Islamic Versus Conventional Banking: Characteristics and Stability Analysis of the Malaysian Banking Sector

Chapter 13 Islamic Versus Conventional Banking: Characteristics and Stability Analysis of the Malaysian Banking Sector Ahmad Azam Sulaiman @ Mohamad, Mohammad Taqiuddin Mohamad and Siti Aisyah Hashim Abstract Q9 Purpose This research analyses the stability of a number of banks operating in Malaysia by using descriptive statistical analysis based on internal variables. These include the characteristics of the bank, capital adequacy ratio, ratio of profitability, liquidity ratio and the ratio of bank operations. Methodology/approach Each bank s stability is studied using z-score analysis. Data are sourced from the balance sheets and income statements of the banks from 2000 to 2011. Findings The results indicate that characteristics of a bank do influence a bank s performance. There are significant differences in financial ratios between Islamic and conventional banking. Islamic banks provide a lower loan loss of capital to cover impaired loans than conventional banks. This provides high capital based on the mean value obtained. The capital ratio allows both sets of banks to meet the capital adequacy ratio set by the Central Bank of Malaysia. Meanwhile, in profitability ratios, conventional banks have higher returns on higher assets, whereas Islamic Banking has higher returns on higher equity. Only 8 Islamic banks and 11 conventional banks are highly stable banking institutions in Malaysia. Keywords: Bank s characteristics; stability; Islamic; conventional banking 1. Introduction Banking is a service industry that mediates between the community and the corporate world where the community uses the financial services offered by the banks. Banks also offer loans and investment services for those who have New Developments in Islamic Economics, 197 214 Copyright 2018 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181013

198 Ahmad Azam Sulaiman @ Mohamad et al. financial deficits and surpluses. In Malaysia, conventional banking is long established, whereas Islamic banking only began in 1983. Islamic banking is rapidly expanding at present in nations such as Russia, France, Germany and Turkey, meeting the needs of Muslims in those countries. A factor contributing to this expansion is economic uncertainty in Europe, which has led them to look to Malaysia as a reference for understanding an Islamic banking system. Such recognition by outsiders is evidence that the Islamic banking system in Malaysia is a successful application of Islam to banking. The establishment of Islamic banking institutions in Malaysia also arises from the needs of the Muslims who are the majority of Malaysia s population. Bank Islam Malaysia became the first Islamic bank in 1983. The second Islamic bank was established around 1999, Bank Muamalat Malaysia, in order to improve and enhance Malaysia s Islamic banking. After witnessing the encouraging response that the Islamic banking system has received from the public, conventional banks are also keen to offer Islamic banking scheme products. The Central Bank of Malaysia (Bank Negara Malaysia, BNM) launched the Interest- Free Banking System, which was adapted for Islamic banking and is still in use. BNM has also approved seven domestic banking groups for structural transformation under the Islamic Banking Scheme to Islamic subsidiaries. With this transformation, the potential of the universal Islamic banking licenses under the Islamic Banking Act 1983 can be fully realised. In addition, foreign Islamic banking is interested in operating in Malaysia: there are currently eight foreign Islamic banks operating in Malaysia. With the launch of the Islamic Banking Scheme and the entry of foreign Islamic banks, Islamic banking is reaching an international level. Assets and equity in Malaysian Islamic banking are on the increase and are expected to be stronger in the future. The growth of Islamic banking is experiencing an encouraging performance, comparable to conventional banking, and is competitive in the global arena. Greater competition will stimulate global banking. 2. Literature Review The characteristics of Islamic and conventional banking have been the subject of multiple studies by previous researchers, along with the growth of world banking institutions based on banking performance which make comparisons between the two forms of banking. The research by Hassan and Bashir (2003) has analysed how their characteristics and overall finance have affected Islamic banking s performance. Bank data have been used to review the performance of Islamic banking from 1994 to 2001. These researchers used various internal and external characteristics to assess the profitability and efficiency of banks. Several banking ratios were also used to assess the relationship between the performance and the internal characteristics of the banks, such as the management of financial resources, management of funds and the ratio between strength and liquidity. The study found that the macroeconomic environment, financial structure and taxation will increase the capital- and loans-to-asset ratio, which in return will lead to higher profits.

