RESEARCH
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M.Suyanto, STMIK AMIKOM Yogyakarta

yanto@amikom.ac.id

The study evaluates interbank performance of Bank Muamalat Indonesia in profitability, liquidity, risk and solvency, and community involvement for the period 2000 – 2004. Financial ratios are applied in measuring these performances. F-test is used in determining their significance. “The study found that BMI relatively has more profit and commitment to community development but has less liquid compared to the conventional banks. BMI does not show (statistically) any difference in risk performance with the conventional banks”.

Keyword : Performance, BMI, Conventinal Banks

Introduction

Evaluation of bank performance is important for all parties, particularly for depositors, bank managers and regulators. In a competitive financial market, bank performance provides signal to depositor investors whether to invest or to withdraw funds from the bank. Similarly, it flashes direction to bank managers whether to improve its deposit service or loan service or both to improve its finance. Regulator is also interested to know for its regulation purposes.

The importance of underlying force that led to the establishment of this Islamic bank in Indonesia was the elimination of riba that is used for interest. Bank Muamalat Indonesia (BMI) took the initiative to do business without using interest considered as being predetermined rate of return to a deposit. All transactions in the conventional banks are based on interest or “riba”, which is prohibited by Islam. Islamic bank is sought as a solution to it. With the increase in Muslim populations and awareness of Islamic values, there was a greater demand for Islamic bank and interest-free finance by Muslim consumers, traders, investors, and businessmen.

Bank Muamalat Indonesia was established in July 1992 to meet these demands and challenges. Since then, BMI has introduced and marketed various interest free products such as Wadiah ad Dhamana account, Mudarabah, Musharakah and others. Bank’s business has expanded over the years. Its assets and deposits increased from Rp 1,127 billion to Rp 3,455 billion in 2004. The financing of loans and services increased to Rp 2,605 billion in 2004. The number of branches increased to 75 in 1998.

It has been 14 years since BMI was established; however, there has been no study as to how the bank performance in liquidity, profitability, risk and solvency in Indonesia, as well as its commitment to economy and Muslim community during 2000 – 2004. The previous studies on profitability and other measures, Samad (1998), Ariff (1989), Dirrar (19996), Mohiuddin (1991) Sum (1995), Samad and Hassan (2000) were far from being satisfactory. These studies used used neither statistical technique nor made inter-bank comparisons with there sets of conventional banks in Indonesia. However, such issues of profitability, liquidity, risk and solvency; and community involvement of the bank during 2000-2004 are very important to depositors and investors, So, the present study intends to evaluate the performance of Islamic banks using the above mentioned criteria. This study is different from the earlier studies with respect to contents, coverage of years and methodology. In evaluating BMI’s performances, this study also wants to test two hypotheses. The first hypothesis states that the liquidity ratios of Islamic banks are expected to be higher in earlier years of operation than later years due to a learning curve. The second hypothesis states that as Islamic banking makes its inroad in the society, the volume of two truly Islamic financial modes of lending (Mudharabah and Musharakah) are expected to grow large years of its operation.

Hassan (1999) examines the Islamic baking principles in theory and its application with case study of Bangladesh. The abudance of short-term funds compared to long –term funds available for lending is a rational response on behalf of banks to solve information al asymmertries prevalent in credit market. In traditional finance literature , it is shown that debt contract (murabaha) is superior to equity contract. However, equity contract can be superior to debt contract in an economy where informational asymmetries resulting from adverse selection and moral hazard are trust given to banking firm,It is naturally expected that as a custodian of trust for the depositos’ deposits, Islamic bank is likely to be more liquid and become more solvent compared to its counterpart conventional banks,Islamic bank management, according to Islamic ethics, is accountable to the depositors in this world and the world hereafter for their failure to keep the trust entrusted upon them. It is, therefore, expected thet the liquidity and solvency ratio of the Islamic bank will be higher than conventional banks.

