In Depth Comparative Analysis between Meezan Bank of Pakistan and Ithmaar Bank of Bahrain
In Depth Comparative Analysis between Meezan Bank of Pakistan and Ithmaar Bank of Bahrain
Introduction
To be able to compete with the conventional industry, Islamic banks are required to run their business, not only financially well, but also in accordance to good corporate governance standard and maintain the compliance to sharia. This paper is aimed to examine the financial performance, the quality of ethical disclosure, and social performance of two Islamic Banks during the period of six years, ranging from 2010 to 2016, they are Meezan Bank of Pakistan and Ithmaar Bank of Bahrain.
The analysis drew upon information obtained from the voluntary publications, including six year annual reports and website. In addition to that, data were also derived from the third party data provider such as Zawya, Bankscope, and IFSB IFIs Stability Report.
Brief Financial Analysis
Table 1. Financial Performances – Key Ratios
ITHMAAR
2014 2015 CAR
Efficiency
ROA
-0.12% -0.58%
MEEZAN
2014 2015 CAR
Efficiency
ROA
Many research conducted reveals that the majority of Islamic banks customers are rationalist instead of emotionalist, thus Islamic banks are also required to have good financial performance competing with the conventional industry which is already well established with strong capital and infrastructure. Three key ratios in examining the bank financial performance have been chosen which are capital adequacy, efficiency, and profitability ratio.
Capital Adequacy
According to Basel III, banks are required to maintain their Capital Adequacy Ratio (CAR) to
be above 8%. Maintaining this ratio does not only help the bank keep healthy and protect their customers, but also promotes stability for the whole financial system. During 2010-2015, Ithmaar Bank and Meezan Bank have been fulfilling the minimum requirement of CAR and was categorized as ‘well capitalized’.
Efficiency
This ratio is very effective in comparing amongst banks’ or with the whole industry. This reflects the quality of the management which usually positively related to the ability of the bank to generate profit. It could be seen that during the last six year Meezan Bank has operated its business more efficient compared to Ithmaar Bank. The difference is quite significant, Meezan Bank performs 32% more efficient compared to Ithmaar Bank. This indicates that Meezan Bank has a better management on using assets and liabilities internally.
Profitability
Return on Assets (RoA) is one of the indicator to measure the profitability of the company, calculated by dividing the annual income by the total assets. There is no particular standard or rating to measure RoA since each industry has their own financial structure. It tells about how much have been generated from the use of capital. Even though both banks have a positive growth on asset, but during the last six years the RoA of Ithmaar Bank was always negative, it suggest that the management did not utilize the capital properly, changes on management must be made to revitalize this bank, on the other hand, the RoA of Meezan Bank was always positive. One point to note that because of the bank industry are relatively highly leveraged, 1.32% on average of RoA of Meezan Bank is considered substantially as a good financial performance.
Reporting Analysis
Picture 1. Narrative Reporting Analysis
ank B 1.50%
ezan 1.00% Me
The analysis for this part was drawn by using a particular software so called Diction to indicate signs of impression management from their narrative disclosures. Impression management is aimed to create a bias on investor perspective which may considered as deception when Islamic banks are required to be always reporting the truth. On this analysis, the RoA was chosen as the key performance indicator and also has been adjusted to make the comparable with the language indicator.
Regardless to the fluctuation of the financial performance, the value of optimism and certainty from this two banks are stable, this indicate the possibility that impression management is suspected to be done during the last six periods especially in Ithmaar bank. The chairman of Ithmaar Bank tried to give a good impression to the stakeholders as well as the shareholders that the bank was in a stable condition with high level of optimism by highlighting their positive entailments.
Ethical Disclosure
The ethical disclosure quality of these two bank is analyzed by employing previous research checklist conducted by Belal et. al.
Picture 2. Ethical Disclosure Summary
In general, both banks have virtually similar quality of voluntary disclosure, which are 60% (Ithmaar Bank) and 59% (Meezan Bank) on average. Notwithstanding, the two banks disclosure score has different trend, Meezan Bank is getting more disclosed while Ithmaar Bank is more likely to hide some aspects year over year. The earlier annual report of Ithmaar Bank is better in term of comprehensiveness compared to the late years. Both are also put more attention to disclose the universal aspects instead of legitimizing their identity as Islamic banks by emphasizing the Islamic aspects such as zakat and qard hasan. Ithmaar Bank has also lower score on Islamic Commitment and Sharia Awareness. While Meezan bank has 94% on average on Islamic commitment, Ithmaar has only 56% on average, it reveals that, although both of these two bank emphasize more on universal aspects, Meezan Bank has higher willingness to build an image as an Islamic financial institution. It is also supported by the findings on visual analysis.