Islamic Versus Conventional Banking 199 Q1 Bashir (2006) used the same methodology as Hassan and Bashir (2003) when examining Islamic banking in the Middle East. In this study, covering the period 1993 1998, this research utilised the fund resources management, the use of funds and the ratio of strength to liquidity. Another indicator was dummy variables for ownership. The results also demonstrated that control of the macroeconomic environment, financial structure and taxation will increase the capital ratio and loan ratio, increasing the bank s profits. Thus, the total of the equity and big loan ratios, reacting with growth of domestic products (GDPs), will produce a high profit margin (Hassan & Bashir, 2003). The findings also indicated that foreign ownership is likely to be profitable, and that stock markets and banks are complementary. The research conducted by Haron (2004) was on profits by Islamic banks in general. Its aim was to examine the factors that contribute to the profitability of Islamic banks. The financial ratio that was used in the research as a proxy for profit comprises the percentage of total assets, bank profit on the total asset, net profit before tax to total assets, net profit before tax to capital and reserves and net profit after tax to capital and reserves. This research determined that internal and external factors are strongly related to the level of the total income of Islamic banks. Additionally, the funds deposited in the current account, the total of capital and reserves, the percentage of shared profit between banks and depositors, and money supply have a large influence on the profitability of Islamic banks. A study of conventional banks that examined internal and external factors was also conducted by Kosmidou, Tanna, and Pasiouras (2005). They studied the specific effect of banks characteristics, macroeconomic context and financial structures on the profits of UK commercial banks from 1995 to 2002. There are five internal indicators for assessing a bank s performance: the ratio of cost to income, ratio of liquidity, ratio of asset quality, equity ratio and total of assets. Four measurements of external factors were used: GDPs, inflation, concentration of the banking industry and stock market capital. Naceur (2003) also conducted research on the benefits of conventional banks by using four characteristics administrative expenses ratio, capital ratio, loan ratio and bank s size as the internal indications of bank performance. Naceur (2003) found that a bank s capital strength has a positive effect, more dominant than its profits and expenditure management. The size of banks had also become more efficient. A bank s specific factors appear stronger with the inclusion of macroeconomic measures and the financial market in determining its performance. This also has a positive influence on a bank s profits. Widagdo and Ika (2008) compared the performance of Islamic and conventional banks in Indonesia. By using various financial ratios revenue, liquidity risk and solvency, and efficiency as well as a t-test, the study found no major differences in performance between Islamic and conventional banking in the periods of research. Sarker s (1999) study of the performance of Islamic banking in Bangladesh indicated that an Islamic bank cannot operate with high efficiency if it operates under a conventional framework. This is not a deficiency in the mechanics of Islamic banking but is due to the lack of efficiency in conventional

200 Ahmad Azam Sulaiman @ Mohamad et al. banking, and it impedes effective Islamic banking. Nonetheless, Islamic banks in Bangladesh can operate under the conventional framework by using the financing of loss and profit partnerships. 3. Research Methodology This study used the research approach adopted by Hassan and Bashir (2003) and Bashir (2006) by using banks characteristics and financial ratios to assess the performance and competitiveness of Islamic banking as represented by profit indicators, capital, operations and the liquidity of Islamic banking in the period 2000 2011. Income statements and balance data sourced from 19 Islamic banks and 23 conventional banks in Malaysia were analysed. This research used descriptive statistical analysis to study the differences in performance between Islamic and conventional banking. The Islamic and conventional banks are listed in Table 1. Normally, a bank faces risks present inside or outside its operation. These various risks can be categorized under the CAMEL framework Capital adequacy, Asset quality, Management quality, Earning, and Liquidity (Errico and Farahbaksh, 1998). Nowadays, the tendency is to research the stability of banking and finance in the period in which it operates. The International Monetary Fund (IMF) has introduced Financial Soundness Indicators to more precisely study the stability of a bank s finances by the addition of financial indicators (Sundararajan et al., 2002). Table 3 shows the variables used in this study in its comparison of performance between Islamic and conventional banking. The development of both forms of banking is similar and both operate in the same market. Financial indicators, such as those in Table 2, were used because they help regulators evaluate the performance of banks. Table 2 also shows the definition of each ratio used in previous studies. Table 1 lists Islamic and conventional banks operating in Malaysia. The list was sourced from BNM s website. Bank Islam Malaysia and Bank Muamalat are fully Islamic banks, while Citibank Malaysia and Deutsch Bank run Islamic banking schemes. The other Islamic banks are subsidiaries of Islamic banks that have gained approval from BNM to operate separately alongside conventional banks. Financial indicators were identified to analyse the performance of the banks. The characteristics of a bank usually have a significant relationship with its performance: a bank s characteristics that function well will improve its performance. There are several bank characteristic variables that have been used by past researchers. However, this research only uses two from previous research: the ratios of loans to total assets and equity to total assets. According to Hassan and Bashir (2003), these are the leverage ratio and the liquidity ratio of the bank. The second indicator for studying a bank s profile is the quality of its assets. The control of the indicator of asset quality is important because insolvency risks for a financial institution will become apparent from asset losses. Low quality of assets can cause a shortage of capital and increase risk to credit and capital. The