Instead of interest based contract, Islamic bank is founded on different philosophy; and it delivers a set of distinguished products in the financial market. Unlike conventional banks where interst is an integral part of bank business, Islamic bank was established to avoid interst in all bank transactions. It does not deal with interest. Interest is avoided because “riba” is prohibited in Islam. As a business firm BMI delivers special financial products that are different form the conventional banks. It delivers interest-free products. For example, trust profit sharing (called Mudarabah) and joint venture profit sharing (called Musharakah) are two distinguished and unique products of an Islamic bank. The important feature of this loan (Mudarabah and Musharakh) is that they are interest-free. There are no elements of interest involved in this transaction. For the Muslim population,business firms and entrepreneurs in Indonesia, the supply of Mudarabah and Musharakah loan was a long waited product. In these transaction Muslims can serve religious obligation and at the same time can earn profits. With the economic development of Indonesia and the increase in Muslim population, Islamic values, Muslim business and firms, it is expected that demand for these products (Mudarabah and Musharakah) are likely ton increase gradually over the years. It is also expected that the information gap between bank and the bank borrowers to be minimum because both party jointly working to maximize losses. Projects undertaken under the Mudarabah and musharaka are constantly supervised and monitored by the Islamic bank. So the chances of failures are minimized. Based on the expectation of minimum failure, it is expected that the supply of these loans will increase over the years. This paper will test the hypothesis that the supply for this loan (Mudarabah and Musherakah) of the Islamic bank increases over years.

The paper is organized as follows. Following introduction and rational of this study in section I, Section II describes methodology, data and the tools for measuring bank performance Section III provides empirical evidence and analysis. Summary and Conlusion are provided in Section IV.

I. Methodology and data :

Financial management theories provide various indexes for measuring a bank’s performance. One of them is accounting ratios. The financial ratios are quite common in the literarture. Bank regulators, for example, use financial ratio to help evaluate a bank’s performance. Booker (1983Z), Korobow (1983), Patnam (1983), Sabi (1996), Samad (1999), Akkas (1994), Meister and Elyasiani (1998) and Spindler (1991) gave employed financial ratios for evaluating a bank’s performance. The study makes comparison of Islamic Bank (BMI) and conventional banks performances. First, BMI is compared with a conventional bank (Bank Swadesi) which is a smaller (in terms of asset) bank than BMI. Second comparison is made with another conventional bank (Bank Central Asia) which is larger than BMI. Third, comparison of BIMB and the 145 commercial bank is made here. This type of inter-bank analysis is common in bank performance study (Sabi (1996). In the competitive financial market, performance of a bank can be better understood by an analysis of inter-bank comparison. The study uses ten financial ratios for bank’s performance. These ratios are grouped under four broad categories. The analysis of bank performance concentrates on the following on four financial ratios; a. profitability ; b. liquidity; c. risk and solvency; d. commitment to domestic and Muslim community.

a. Profitability Ratios :

The profitability can be judged by the following criteria.

  1. Return on asset (ROA) = Profit after tax / total asset.
  2. Return of equity (ROE) = Profit after tax / equity capital
  3. Profit expense ratio (PER) = Profit / total expanse. A high PER indicates that a bank is coast efficient and makes high profit with a given expense.
  4. Non Net Interest Margin (NIM) = Profit after tax / Productive Asset

ROA and ROE are the indicators of measuring managerial efficiency (Ross (1994), Sabi (1996), Hassan (1999) and Samad (1998). ROA is net earning per unit of a given asset. It shows how a bank can convert its asset into net earnings. The higher ratio indicates higher ability and therefore is an indicator of better performance. Similarly, ROE is net earnings per dollar equity capital. The higher ratio is an indicator of higher managerial performance,However, profitability is only part of bank performance story.

b. Liquidity Ratios.

Bank and other depository institutions share liquidity risk because transaction deposits and saving account can be with drawn at any time. Thus when withdrawal exceeds new deposits significantly over a short period, banks get into liquirity trouble. There are several measures for liquidity.

1. Cash depository ratio (CDR) = cash / deposit. Cash in a bank vault is the most liquid asset of a bank. Therefore, a higher CDR indicates that a bank is relatively more liquid than a bank which has lower CDR. Depositors’trust to bank is enhanced when a bank maintains a higher cash deposit ratio.

2. Loan deposit ratio (LDR) = Loan / deposit. A higher loan deposit ratio indicates that a bank takes more financial stress by making excessive loan. Therefore, lower loan deposit ratio is always favorable to higher loan deposit ratio.

3. Capital adequacy ratio (CAR) = capital / risk asset. A high CAR indicates that a bank has more liquid asset. A lower ratio is a sign for illiquidity as more of the assets are long term in nature.

c. Risk and Solvency Ratios

A bank is solvent when the total value of its asset is greater than its libility. A bank becomes risky if it is insolvent The following are the commonly used measures for a risk and insolvency.

1. Debt to total asset ratio (DTAR) = Debt/total asset indicates the financial strength of a bank to pay its debtor A high DTAR indicates that a bank involves in more risky business.

