Islamic And Conventional Banking Evidence From Tunisia Finance Essay

The aim of this paper is to look into whether it is possible to separate between an Islamic bank ( Albaraka ) and a conventional bank ( Amen bank ) on the footing of fiscal ratios that step profitableness, bank efficiency, hazard, plus quality, and liquidness. Our findings reveal a great difference across these two Bankss. Albaraka is more profitable and less hazardous than Amen bank. However, the efficiency of the Islamic bank is lower than that of the conventional bank.

1. Introduction

The earliest Islamic bank is the Mit Ghamr established in Egypt in 1963. Islamic banking is developing quickly around the universe and is progressively recognized as a feasible alternate manner of funding. This prosperity of Islamic finance helps to carry through the demands of Muslims to obtain a funding that respects their faith ( Halal funding ) . Furthermore, recent surveies argue that Islamic finance can even last in non-Muslim states. Indeed, there are about 50 Muslim Bankss located in western states and offshore Centres. London tends to be the European hub for Islamic finance with 22 fully-fledged Islamic Bankss and Islamic Windowss. In 1999, Dow Jones created ‘Islamic Market Indexes ‘ to offer Sharia-compliant investing portfolios. Several major Western Bankss such as Citibank, HSBC, ABN Amro, Bank of America, Standard Chartered, and the Union Bank of Switzerland, either have Islamic Banking subordinates or have Islamic Windowss that offer Islamic fiscal merchandises to their clients ( Khan, 2010 ) .

Islamic finance is based on the prohibition of Riba ( vigorish ) . Riba is out ( non-halal ) by the Holly Qur’an every bit good as by the Sunnah because money itself has no intrinsic value. The Islamic fiscal system prohibits the payment or reception of any preset, fixed rate of return. The Sharia ( Islamic Law ) forbids doing money from money. The wealth can be raised by puting in assets.

The 2nd rule of Islamic banking is the profit-and-loss sharing ( PLS ) . This rule is complementary with the first 1. Banks do non bear down fixed involvement on the loans offered to their clients but they are rewarded by take parting in the net income resulting of bank financess. However, Chong and Liu ( 2009 ) happen that merely a negligible part of Islamic bank funding in Malaysia is compliant with PLS rule. Similarly, Zaman and Movassaghi ( 2001 ) conclude that some of the patterns and the fiscal instruments used by the Islamic Bankss do non esteem Islamic rules.

In this survey, we attempt to look into the difference between Islamic and conventional banking in Tunisia by the comparing of fiscal ratios of Albaraka and Amen bank. Our findings indicate that this difference is strongly important.

The balance of this paper is organized as follows. Section 2 provides an overview about promising growing of the Islamic finance industry worldwide. Section 3 presents the funding techniques provided by Muslim Bankss. Section 4 investigates through empirical observation the difference between Islamic and conventional banking on the footing of some accounting ratios. Section 5 concludes.

2. Overview on Islamic banking

Islamic banking is presently practiced in more than 50 states worldwide ( Chong and Liu, 2009 ) . Muslim Bankss operate in over 60 states, though largely concentrated in the Middle East and Asia ( Zaman and Movassaghi, 2001 ) . There are more than 300 Muslim fiscal establishments around the universe, including Bankss, mortgages companies, Takaful companies and investing financess. There are many indexs that reveal the progressively importance of Islamic finance. The value of assets of Islamic fiscal establishments ( IFIs ) was approximately five billion U.S. dollars in 1985 ( Iqbal, 1997 ) . At the morning of the 3rd millenary, it was estimated at 100 billion dollars, which, represents about the one-fourth of short-run external debts of developing states ( World Bank 2000, p. 79 ) . In 2008, the value of the universe ‘s “ Islamic assets ” became about US $ 700 billion ( Economist, 2008 ) and it is estimated that by 2012, Islamic assets will make about US $ 1,600 billion, with grosss of US $ 120 billion ( Islamic Financial Services Board, 2010 ) .