Table 1: Islamic and Conventional Banks in Malaysia. Islamic Banks Conventional Banks 1 Bank Islam Malaysia 1 Affin Bank 2 Bank Muamalat Malaysia 2 Alliance Bank Malaysia 3 Affin Islamic Bank 3 AmBank (M) 4 Alliance Islamic Bank 4 Cimb Bank 5 Amislamic Bank 5 Hong Leong Bank 6 CIMB Islamic Bank 6 Malayan Banking 7 Hong Leong Islamic Bank 7 Public Bank 8 Maybank Islamic 8 RHB Bank 9 Public Islamic Bank 9 Bangkok Bank 10 RHB Islamic Bank 10 Bank of America Malaysia 11 Al-Rajhi Banking and Investment 11 Bank of China (Malaysia) Corporation (Malaysia) 12 Asian Finance Bank 12 Bank of Tokyo-Mitsubishi UFJ (Malaysia) 13 Kuwait Finance House 13 Citibank (Malaysia) 14 OCBC Al-Amin Bank 14 Deutsche Bank (Malaysia) 15 HSBC Amanah Malaysia 15 HSBC Bank Malaysia 16 Standard Chartered Saadiq 16 Industrial and Commercial Bank of China (Malaysia) 17 Citibank 17 J.P. Morgan Chase Bank 18 Deutsche Bank 18 OCBC Bank (Malaysia) 19 Standard Chartered Bank Malaysia 20 Sumitomo Mitsui Banking Corporation Malaysia 21 Bank of Nova Scotia 22 Royal Bank of Scotland 23 United Overseas Bank (Malaysia) Source: Central Bank of Malaysia (2000 2011). Islamic Versus Conventional Banking 201

202 Ahmad Azam Sulaiman @ Mohamad et al. Table 2: Financial Ratios. Indicators of Financial Ratios Definition Bank Characteristics Loan/total asset Loan ratio to total asset is used to calculate the total of the outstanding loan as a percentage of total assets. A high ratio indicates that the bank gives high loans and that liquidity is low. A high ratio shows that the bank is in risk of breach. Equity/total asset The equity ratio to total asset is a measure of the bank s ability to refrain loss. A descending trend in the ratio signals a probable issue with capital adequacy. Asset quality Reserves for loan loss/affected loan The ratio of loan loss to affected loan is interrelated where it measures how far reserves can compensate for an affected loan. A high ratio value indicates that the bank is providing adequate reserves for the affected borrower. Affected loan/gross loans The ratio of affected loan to gross loans is the measure of the total amount of doubtful loans. The lower the value of the ratio, the better the asset quality. Capital Adequacy Tier 1/TRWA Tier 1 is bank capital comprising paid share capital, retained earnings and statutory reserves, as well as deferred tax assets. TRWA is the total of risk-weighted assets, including credit risk, market risk and operational risk. It measures the standard adequacy capital for the deposit user towards risk assets. The measure of standard capital adequacy for the bank is 4%. If the amount received is lower than that, it indicates that the bank does not have sufficient standard capital adequacy. A bank s capital comprises Tiers 1 and 2. Tier 1 consists of paid stock capital, retained earnings, statutory reserves and deferred tax assets.

Islamic Versus Conventional Banking 203 There are general provisions in Tier 2 for the collective diminution in value of bad and doubtful financing and the rejection of investments in instruments from other banks. For TRWA, this consists of reasonable risk assets, market risk and operational risk. It measures capital adequacy for deposit users. Capital adequacy and its readiness will determine the strength of the financial institution in facing shocks to the balance sheet. Total Capital/TRWA Profitability Ratio Return on Asset (ROA) Measures the efficiency of the management of the bank, being the net profit for each specified unit. A high ratio reflects a high ability resulting in positive performance. Return on Equity (ROE) Measures the bank s efficiency. ROE is also considered the net profit for each capital equity. A higher ratio reflects a high performance of bank management. Operation Return on average asset (ROAA) Ratio obtained by dividing revenue after tax by the total average asset. Determines the bank s efficiency in using the asset. Return on average equity (ROAE) Ratio obtained by dividing the tax return with average equity. Gives a better picture of a bank s revenue. Liquidity Cash/deposit A liquidity measurement where a high ratio indicates high liquidity in a bank. Net borrowing/customer fund and Short-Term Fund Depositors trust will increase when the bank maintains this ratio. Ratio of net borrowing to deposit fund measures the bank s liquidity where a high value indicates lower bank liquidity.