2. Non Performing Financing (Loan) (NPF) = collectibility / total financing. The higher value of NPF indicates greater risk for a bank.

d. Commitment to Community

  1. Mudaraba-Musharaka (Financing) Ratio (MM/TA) = (F/TA) = Mudaraba-Musharaka (Financing) /Total Asset. A higher percentage of F/TA indicates a greater commitment to community development.

The performance of Islamic Bank BMI is measured in two stages. First, Islamic bank is compared with two selected banks. Of the two banks, one (bank Swadesi) is a smaller and the other (BCA) is larger than BMI. Second, BMI is compared with banking industry (145 commercial bank).

In all two stages of compa-rison, ANOVA is used to test the null hypothesis of the equality of means in order for our comparison more reliable and meaningful. Since MSB/MSW is the estimatedF-value, so if the estimated F-value is higher than the critical value, there is sufficient evidence to reject Ho that the means of performance of the two banks are not identical, ANOVA supports the conclusion that the population means of the variable for the two banks are not identical. On the other hand, if the F-statistics is less than its critical, ANOVA supports that the performances are not statisticall different from each other.

II. Analysis of Empirical Results

This improved profitability (NIM) performance when compared with a conventional bank show that (table 1, Table 2, and Table 3) BMI is leading from the commercial banks. An average profit of BMI is 6.03 % whereas the average profit of the commercial banks for the same periods was 3.72 %. This difference in profitability performance is statistically significant at 5% level. These results are different with those of Samad (1999) and Hassan (1999), but the results are consistent with Haron (1996). There are various reasons for lower profitability performance of BMI. First, BMI use a profit-sharing principle. Secondly, BMI applies to mark-up policies. BIMB maintains less liquidity than Swadesi bank, BCA, and the commercial banks. This is evident from inter-bank comparison of liquidity ratio. Inter-bank comparison in show statistically any significant difference. In terms of CDR, LDR, CAR the commercial banks show better performance than BMI and it is significant at 1 % level for CDR and LDR and 5 % level for CAR .

BMI is compared with conventional banks in table 1, table 2 and table 3 it is found that BMI is relatively less risky and more solvent than two other individual conventional banks (Swadesi and BCA). The average debt-to total asset ratio (DTAR) for BMI is 76.15 % as compared to 82.24 % for the Swadesi Bank and 84.61 % for the BCA bank respectively. The difference in means in DTAR for two individual banks (Swadesi and BCA) versus BMI is statistically significant. ANOVA suggest that the null hypothesis (Ho) of the equality of two means for BMI and two individual banks be rejected at 1 % level and 10 % level of significance. This implies that these two performance measures are not equal.

First, the reason for low risk of the Islamic bank (BMI) is that its investments in govermment securities are much large than the conventional banks. This difference in investments is statistically significant. Secondly, it has more equity compared to assets shown by its debt equity to total assets (DTA). Larger equity capital indicates a higher shock absorbing capacity for the Islamic bank. It can withstand more assets or loan losses compared to bank (banks) which has (have) less capital. However, lack of data on loan losses and non-performing loans in Islamic and conventional banks prevents us from making a conclusive judgment.

With regard to BMI’s community commitment measured by the investment in loans (financing) as a percentage of total assets, FTA. This improved community commitment (LTA) performance when compared with a conventional bank show that (table 1, Table 2, and Table 3) BMI is leading from the Swadesi, BCA and Commercial bank, . An average FTA of BMI is 80.85 % whereas the average FTA of the Swadesi, BCA and Commercial Bank for the same periods were 41.44 %, 17.61 % and 37.96 %. This difference in profitability performance is statistically significant at 1 % level and indicates that BMI is greater commitment to community development when compared with a conventional bank.

Interestingly, the Indonesian experience in Islamic Banking is very difference to those found in Bangladesh. The data on Islamic Bank Bangladesh Limited (IBBL) shows that majority of financing has hovered around in the vicinity of 2% during the bank’s 16 years existence. Financing to the agriculture has been minimal. (Hassan, 1999).

IV. Summary and Conclusion

The compararison of BIMB with the conventional banks on ROA, ROE and PER does not show (statistically) any difference in performance, but NIM with the commercial banks show any difference in performance, BMI is 6.03 % compared to 3.72 % of the commercial banks. Howerver, inter bank comparison of liquidity performance suggests that Bank Muamalat Indonesia (BMI) appears to be statistically less liquid compared to the conventional banks , in CDR, LDR and CAR measure. The average cash-deposit ratio (DER) of BMI is 1.91 % compared to 2.70 % of the commercial banks.