The ground of the enormous advancement of Islamic banking is due to their reason and effectivity experienced by Muslim every bit good as Non-Muslim states ( Ebrahim and Safadi, 1995 ) . Gambling and Karim ( 1986 ) suggest that if the persons are Muslims so their personalities are Islamic and their civilization is Islamic. However, Ariss ( 2010 ) notes that Islamic finance is non limited to stakeholders with common spiritual backgrounds.

Figure 1 shows the repartition of Islamic finance assets for the year-end 2008. It reveals that commercial Bankss have the largest part of Islamic assets.

Fig. 1. Market portion of Islamic finance assets a”ˆ 951 billion at terminal 2008

Beginning: IFSL estimations based on The Banker, Ernst & A ; Young

Figure 2 shows that 36 per centum of Islamic finance assets are located in Iran. This grounds can be explained by the fact that in this state full banking system has been converted to Islamic banking. Indeed, the Iran ‘s Islamic revolution of 1979 had been followed by a authorities enterprise for the constitution of interest-free banking. Gambling and Karim ( 1991 ) show that this Islamic revolution was a consequence of the dissatisfaction of the less affluent societal categories with the West backed politico-economic system that governs Iran under the Shah.

Fig. 2. Geographic dislocation of Islamic finance

Table 1 shows the figure of Islamic Bankss and fiscal establishments by state, their entire assets, and the repartition of assets between each Islamic sector for the year-end 2008. Of the 302 fiscal establishments runing over the universe, 118 are located in five states of the Gulf Cooperation Council part[ 1 ]. Following the events of September 11, 2001, a considerable sum of Arab money flowed out of western states back to the Middle East. This has farther increased the laterality of the GCC part in Islamic banking world-wide ( Olson and Zoubi, 2008 ) .

Table 1. Muslim Bankss and fiscal establishments at year-end 2008 ( in US $ billion )



of houses

Sum of


of which









— –


















— –






— –

Dutch east indies










— –






— –





— –

— –











— –

— –

United kingdom




— –

— –





— –






— –

— –

United arab republic




— –

— –





— –

— –





— –





— –

Other states












Beginning: International Financial Services, London, ( Islamic finance 2010 ) .

3. Islamic manner of funding

Muslim Bankss provide several signifiers of support ( Tamouil ) that are in line with Sharia ( Islamic Law )

3.1. Musharaka

The Musharaka is a partnership understanding between two or more parties in the capital of a company, undertaking or operation. The net incomes are distributed harmonizing to an allotment expression for apportioning predetermined. In the event of a loss, it is supported by the parties in proportion to the capital invested.

By offering this type of contract, Islamic Banks history on the morality of the client on a relationship of trust and profitableness of the undertaking or dealing.

3.2. Moudharaba

The Moudharaba ( profit-sharing ) is a contract between two parties. A named party “ givers ” or “ Rab Al Mal ” provides the 2nd portion, called “ Manager ” or “ Moudhareb ” financess. The latter is responsible to pull off, while specifying a anterior allotment of net incomes to be made.

3.3. Murabaha

Murabaha ( cost plus ) is a contract of sale at cost plus a border known and agreed between the bank and the client. The bank buys the plus chosen by the client and resells it at the purchasing monetary value plus a net income at a rate agreed between the two parties at the clip of come ining into the contract.

3.4. Ijara

By contrast, if the client does non desire to purchase the plus and prefers to lease it, this dealing can be undergone in the Islamic model as Ijara ( renting ) . Under the Ijara dealing, the bank ( referred as Mu’jir ) purchase the belongings as requested by the client ( referred as Must’jir ) and gives the client the right to utilize and profit for a period of preset clip and the client pays portion against an in agreement rent in progress ( referred to as Ujrah ) . The belongings is owned by the Bank since merely the usufruct, that is to state the right to utilize, is transferred to the lessee. The Ijara can be defined as the enjoyment of the usufruct determined with a known border for a period of clip.