204 Ahmad Azam Sulaiman @ Mohamad et al. Q2 quality of assets depends on the collection, monitoring and evaluation of the bank s credit; it can be increased by raising loans, making adequate allocation to face loss or preventing asset concentration in a geographical or economic sector. Loan probability indicators in repaying loans must be considered because they are necessary for any asset quality analysis. The aim is to monitor the fluctuations of indebtedness in economic sectors that are exposed to changes in economy activity (Hassan & Bashir, 2003). The third financial indicator is the capital adequacy ratio, which shows the strength of a financial institution towards shocks to the balance sheet (Hassan & Bashir, 2003). As stipulated by Basel III, 1 Islamic and conventional banks must maintain their capital adequacy around 8%. Every bank must ensure that their capital core is Tier 1 to meet the requirement of 6% (BNM, 2011). The management of the bank could manipulate the internal capital risk if the bank suffers a lack of capital adequacy to reduce the effect of the capital adequacy rule (Sulaiman & Mohamad, 2010). This also illustrates the strength of banks in facing the risk of non-performing loans. This is because high capital can accommodate capital credit risks that exist in the bank (Hassan & Bashir, 2003; Bashir, 2006; Kosmidou, Tanna, & Pasiouras, 2005). Table 2 shows the definitions of the financial ratio that have been used in this research. These financial ratios used are derived from the past research of Hassan and Bashir (2003) and Bashir (2006). The profitability ratio, return on assets (ROA) and return on equity (ROE) are used to measure the bank s efficiency in managing specific assets and capital equity it holds. The two ratios are always used in research on the financial performance of banking institutions (such as Bashir, 2006; Haron, 2004; Hassan & Bashir, 2003; Naceur, 2003; Widagdo & Ika, 2008). This is because these finance indicators are important profitability ratios for assessing a bank s performance as well as its value to investors seeking greater profit. On the other hand, the operating ratio assesses the differences between the performance of Islamic and conventional banking. This ratio determines the market risk of a financial institution. Other financial indicators are net interest income, revenue per total average assets, other operating income by total assets, non-operating items, taxes per total assets and other operating items as net income. Since Islamic banking does not charge interest, its income is taken into account. A large operating ratio indicates that the bank is operating well (Hassan & Bashir, 2003). The last ratio to be examined is the liquidity ratio. A bank s liquidity is an important criterion for the bank s ability to transform liabilities into assets. Liquidity is not usually much of a problem for strong banks in competitive banking systems. However, liquidity problems that occurred in the 1997 financial crisis had been the main cause of solvency issues (Hassan & Bashir, 2003). There 1 Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to improve the banking sector s ability to absorb shocks arising from financial and economic stress whatever the source improve risk management and governance and strengthen banks transparency and disclosure.

Islamic Versus Conventional Banking 205 are various indicators that measure a bank s liquidity ratio. In this research, the indicators of liquidity ratio are net loans to total assets, and deposits and cash to total assets and total liabilities. The ratio of net loans to customer deposits and short-term funds are a measure of a bank s liquidity, with high ratios reflecting low bank liquidity. The ratio of cash to bank deposits indicates the highest liquidity. Thus, the level of the indicator indicates that banks have highly liquid assets and vice versa. Depositors trust in the bank increases when the bank maintains the ratio of deposits (Hassan & Bashir, 2003). 4. Results The profile comparison between Islamic and conventional banking in Malaysia may be seen in Table 3. It is apparent, based on the mean value of a bank s characteristics, that Islamic banking is riskier than conventional banking. This is because Islamic banks offer more loans and are exposed to breaches if customers do not repay loans. From the perspective of asset quality, the high mean value for conventional banking reflects the fact that those banks possess significantly higher loan loss reserves than Islamic banks. On the other hand, Islamic banks provide a low reserve because impaired loans in Islamic banks have a lower rate of 0.0289, compared to a mean value for conventional banking of 0.0981. Therefore, the asset quality of Islamic banking is superior to conventional banking. The ratio of capital adequacy, the mean value of Tier 1 to the total of riskweighted assets (TRWA), and total capital to TRWA for the two banking systems demonstrate that both meet the adequacy of their core capital by 6%, and a total capital of 8%. This indicates that Islamic and conventional banking are in strong positions to meet any financial shocks. In terms of profitability ratios, conventional banks have a higher ROA than Islamic banking. On the other hand, Islamic banking has a higher ROE than conventional banking. This reflects the fact that Islamic banks have better equity management than conventional banks, yet lack the ability to manage bank assets. In conventional banking, the opposite is true. Additionally, the ratio of bank operations indicates that Islamic banking has a lower mean value in return on average asset (ROAA) than conventional banking, whilst the latter has a lower mean value in return on average equity (ROAE) than Islamic banking. The mean value indicates that operations related to the assets of conventional bank are better but, for equity-related operations, Islamic banking is superior. Analysis of bank liquidity, the mean value of net loans to customer deposits and short-term funds, and cash value to Islamic banking deposits demonstrates that Islamic banking in Malaysia has higher liquidity in assets compared to conventional banking. If this value is maintained in Islamic banking, the trust of depositors in the bank increases. Table 3 below records the results of the descriptive analysis for 18 Islamic and 23 conventional banks, and an overall analysis of the banking system. The EViews 7 program was used to analyse the data. All variables are internal bank variables. The bank data were analysed based on six key points: mean value,