Picture 3. Ethical Disclosure by Category 29%
100% Community Involvement
Management 93%
90% Board of Directors 97%
100% Disclosure 100%
Sharia Awareness
Quard Hassan
94% Islamic Commitments
Sharia Supervisory Board
Corporate Governance 96%
It is evidence that Ithmaar Bank and Meezan Bank have the highest score of disclosure on disclosure policy and and employees’ welfare. The lowest score could be seen from Qord
Hasan, Zakah, Complaints, and Environmental aspects which are considered as Islamic financial reporting aspects.
Directorships and Corporate Governance
The high level of diversity of BoD members’ background has been obtained by the two bank in term of educational backgrounds, experiences, and ages, including the executive and non- executive members. Cross-directorship was found on the most of the member of the board of these two banks. They also hold their own shares within the company. This two condition may lead to agency coast issues which can result negative effect on their effectiveness as the board. None of these two bank has clearly stated that they are following any international governance code of conduct such. However, the BoD of two banks has already set up written good corporate governance policy and committed to be always comply with it. Meezan Bank has more specific code of conduct compared to Ithmaar Bank.
In regards to Sharia Supervisory Board, the best practice has been obtained. Both bank has tailored their business model of SSB which is the composition of one chairman and at least three expert members with diverse educational backgrounds and experiences, including the diversity on Islamic school in regards to the diversity of the school of their stakeholders. The main problem found is that none of these two bank disclose any regular meeting of the SSB and also the ‘chronic’ cross-directorship amongst them. Some of the SSB member have been sitting on more than 50 institutions worldwide. It is suspected that the activeness and the effectiveness of their role could be very low. The ineffectiveness could be also indicated when there are no significant changes on the Sharia Supervisory Board Report year over year, the structure and content are very similar during six years when it is expected that the report would be dynamic regarding to the fluctuation of banks’ performances. However, Meezan Bank has more
comprehensive Sharia Supervisory Board Report compared to Ithmaar Bank. It consists research and new product development, training and development, sharia advisory and industry support, review on assets, review on liabilities, sharia audit department, summary of direct payment in murabaha financing, charity, and recommendation, while Ithmaar Bank sah only two pages general statement without any significant changes year over year.
In these large and complex institutions, it is recommended that the sharia board have more concern on the amount of time the spend directly with the institutions since the main function of them is to monitor the implementation of what has been derived from the sharia standard (al-Qurah, 2007).
Several board committees have been also set up by the board of director. Ithmaar Banks has at least four committees which are Executive Committee, Audit and Governance Committee, Remuneration and Nomination Committee, and Risk Management Committee. Meezan bank has more complex committees structure compared to Ithmaar Bank, which includes Asset Liability Management Committee, Business Continuity Steering Committee, Business Review Committee, Credit and Risk Management Committee, Disciplinary Action Committee, Disciplinary Action Review Committee, Internal Control and Operational Risk Management Committee, IT Steering Committee, and Investment Committee. In the Ithmaar Bank, the Governance Committee is overlapping with the Audit Committee, while in Meezan Bank, there is no specific committee handling governance issues, but some tasks in regards to achieve good corporate governance has already spread amongst several committees.
Moreover, as the reputable auditor is considered as the alternative indicator of earning quality , both of banks’ board of director have appointed highly reputable external auditors which are PricewaterhouseCoopers ME Limited and A. F. Ferguson and Company, ensuring the quality of audit process and report resulted on the annual report. The reports were also provided on time in the two banks.
Ownership
The structure of owners is very important to measure the possibility of agency cost issues. Both of the bank have a specific disclosure on the interest of directors’ section. The board has quite significant contribution within the bank capital which may lead to agency issues. Foreign institutional investors hold the major share on those two banks, which about 80% on average. This could be also resulted by the large number of
foreign members of board of director. Positively, as resulted from the research of You (2013) that state ownership effect negatively to the quality of corporate governance on the long term, state ownership on these two bank are relatively small.
