XXI
includes resolving disputes between the institutions themselves or institutions and their
clients.
CHAPTER 4: COMPARATIVE ANALYSIS OF RISK MATRICES
This chapter presents the comparative analysis of risk matrices for the Islamic and the
conventional banks in the 57 OIC member Muslims countries categorized into three major
geographical regions: a) The Asian region, b) The MENA (Middle East and North Africa) region,
which also includes the GCC countries, and c) The Sub-Saharan African countries. Later, a
similar analysis is conducted for five countries, Malaysia, Turkey, The United Arab Emirates,
Kingdom of Saudi Arabia, and Bangladesh, which are home to large and growing Islamic
finance industries.
The financial statement data for the Islamic and conventional banks are collected from the
BankScope Database. For each geographic region, a sample of conventional banks is selected as
a control sample, where conventional banks are matched based on the total asset size of
Islamic banks. The BankScope Database provides 35 risk matrices categorized into four major
types: (a) Asset Quality Ratios, (b) Capital Adequacy Ratios, (c) Operational Efficiency ratios,
and (d) Liquidity Ratios. However, only the major risk matrices under each category are
discussed in this chapter.
There are 41 Islamic banks listed in the BankScope database from Malaysia, Indonesia, Brunei,
Singapore, Bangladesh, Philippines, Russia and Pakistan that are considered in the Asian region.
The average asset size of these Islamic banks is 2,923.478 million USD, and Total Deposit
volume accounts for of 2,545.458 million USD, with an average of 37.47 branches and 413
employees per bank. For the Asian region, the Asset Quality of the Islamic banks’ loan portfolio
is rather poor, compared with that of their conventional counterparts, as evident by the
Average Loan Loss Res/Gross Loans ratio and average loan loss reserve over gross loan ratios.
Additionally, Islamic banks in the Asian region suffer from lower asset quality, compared to
their conventional counterparts; however, the Islamic banks keep higher cushions in terms of
capital adequacy.
68 Islamic banks from the 16 MENA countries (Bahrain, Egypt, Iran, Iraq, Jordan, Kuwait,
Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, West Bank
and Gaza, Yemen) are selected for the analysis, based the data available in the BankScope
database. The average asset size of the Islamic banks is this region is 5,847.867 million USD,
and the average Total Deposit volume is 4,434.627 million USD. Islamic banks in the MENA
region have on an average 28.51 branches and 550 employees. For the MENA region, although
the Average Loan Loss Res/Gross Loans ratio is higher for the Islamic banks, other asset
quality ratios are lower than their conventional counterparts. In general, Islamic banks hold a
better loan portfolio, compared to their conventional counterparts. The higher capital
adequacy ratios of the Islamic banks show that they keep a higher equity cushion in order to
cover the risk exposure and avoid capital adequacy problems. A Higher Net Interest Margin for
Islamic banks represents cheaper sources of funding. Interbank ratios for the Islamic banks are