206 Ahmad Azam Sulaiman @ Mohamad et al. Table 3: Analysis of Characteristics of Islamic and Conventional Banking. Bank Characteristics Islamic Banking Conventional Banking All Banks Mean value Loans/total assets 0.3901 0.1044 0.1275 Equity/total assets 0.1577 0.4544 0.4058 Loan loss reserves/impaired loans 21.9759 113.3735 62.9965 Impaired loans/gross loans 0.0298 0.0981 0.0682 Tier 1/TRWA 3.9981 0.0890 0.0851 Total Capital/TRWA 4.1095 15.2088 10.3359 Return on Assets (ROA) 0.0062 0.1388 0.0102 Return on Equity (ROE) 0.1224 0.0133 0.1316 Return on Average Assets (ROAA) 0.01193 0.0144 0.0133 Return on Average Equity (ROAE) 0.1564 0.1544 0.1553 Cash/Deposits 0.2726 26.4657 14.9429 Net Loans/customer funds and short-term funds 33.8060 3.7378 0.0158 Maximum value Loans/total assets 0.9805 1.1481 1.1481 Equity/total assets 0.9995 0.7769 0.9994 Loan Loss Reserves/Impaired Loans 1.2779 12,282.76 12,282.76 Impaired Loans/Gross Loans 0.3479 17.8846 17.8846 Tier 1/TRWA 451.7663 0.9817 451.7663 Total Capital/TRWA 466.2887 161.7487 466.2887 Return on Assets (ROA) 0.0507 1.6637 1.6637 Return on Equity (ROE) 4.5967 0.2122 4.5967

Islamic Versus Conventional Banking 207 Return on Average Assets (ROAA) 0.1387 0.09 0.1387 Return on Average Equity (ROAE) 1.3719 1.03 1.3719 Cash/deposits 4.821088 1802.511 1802.511 Net Loans/customer funds and short-term funds 2464.388 70.924 2464.388 Minimum value Loans/total assets 0 0 0 Equity/total assets 20.019 0 20.019 Loan Loss Reserves/impaired loans 2415.5 2500.0143 2500.0143 Impaired Loans/gross loans 20.0080 20.0043 20.00795 Tier 1/TRWA 20.0185 0 20.0186 Total Capital/TRWA 20.0185 0 20.0185 Return on Assets (ROA) 20.2910 20.0369 20.2910 Return on Equity (ROE) 20.6571 20.7211 20.7211 Return on Average Assets (ROAA) 20.1002 20.0335 20.1002 Return on Average Equity (ROAE) 21.2932 20.3999 21.2932 Cash/deposits 0 0 0 Net Loans/customer funds and short-term funds 0 0 0 Standard deviation Loans/total assets 233.8734 5.4817 0.0188 Equity/total assets 0.2662 0.1352 0.1976 Loan Loss Reserves/impaired loans 0.2539 0.2417 0.2643 Impaired Loans/gross loans 28.4029 788.5191 594.3846 Tier 1/TRWA 0.0527 1.0763 0.8077 Total Capital/TRWA 39.5991 0.1019 0.1043

208 Ahmad Azam Sulaiman @ Mohamad et al. Table 3: (Continued) Bank Characteristics Islamic Banking Conventional Banking All Banks Return on Assets (ROA) 40.6883 21.7107 31.9269 Return on Equity (ROE) 0.0244 0.1544 0.0210 Return on Average Assets (ROAA) 0.3351 0.0173 0.2502 Return on Average Equity (ROAE) 0.0232 0.0129 0.0182 Cash/Deposits 0.2701 0.1581 0.2143 Net Loans/Customer Funds and Short-term 0.4809 148.011 111.4436 Funds Skewness value Loans/Total Assets 20.0982 5.0122 3.3681 Equity/Total Assets 2.4190 20.8586 20.3831 Loan Loss Reserves/impaired loans 214.5224 13.6497 18.1583 Impaired Loans: Gross Loans 2.9848 16.4441 21.9245 Tier 1/TRWA 10.3644 4.7208 4.3709 Total Capital/TRWA 10.4042 3.6695 9.7642 Return on Assets (ROA) 28.8396 2.9651 24.1407

