therefore, using their data can help develop a working model that reflects the banking sector in the UAE.
Each of the independent variables used to develop this model is great influences the profitability of the banks. Financial ratios are very useful to different stakeholders such as investors, creditors, and management who often use them to evaluate the financial health and performance of a bank to make their decisions. Investors are usually interested in the level of profitability of a bank and how well the management team utilizes different resources available to them to make a more informed decision. Creditors are more interested in the financial health of the especially, liquidity, level of leverage and profitability of a company to gauge their ability to pay off loans when they are due. Internal users such as management teams use the same financial model to evaluate their performance by conducting a trend analysis to see how they have been performing over time they can also use these ratios to help them compare their performance with other companies in the same industry. This study uses dependent variables and independent variables to develop a model that can help show the overall performance of banks.
The dependent variable in this model is the level of profitability of the banks evaluated as indicated by their level of return on assets (ROA). This financial ratio shows how well the management teams of the banks are able to use assets available to them to generate profits and is calculated by expressing net income realized by each bank each year as percentage of the total assets of the banks. The higher the ratio, the more efficient the banks management teams are able to use bank assets to generate profits for their shareholders.
The independent ratios used in this study are, current assets held by the bank, total assets in their financial statements each year, total deposits held by the banks each financial period, interest expenses, level of inflation of the UAE each year of analysis and the GDP growth rates of the UAE from 2014-2018
Each of the independent variables used to develop this model is great influences the profitability of the banks. The first is the current assets held by each bank expressed as a percentage of total assets of the bank each financial period which is used to indicate the level of liquidity of the banks within the financial period. Current assets used in this model include all cash assets or assets which their statement of financial position and covers both tangible and intangible assets of the bank. Current assets used in this model include all cash assets or assets which are easily transformed into cash while total assets include all assets held by the bank as indicated in their statement of financial position and covers both tangible and intangible assets of the bank. The levels of liquid assets held by the banks influence their profitability.
It also uses total assets to investigate how total assets held by the bank influence their general profitability. Total assets held by the banks indicate the size of each bank and influences the level of profitability. The level of total assets held by the banks is closely related to the profitability of the bank since it influences the investing activities of the banks.
The objective of this assignment was to develop a reliable model which can be used to explain and measure the performance of banks in the UAE. ROA was chosen as a performance indicator for five specific banks which represents the banking sector in the UAE. Dependent variables and independent variables were used to explore the performance of banks in the UAE. The assignment touches on different data sources, description of the variables and measurement, data analysis and procedure as well as model specification. Results from this analysis show a statistically significant relationship between the dependent variables used and the level of profitability and between the conventional and Islamic banks.
Annual Reports. (2018). Retrieved March 22, 2019, from Commercial Bank of Dubai: https://www.cbd.ae/corporate/about-cbd/financials-and-investor-relations/annual-report
Noor Bank PJSC. (2018, December 31). Retrieved March 22, 2019, from Noorbank.com: https://www.noorbank.com/themes/lemonis/pdf/annual-financial-statment- dec-en-2018.pdf
Annual Reports. (2019, March 1). Retrieved March 22, 2019, from Emirates NBD: https://www.emiratesnbd.com/en/investor-relations/financial-information/annual-reports/
Investor Relations. (2019, March 21). Retrieved March 22, 2019, from Dunai Islamic Bank: https://www.dib.ae/about-us/investor-relations/financial-information
United Arab Emirates: Inflation rate from 2012 to 2022 (compared to previous year). (2019). Retrieved March 22, 2019, from Statistica: https://www.statista.com/statistics/297779/uae-inflation-rate/