3.5. Istisna’a

The Istisna’a is defined as a contract of sale between the “ Final Buyer ” or “ Al Mustasni ‘ ” and “ marketer ” or “ Al Sani ‘ . ” The latter undertakes to fabricate or get an plus topic of the contract, requires a procedure of industry. The marketer is committed to purchase natural stuffs, and supply the necessary work to present the goods manufactured in conformity with predefined description of the features of the belongings. The sale monetary value and payment footings are agreed and set at the contract sign language. Payment can be done at the decision of the contract, in installments or on a specified day of the month in the hereafter.

3.6. Salam

Salam can be defined as a contract of sale with deferred bringing. The monetary value is paid in progress at the clip of undertaking while the bringing of the purchased goods or services is postponed to an in agreement hereafter day of the month.

4. Muslim banking in Tunisia

Islamic banking in Tunisia was implemented in 1983 by the incorporation of Albaraka Bank which holds presently nine subdivisions. It provides a big scope of merchandises and services that are Sharia-compliant. The experience of Noor Islamic Bank belonging to Dubai Holding Group in Tunisia was really short since it retired after merely one twelvemonth.

However, Islamic banking is still underdeveloped in Tunisia. Indeed, it ‘s surprising to observe that Zitouna bank established in May 2010 is the first Islamic Tunisian bank unless 99 % of Tunisians are Muslim, the Islam is the faith of the State harmonizing to the Constitution of 1959, Kairouan is the Islam ‘s 4th holiest metropolis, and that Tunisia is the native state of several great Muslim bookmans such as Ibn-Khaldoun ( 1332-1406 AD ) and Imam Sahnoun ( 776-854 AD ) . This subdivision of finance is still mostly unknown, non merely from public but besides from professionals. The plausible account of this insignificance of Islamic banking is that Tunisia has been governed since her independency by a secular leftist party. Indeed, the full transition in Iran to Islamic banking system is explained by the being of an Muslim authorities that evolved from the revolution of 1979.

Naser and Jamal ( 1999 ) conduct a questionnaire in order to measure the grade of client consciousness and satisfaction of merchandises and services offered by Islamic Bankss in Jordan. They find that respondents are dissatisfied with some of Islamic bank services. Their study reveals besides that clients know Islamic fiscal merchandises but they do non cover with them. Khan ( 2010 ) paperss grounds that much of Islamic banking and finance still remains functionally identical from conventional banking.

4. Empirical analysis

4.1 Datas

Our sample includes merely two Bankss: one Islamic “ Albaraka ” and another conventional “ Amen bank ” . In Tunisia, there are merely two Muslim Bankss Albaraka incorporated since 1983 and Zitouna launched in 2010. Our pick of Amen bank to compare between Islamic and conventional banking was based on the standards of the sum of capital. Al Baraka Tunis named Bank Ettamouil Tounsi Saoudi ( B.E.S.T BANK ) presently has 8 subdivisions. It operates chiefly with non occupants. Amen Bank was founded in 1966.

Annual studies of these two Bankss were downloaded from their web sites. Our sample period is from 2000 to 2008.

4.2 Definitions of fiscal ratios

In this survey, we used 13 fiscal ratios to separate between Islamic and conventional banking. Following Olson and Zoubi ( 2008 ) , these ratios can be clustered into five general classs: profitableness, efficiency, plus quality, liquidness, and hazard. Table 2 defines the 13 ratios.