Social and Environmental Responsibility
Islamic Banks are expected to satisfy the earlier aspiration of Islamic Moral Economy by maximizing their role within the society and to the natural environment (Asutay, 2008). Both have very high score on charity, sponsorship, and community involvement. However, Ithmaar Bank has better programs and disclosure compared to Meezan Bank, including on education, health, and environment. Moreover, despite those high scores on social performances, both banks have very low score on zakah and qardh hasan. There was no record from their annual report regarding on zakah payment and qard hasan. In the most cases, these two social aspects are more likely recognized as what make Islamic banks different with their counter party. Collecting and distributing zakah are always bold to highlight the Islamic aspects of Islamic financial institution. It is also very problematic when debt based financing dominates their portfolio instead of profit sharing based financing which is believed to have ability in enhancing the social capacity building and ownership (Asutay, 2008).
Concerning community involvement, Meezan Bank tends to have more interest in sponsoring Islamic program, events, and Muslim communit, while Ithmaar Bank are noticeably more universal interested in distributing its charity fund to the community. Most of the program supported by Ithmaar was sport and health events, while Meezan spent their charity fund predominantly for education and disaster relief. Both of them have commitment to the local economy and widening job opportunity, including internship program for university student and scholarships for underprivileged students. Both of them have been also involved in establishment of several new educational institutions nationwide as well as in the region.
Both banks have very weak program and disclosure on environmental aspects. There is no information about environmental screening for any project done by the banks. The policy and disclosure is very limited to the daily operational aspects of the bank such as paperless policy and the disclosure of the carbon resulted by the office activities. In the last three years there is environmental account on the balance of the use of charity fund of Meezan Bank, nevertheless, it is in very small amount of money with the same amount year to year.
Visual Quality
This part examines the quality of design and layout of the annual report. The result may reflect the quality of brand and communication management of the banks. Ithmaar Bank most likely to use red related color as the main objects and white as the backgroud to strengthen its brand and its nationality since the color of Bahrain flag is also red and white. White background are considered as symbol of elegancy and economic class, it could be seen that Ithmaar Bank wants to have high class banking image. Meezan Ban k’s design schemes are more colorful and dense. Meezan Bank uses more pictures compared to Ithmaar Bank. It suggests that Meezan intends to establish an image as a dynamic organization.
The number of pages and the density of paragraph of Meezan’s annual report are significantly higher than Ithmaar, it shows that Meezan Bank has a higher willingness to disclose any information to its stakeholders voluntarily. By the last two years, the quality of image and design of Mezaan has also been improved significantly, it becomes more attractive and well designed. In the earlier years, some pictures are pixelated and not laid out proportionally, this may reflect that had no willingness to pay higher cost on branding management. Arabic words and ornament are also more
frequent found on the Meezan Bank’s annual report year over year, it suggests that Meezan Bank has more intention to establish and maintain their Islamic image, while Ithmaar Bank has more Euro-centric pattern of design with elegancy and minimalism.
Bibliography
Asutay, M., 2008. Islamic banking and finance: social failure. Global perspective on Islamic banking and insurance, October-December. Asutay, M., 2012. Conceptualising and Locating the Social Failure of Islamic Finance: Aspirations of Islamic Moral Economy vs. the Realities of Islamic Finance. Asian and African Area Studies, 11(2), pp. 93-113.