Islamic Versus Conventional Banking 209 Return on Equity (ROE) 10.9929 6.7682 11.8742 Return on Average Assets (ROAA) 0.7574 0.8289 0.7470 Return on Average Equity (ROAE) 0.86325 1.2081 1.0339 Cash/Deposits 5.9224 9.1485 12.2808 Net Loans/customer funds and short-term funds 9.1610 7.1976 0.3778 Kurtosis Loans/total assets 1.9462 34.5025 14.1010 Equity/total assets 7.4411 2.2594 1.7971 Loan Loss Reserves/impaired loans 211.936 207.7801 367.462 Impaired Loans/gross loans 13.7479 272.2427 484.0525 Tier 1/TRWA 109.6467 37.2614 30.8354 Total Capital/TRWA 110.5567 20.0596 123.0068 Return on Assets (ROA) 105.0249 39.0669 108.8063 Return on Equity (ROE) 148.7496 73.1780 210.6303 Return on Average Assets (ROAA) 11.7921 7.0117 14.5132 Return on Average Equity (ROAE) 10.7398 7.8068 13.1308 Cash/Deposits 48.6703 95.2561 170.4863 Net Loans/customer funds and short-term funds 88.5968 83.8639 11.9456

210 Ahmad Azam Sulaiman @ Mohamad et al. maximum value, minimum value, standard deviation, and skewness and kurtosis values. The next analysis is related to the maximum and minimum values in each bank variable. The ratio of loans to total assets has a maximum value of 1.1481 for conventional banking; the minimum value is zero for both types of banking. The ratio of equity to total assets has a maximum value of 0.9995 and a minimum value of 20019, both being available in Islamic banking. Both maximum and minimum value for the ratio of loan loss reserves to impaired loans are available in conventional banking, where the maximum value is 12,282.76 and the minimum value is 2500.0143. Conventional banking also has the highest value for the ratio of impaired loans to gross loans (17.8846) while the lowest value was for Islamic banking at 20.0080. Both the maximum and minimum values of the core capital and total capital ratios are found in Islamic banking. This indicates that Islamic banks have greater capital than conventional banks, totalling 451.7663 and 466.2887 for core capital to total capital, respectively. Islamic banking also has the lowest capital value of 20.0185 for both ratios. Whereas ROA ratio shows conventional banking at the highest value of 1.6637, the lowest value is held by Islamic banking, as low as 20.2910. In contrast, with ROE, the highest ratio was for Islamic banking at 4.5967, while the lowest value was for the conventional banking at 20.7211. For ROAA and ROAE, the maximum and minimum values of both ratios are for Islamic banking: its maximum value of ROAA is 0.1387, and its minimum value is 20.1002. The maximum and minimum values for ROAE were 1.3719 and 21.2932, respectively. This indicates that conventional banking has a medium value for ROAA and ROAE. The maximum value of the ratio of cash to deposits for conventional banking is higher than for Islamic banking at 1802.511, while the minimum value of this ratio for both is zero. Thus, the liquidity of both Islamic and conventional banking is positive. This is similar to the ratio of net loans to customer deposits and short-term funds, in which both conventional and Islamic banking have a minimum value of zero. The maximum value of this ratio, 2464.388 for Islamic banking, is much higher than the maximum value for conventional banking. The standard deviation indicates whether the size of the dispersed data is smaller or larger. Table 3 records the greatest standard deviation at 788.5191, which is for the ratio of loan loss reserves to impaired loans for conventional banking; the second-largest standard deviation is 233.8734 for Islamic banking for the ratio of net loans to customer funds and short-term funds. This means that the dispersion of both data is great. The smallest dispersions of data are for ROAA in conventional banking, with a standard deviation of 0.0129. In addition, the ROAE ratio for conventional banking also has the smallest data dispersion, with a standard deviation of 0.0173. Skewness value describes the skew of data either to the left (negative value data) or right (positive value data), indicating an imbalance. Table 3 contains six ratios with negative value of skewness: the ratio of loans to total assets for Islamic banking (20.0982); the ratio of equity to total assets for conventional banking (20.8586) and for all banks (0.3831); the ratio of loan loss reserves to

