Risk Management in
Islamic Financial Instruments
94
4.4.5.2 Risk Matrices
Asset Quality Ratios
Chart 4.43 shows that, for the Bangladesh banking sector, the Asset Quality of the Islamic
banks’ loan portfolios are poor, compared to that of their conventional counter parts. The
average Loan Loss Res/Gross Loans ratio and average loan loss reserve over gross loan ratio
for the Islamic banks are 7.75% and 73.49%, which are higher than those of their conventional
counterparts at 2.83% and 16.53%, respectively. However, the Islamic banks, in general, keep
a higher loan loss reserve, which is reflected by a higher average Loan Loss Res / Impaired
Loans ratio of 120.41%, compared to that of conventional banks at 70.28%.
Capital Adequacy ratios
In Bangladesh, the lower average Equity/Tot Assets ratio for Islamic banks (2.51%), compared
to that of conventional banks (9.11%) represents a higher risk exposure and a possible capital
adequacy problem for the Islamic banks. Additionally, the Tier1 ratio and Equity/Net Loans
ratio are negative at -1.49% and -3.99%, respectively, which symbolizes possible solvency risk.
(See Chart 4.44)
Operational Efficiency ratios
Chart 4.45 shows that, in general, higher operating ratios represent lower cost of funds, higher
efficiency and higher yields on equity and assets. A higher average Net Interest Margin for the
conventional banks (4.69%), compared to Islamic banks (4.02%) represents cheaper sources
of funding that the conventional banks enjoy. This is also reflected in the higher ROAs and
dividend payouts for the conventional banks.
Liquidity Ratios
An Interbank ratio of greater than 100 indicates the bank is a net lender, rather than a
borrower and resembles higher liquidity. The average Interbank Ratio for Islamic banks
(128.04%) is higher than the conventional bank ratio (57.97%), which suggests that Islamic
banks hold additional liquidity. Lower operating efficiency may be caused by the additional
liquidity that the Islamic banks are required to maintain, due to the lack of short-term Shariah
compliant investment tools. However, Islamic banks maintain higher Net Loans / Cust & ST
Funding and Net Loans / Tot Dep & Bor ratios (79.09% and 18.33%, respectively), compared
to conventional banks (65.02% and 17.51%, respectively), which suggests the overall lower
liquidity situation for the Islamic banks. (See Chart 4.46)