Table 2. Definitions of fiscal ratios

Bank profitableness ratios

ROA = return on assets = NI / TA = net income / entire assets

ROE = return on equity = return on equity = NI / SE = net income / stockholders equity

PM = net income border = NI / OI = net income / runing income

Bank efficiency ratios

OIA = runing income to assets = OIA / TA = runing income / entire assets

OEA = runing disbursals to assets = OE / TA = runing disbursals / entire assets

OER = runing disbursals to gross = OE / OI = runing disbursals / runing income

Hazard ratios

DTA = deposits to assets = TD / TA = entire sedimentations and clients dues / entire assets

ETD = equity to sedimentations = SE / TD = stockholders equity / sum sedimentations and clients dues

TLE = entire liabilities to equity = TL / SE = entire liabilities / stockholders equity

Liquidity ratios

CTA = hard currency to assets = C / TA = hard currency / entire assets

CTD = hard currency to sedimentations = C / TD = hard currency / sum sedimentations and clients dues

Asset-quality indexs

LTD = loans to sedimentations = TL / TD = entire loans / entire sedimentations and clients dues

LR = loan ratio = TL / TA = entire loans / entire assets

4.3 Empirical findings

Table 2 studies descriptive statistics for both subordinates. A t-test for equality of agencies between the Albaraka bank and Amen bank for each of the 13 fiscal ratios is presented in the last column of the tabular array. Merely the difference of return on plus is non-significant. The other ratios are significantly different between the two subordinates at the 1 % degree.

This tabular array shows that two of the three profitableness ratios indicate that the Islamic bank is more profitable than the conventional bank. This findings is consistent with old consequences reported in old documents such as Rosely and Abu Baker ( 2003 ) , and Olson and Zoubi ( 2008 ) . The ROA norms 1.8 % yearly for Albaraka versus 1.1 % for Amen bank. The difference is important at 1 % degree.

Efficiency ratios reveal that the Islamic bank is less efficient than the conventional bank. Mokhtar, Abdullah, and Al-Habshi ( 2006 ) look into the efficient of the overall Islamic banking industry in Malaysia over the period 1997-2003. Their findings suggest that Islamic Bankss are less efficient than conventional Bankss. In add-on, the efficiency of fully-fledged Islamic Bankss is higher than that of Islamic Windowss. Their survey reveals besides that Islamic Windowss of foreign Bankss tend to be more efficient than those of domestic Bankss. . This lower efficiency of Islamic banking relation to conventional banking may be due to miss of economic systems of graduated table due to the smaller size of Islamic Bankss, or it may originate because clients of Muslim Bankss are pre-disposed to Islamic merchandises irrespective of cost ( Olson and Zoubi, 2008 ) .

The hazard ratios reveal that the conventional bank is riskier than the Islamic bank. This lower hazard of Albaraka compared to Amen bank may be due to the fact that Albaraka Tunisia activity is entirely oriented to non-residents.

The liquidness ratios suggest that Albaraka held less hard currency relation to assets and sedimentations than Amen bank. This grounds may be due to the deficiency of short-run liabilities to cover for the Islamic bank. Keeping a batch of hard currency tends to cut down the profitableness of the bank because hard currency pays no involvement.

The asset-quality indexs show that the conventional bank takes more hazard than the Islamic bank since it gives more loans relative to sedimentations and assets.

Table 3. Descriptive statistics of the fiscal ratios



Standard divergence

t-test for equality of agencies


Amons Bank


Amons Bank


Bank profitableness ratios



















Bank efficiency



















Hazard ratios







Explosive trace detection












Liquidity ratios













Asset-quality indexs













The t-test for equality of agencies is based on the mean for Albaraka minus that of Amen Bank for each fiscal ratio.

*** Denotes significance at 1 % degree.

5. Decision

The empirical consequences of this survey suggest that we can separate between Islamic and conventional Bankss on the footing of fiscal ratios. They indicate that although Islamic banking is more profitable than conventional banking, it ‘s still less efficient. This survey represents an overview on the underdevelopment of Islamic banking in Tunisia compared to its beef uping growing global. Future researches should concentrate on the grounds of the irrelevancy of Islamic finance industry in Tunisia although the capacity of this subdivision of finance to lend towards sustainable development and a planetary prosperity.