Islamic Versus Conventional Banking 211 Islamic banking impaired loans (214.5224); and the ROA for Islamic banking (28.8396) and for all banks (24141). The skewness of other ratios is positive and the biggest skewness value is in the ratio of loan loss reserves to impaired loans, and impaired loans to gross loans for all banks, at 18.1583 and 21.9245, respectively. The height or peak of data is called kurtosis. Kurtosis is used to assess whether the data are peaked or flat. Table 3 shows the ratio of impaired loans to gross loans for conventional banks having the highest kurtosis value against all ratios in Islamic and conventional banking, with a value of 272.2427; this ratio has a higher maximum value than others. Meanwhile, the ratio of loans to total assets for Islamic banking has the lowest kurtosis value of 1.9462, influenced by the minimum value of this ratio. Table 4 shows the analysis of z-scores for Islamic and conventional banking. Z-score is used to analyse the stability of a bank, with a value derived through the z-score formula that was introduced by Altman (1968). Bank stability in this table depends on the average value of all banks. A bank is considered stable when the z-score value is higher than the average value; if the z-score is lower than the Table 4: Z-Score Analysis No. Islamic Banking Z-score Average 1 Bank Islam Malaysia 2 Bank Muamalat Malaysia 3 Affin Islamic Bank 4 Alliance Islamic Bank 5 AmIslamic Bank 6 CIMB Islamic Bank 7 Hong Leong Islamic Bank 8 Maybank Islamic 9 Public Islamic Bank 10 RHB Islamic Bank No. Conventional Banking Z-score Average 35.6061 1 Affin Bank 65.3165 215.3143 2 Alliance Bank 181.5609 Malaysia 199.8826 3 AmBank (M) 71.0707 182.4283 4 CIMB Bank 165.1601 228.9128 5 Hong Leong Bank 143.9002 56.5221 6 Malayan Banking 68.0758 52.8399 7 Public Bank 162.9160 171.3182 8 RHB Bank 184.4501 213.1939 9 Bangkok Bank 175.7431 10 Bank of America Malaysia 167.8250 272.3719

212 Ahmad Azam Sulaiman @ Mohamad et al. Table 4: (Continued) No. Islamic Banking Z-score Average 11 Al-Rajhi Banking & Investment Corporation (Malaysia) 12 Asian Finance Bank 13 Kuwait Finance House (Malaysia) 14 OCBC Al-Amin Bank 15 HSBC Amanah Malaysia 16 Standard Chartered Saadiq No. Conventional Banking Z-score Average 4.0794 11 Bank of China (Malaysia) 299.7237 164.7306 12 Bank of Tokyo- Mitsubishi UFJ (Malaysia) 281.9951 75.8488 13 Citibank 323.8741 291.1514 14 Deutsche Bank (Malaysia) 35.3191 152.3615 15 HSBC Bank 270.4251 Malaysia 88.2086 16 Industrial and 239.4338 Commercial Bank Of China (Malaysia) 17 Citibank 232.6456 17 J.P. Morgan Chase 172.8216 Bank 18 Deutsche Bank 366.9420 18 OCBC Bank 349.2407 (Malaysia) 19 Standard Chartered 130.2475 Bank Malaysia 20 Sumitomo Mitsui Banking Corporation Malaysia 21 The Bank of Nova Scotia 22 The Royal Bank of Scotland 23 United Overseas Bank (Malaysia) 0.0000 299.5999 159.4844 300.7500

Islamic Versus Conventional Banking 213 average value, the bank is not stable. The data used are from the years 2000 2011. The average value for all banks is 180.0521. The stability of a bank is important because it strengthens the bank s position in the world market. Table 4 shows the analysis of the banks stability based on the standard of the z-score as used by Altman (1968), Čihák and Hesse (2010), Gamaginta (2011), Beck, Demirguc-Kunt, and Merrouche (2013) and Boyd and Runkle (1993). Generally, all the banking institutions in Malaysia in the last 12 years of study show that, of 18 Islamic banks, only 8 are highly stable; for conventional banking, there are only 11 banks that are stable. There are six Islamic and four conventional banks that are less stable. Another four Islamic and eight conventional banks are at a medium level, as shown in Table 4. It is apparent that there is no significant difference between the stability of Islamic banks and conventional banks. However, the instability of Islamic banking is higher than conventional banks, which indicates that Islamic banks are more vulnerable to banking and economic risks. This illustrates that the banking industry must improve the management and operation of their businesses to better confront economic crises that occur, such as the sub-prime mortgage crisis of 2007 2008 in the United States. 5. Conclusion Its development of conventional and Islamic banking systems has made Malaysia a reference point for the implementation of a dual system of banking. The expansion of the banking system in Malaysia, with efficient regulation from its central bank, has led to foreign banks operating in Malaysia. Thus, the banking system in Malaysia has succeeded in breaking onto the global market. Despite this, both the Islamic and conventional banking systems need further improvement to deal with unexpected economics crises and increased competition between the two. Hence, Islamic banking must be refined, especially for improving their stability to attract the investment needed for further improvement in their performance. Q3 References Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589 609. Bank for International Settlements (BIS). (2016). Retrieved from http://www.bis.org/ about/index.htm?m51%7c1. Accessed on February 10, 2016. Bashir, A. H. M. (2006). Assessing the performance of Islamic banks: Some evidence from the Middle East. Islamic Economic Studies, 11(1), 31 57. Beck, T., Demirgüç-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking & Finance, 37(2), 433 447. Boyd, J. H., & Runkle, D. E. (1993). Size and performance of banking firms: Testing the predictions of theory. Journal of Monetary Economics, 31(1), 47 67.