Risk and insolvency measure between BMI and the commercial banks found that BMI does not show (statistically) any difference in DTAR and NPL performance with the commercial banks. The difference in risk measure in debt-equity and non performaing are not statistically significant.

BMI’s performance in community financing in FTA (MM/TA) show any statistically difference with the commercial banks, BMI is 80.84 % compared to 37.96 %. ANOVA also supports this finding, as the F-value is statistically in significant at 1 % level. BMI is greater commitment to community development when compared with a conventional bank..

REFERENCES

Akkas, Ali. (1996). “Relative Efficiency of the Conventional and Islamic Banking System in Financing Invenstment.” Unpublished PH.d. Dissertation, Dhaka University.

Arif, Mohammad. (1989). “Islamic Banking in Malaysia:Framework, performance and lesson”, Journal of Islamic Economics, vol.2, No.2

Dirrar, E.Elbeid. (1996). “Economics and Financial Evaluation of Islamic Bankking Operations:A case of Bank Islam Malaysia 1983-1995”.Unpublished paper,UIA.

Haron, Sudin (1996). “The Effects of Management Policy on The Performance of Islamic Banks”, Asia Pacific Journal of Management, Vol 13. No. 2: 63-76

Hassan, M.Kabir (1999).”Islamic Banking in Theory and Practice: The Experience of Bangladesh,”Managerial Finance, Vol.25,Vol.5:60-113.

Hassan,M.Kabir and Adnan Q.Aldayel.”Stability of Money Demand under Interest-Free Versus Interest-Based Banking System, “Humanomics,Vol.14,No.4 and Vol.15,No.1:167-186.

Hassan, M. Kabir and Samad, abdus (2000) “The Performance of Malaysian Islamic Bank During 1984-1997: An Exploratory Study ” International Journal of Islamic Financial Services Vol.1,No.3.

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Sabi,Manijeh.(1996).”Comparative Analaysis of Foreign and Domestic Bank Operation in Hungary”, Journal of Comparative Economics,vol.22,pages (179-188)

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Table 1

Performance Measure

Bank Muamalat Indonesia

Bank Swadesi

F-value

I. Profitability

1. ROA

2.14

3.17

2.10

2. ROE

18.50

24.30

0.83

3. PER

1.17

1.22

0.68

4. NIM

6.03

5.73

0.16

II. Liquidity

5. CDR

1.91

2.86

4.91*

6. LDR

90.69

50.24

21.88***

7. CAR

12.15

31.92

20.44***

III.Risk and Solvency

8. DTAR

76.15

82.24

11.50***

9. NPL

7.17

6.75

0.01

IV. Commitment to

Community

10.FTA

80.84

41.44

49.72***

* Difference in means : Significant at 10 %

** Difference in means : Significant at 5 %

***Difference in means : Significant at 1 %

Table 2

Performance Measure

Bank Muamalat Indonesia

Bank Central Asia

F-value

I. Profitability

1. ROA

2.14

2.74

0.88

2. ROE

18.50

28.01

1.93

3. PER

1.17

1.31

0.68

4. NIM

6.03

4.84

1.79

II. Liquidity

5. CDR

1.91

3.34

9.56**

6. LDR

90.69

19.78

99.03***

7. CAR

12.15

30.49

4.57*

III.Risk and Solvency

8. DTAR

76.15

84.61

5.05*

9. NPL

7.17

2.76

1.93

IV. Commitment to Community

10.FTA

80.84

17.61

295.91***

* Difference in means : Significant at 10 %

** Difference in means : Significant at 5 %

***Difference in means : Significant at 1 %

Table 3

Performance Measure

Bank Muamalat Indonesia

Commercial Bank

F-value

I. Profitability

1. ROA

2.14

1.83

0.23

2. ROE

18.50

27.97

1.39

3. PER

1.17

1.10

1.36

4. NIM

6.03

3.72

8.00**

II. Liquidity

5. CDR

1.91

2.70

11.61***

6. LDR

90.69

41.29

39.67***

7. CAR

12.15

19.33

7.52*

III.Risk and Solvency

8. DTAR

76.15

73.82

0.95

9. NPL

7.17

10.88

1.93

IV. Commitment to Community

10.FTA

80.84

37.96

135.66***

* Difference in means : Significant at 10 %

** Difference in means : Significant at 5 %

***Difference in means : Significant at 1 %

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