Risk Management in
Islamic Financial Instruments
64
bank risk matrices for the five selected countries: Malaysia, Turkey, United Arab Emirates,
Kingdom of Saudi Arabia and Bangladesh.
4.3 ANALYSIS OF RISK MATRICES ACROSS MAJOR GEOGRAPHIC
REGIONS
Among the 57 OIC member countries, 31 countries are considered in the sample based on data
availability. These country jurisdictions are generally categorized into three major
geographical regions: a) Asian region, b) MENA (Middle East and North Africa) region (which
also includes GCC countries), and c) Sub-Saharan African countries.
4.3.1 Asian Region
Islamic banks listed in the BankScope database from Malaysia, Indonesia, Brunei, Singapore,
Bangladesh, Philippines, Russia and Pakistan are considered the sample for the Asian region.
Based on the data availability, 41 Islamic banks from the mentioned 8 countries are selected
for the analysis. The sample includes 41 Islamic banks with an average asset size of 2,923.478
million USD and Total Deposit volume of 2,545.458 million USD. Islamic banks in the region
have on, an average, 37.47 branches and 413 employees.
4.3.1.1 Risk Matrices
Asset Quality Ratios
Chart 4.1 shows that, for the Asian region, the Asset Quality for the Islamic banks’ loan
portfolio is rather poor, compared to that of their conventional counterparts. Average Loan
Loss Res/Gross Loans ratio and average loan loss reserve over gross loan ratio for the Islamic
banks are 3.42% and 22.11%, which are higher than those of their conventional counterparts
of 2.88% and 10.69%, respectively. However, the Islamic banks in general keep higher loan
loss reserves, which are represented by higher Loan Loss Res / Impaired Loans ratios.
Capital Adequacy Ratios
Although the Islamic banks in the Asian region suffer from lower asset quality, compared to
their conventional counterparts, the higher Capital Adequacy ratios imply that the Islamic
banks keep higher cushions in terms of capital adequacy. Higher Lower Equity/Tot Assets,
higher Equity/Net Loans and higher Equity / Liabilities show the additional capital cushion
held by the Islamic banks. See Chart 4.2.
Operational Efficiency ratios
In general, higher operating ratios represent a lower cost of funds, higher efficiency, and
higher yields on equity and assets, as shown in Chart 4.3. Higher Net Interest Margins for the
Islamic banks represent cheaper sources of funding. However, Pre-Tax Op Inc / Avg Assets
ratios of around 0.83% are similar for both the Islamic and conventional banks. The Returns
On Avg Equity (ROAE) are higher for the Islamic banks. However, in general, the conventional
banks provide higher dividends.