214 Ahmad Azam Sulaiman @ Mohamad et al. Q4 Q5 Q6 Q7 Q8 Central Bank of Malaysia. (2005). Sistem Kewangan Islam. Retrieved from http:// www.bnm.gov.my. Accessed on April 22, 2013. Central Bank of Malaysia. (2011). Implementation of Basel III. Retrieved from http:// www.bnm.gov.my. Accessed on Mei 15, 2013. Central Bank of Malaysia. (2000 2011). Retrieved from http://www.bnm.gov.my. Accessed on Jun 10, 2013. Čihák, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2 3), 95 113. Errico, M. L., & Farahbaksh, M. M. (1998). Islamic banking: Issues in prudential regulations and supervision. International Monetary Fund Working Paper. Retrieved from http://www.imf.org. Accessed on May 17, 2013. Gamaginta, R. R. (2011). The stability comparison between Islamic banks and conventional banks: Evidence in Indonesia. In 8th international conference on Islamic economics and finance. Retrieved from http://conference.qfis.edu.qa/app/media/232. Haron, S. (2004). Determinants of Islamic bank profitability. Global Journal of Finance and Economics, 1(1), 11 33. Retrieved from http://ie.um.ac.ir. Accessed on May 18, 2013 Hassan, M. K., & Bashir, A. H. M. (16 18 December 2003). Determinants of Islamic banking profitability. In 10th ERF annual conference (Vol. 7), Morocco. Kosmidou, K., Tanna, S., & Pasiouras, F. (2005, June). Determinants of profitability of domestic UK commercial banks: Panel evidence from the period 1995 2002. In Money Macro and finance (MMF) research group conference (Vol. 45, 1 27). Retrieved from http://repec.org. Accessed on May 19, 2013. Naceur, S. B. (2003). The determinants of the Tunisian banking industry profitability: Panel evidence. Universite Libre de Tunis Working Papers, 1 17. Retrieved from http://www.mafhoum.com. Accessed on May 18, 2013 Sarker, M. A. A. (1999). Islamic banking in Bangladesh: Performance, problems, and prospects. International Journal of Islamic Financial Services, 1(3), 15 36. Sulaiman, A. A., & Mohamad, M. T. (2010). Pengurusan Modal Teras Jaminan Keselamatan perbankan Malaysia Menangani Kitaran Ekonomi. Prosiding PERKEM, V(1), 185 194. Sulaiman, A. A., Mohd, N. A., & Mohamad, M. T. (2012). Analisis pulangan saham terhadap keuntungan perbankan Islam Malaysia. Prosiding PERKEM, VII(2), 1382 1391. Sundararajan, V., Enoch, C., San José, A., Hilbers, P., Krueger, R., Moretti, M., & Slack, G. (2002). Financial soundness indicators: Analytical aspects and country practice. IMF occasional paper (Vol. 212). Washington, DC: International Monetary Fund. Widagdo, A.K., & Ika, S.R. (2008). The interest prohibition and financial performance of Islamic banks: Indonesian evidence. International Business Research, 1(3), 98 109.

Author Query Form Queries and/or remarks [Q1] [Q2] [Q3] [Q4] [Q5] [Q6] [Q7] [Q8] [Q9] Missing reference: Kosmidou, Tanna, and Pasiouras (2005) is not listed in the References section; please provide complete reference details. Missing reference: BNM, 2011 is not listed in the References section; please provide complete reference details. Uncited reference: Ref. Bank for International Settlements (BIS), 2016 is not cited in text; please indicate where a citation should appear or delete it from the reference list. Uncited reference: Central Bank of Malaysia, 2013 is not cited in text; please indicate where a citation should appear or delete it from the reference list. Uncited reference: Central Bank of Malaysia, 2011 is not cited in text; please indicate where a citation should appear or delete it from the reference list. Please provide the volume number or issue number or page range for the bibliography in Ref. Errico and Farahbaksh, 1998. Uncited reference: Kosmidou et al., 2013 is not cited in text; please indicate where a citation should appear or delete it from the reference list. Uncited reference: Sulaiman et al., 2012 is not cited in text; please indicate where a citation should appear or delete it from the reference list. The Originality/value section in the abstract is missing. Please provide.