Dusuki, A. W., 2008. What Does Islam Say About Corporate Social Responsibility? Review of Islamic Economics, 12(1), pp. 5-28. Hassan, Rusni. 2012. An Analysis of the Role and Competency of the Sharia
Committees of Islamic Banks and Financial Service Povider. Kuala Lumpur: ISRA
IFSB, 2015. Islamic Financial Services Industry Stability Report 2015, Kuala Lumpur: IFSB. You, Mei. 2012. State ownership and firm performance: Empirical evidence from Chinese listed companies. China Journal of Accounting Research 6 (2013) 75 –
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Appendices Variables
P ITHMAAR
MEEZAN / 20 20 20 20 20 20 20 20 20 20 20 20 U 10 11 12 13 14 15 10 11 12 13 14 15
1 IFSB Guiding Principles for Corporate Governance
Strategic role and function of the
Board of Directors Strategic role and function of
Executive Management Strategic role and function of
Internal auditors Strategic role and function of
external auditors Strategic role and function of SSB
Mechanisms for balancing the
accountability of the above organs Does the organisation comply
with internationally recognised CG standards Has the organisation tailored its
governance policy to suit its business model Has the organisation tailored its
governance policy to meet recognised best practice Has the Board of Directors (BOD)
set up a governance policy framework Has the Board of Directors set up
a Governance Committee Does the Governance Committee
include a member of the Audit Committee
Does the Governance Committee
include a Shariah Scholar Does the Governance Committee
include a member of the SSB Does the Governance Committee U 1
include a non-executive director Does the Governance Committee
work with management, the Audit Committee and SSB Does the Governance Committee
provide the BOD with reports and recommendations based on findings Does the role of the Governance
Committee overlap with the role of the Audit Committee
Does the Governance Committee
include a diverse range of experienced members
Is there a Sharia Supervisory
Board (SSB) Is there a description of the role of P 1
the SSB Number of SSB members
Number of SSB members which
are not full-time advisors to the bank How many meetings have the SSB P 0
held Do the SSB and bank management P 0
have regular meetings Are names, positions and pictures P 0
of the SSB members provided Number of SSB members with
cross-memberships How many SSB members have a
qualification in finance and commerce Number of SSB members with
doctoral qualifications Do SSB members have experience P 1
of banking Has the SSB report been provided P 1
Disclosure of SSB opinions
regarding compliance with Islamic Principles Disclosure of any unlawful
transactions Description of unlawful
transactions Percentage of profit from non-
permissible activities Amount of revenue earned in
unlawful transactions Disclosure of how gains from such P 1
activities have been handled How the bank disposed/intends to P 1
dispose of such revenues Disclosure of reasons for
undertaking unlawful transactions
Opinion of SSB regarding necessity P 0
of undertaking unlawful transactions Disclosure of Islamic Governance
Score Remuneration of SSB members
SSB Report signed by all members P 1
Recommendation by SSB to rectify P 1
defects in product Action taken by management to
rectify defects in product to P comply with Shari'ah Distribution of profits and losses
to comply with Shari’ah Introduced new product
Glossary/definition of products
1 1 0 0 0 1 1 1 1 1 1 TOTAL
3 Islamic Commitments
Commitments in operating within P 1
Shari’ah principles/ideals Commitments in providing returns P 0
within Shari’ah principles Focus on maximising shareholder
returns Current directions in serving the
needs of the Muslim community Future directions in serving the
needs of Muslim community Commitments to engage only in
permissible investment activities Commitments to fulfil contracts
via contract (uqud) statement Appreciation to shareholders and
Is the bank required to pay Zakah
Does the bank pay Zakah
Balance of Zakah fund
Reason for non-distribution of
Zakah fund Has a statement been provided to P 0
show sources and uses of Zakah fund
If bank is not required to pay
Zakah, amount due in shares and deposits Reasons for balance of zakat
SSB attestation that sources and
uses of zakat according to P Shariah SSB attestation that zakat has
been computed according to Shariah Zakah to be paid by individuals-
5 Quard Hassan
Does the bank finance Quard
Hassan Source of Quard Hassan fund
Does bank finance Quard Hassan
from own or depositors resources Is there a formal scheme for
depositors to designate funds for Quard Hassan Balance of Quard Hassan fund
Is there a policy for providing
Quard Hassan Policy for dealing with insolvent
clients Does the bank have a debt policy
Amount of debts written off in
reporting period Amount charged as late penalties
SSB opinion regarding
permissibility of late penalties Details of how are penalties
allocated/used
TOTAL
6 Sharia Awareness
Does the bank train employees in
Sharia Awareness Have new services been approved P 0
by SSB Explanation of shariah concept
legitimising new service Does the organisation engage in
investment activities complying with Sharia
Does the organisation engage in
financing activities complying with Shariaa Conferences on Islamic Economics P 1
1 1 1 1 1 0 0 0 1 1 1 TOTAL
7 IFSB Disclosure to promote Transparency and Market Discipline
Does the bank have a formal
disclosure policy that has been approved by BOD Is the scope of disclosure
consistent with risk assessment and management objectives
TOTAL
8 Board of Directors
Names of board members
Positions of board members
Pictures of board members
Profile of board members
Shareholdings of board members
Multiple-directorships among
board members Membership of audit committee
Board composition : executive vs
non-executive Role duality
Number of Board Meeting
Names of management team
Positions of management team
Picture of management team
Profile of management team
Do managers receive profit
related pay
TOTAL
10 Community Involvement
Does the organisation work
closely with the local community Does the organisation develop
and apply self-regulatory practices and management systems that foster a relationship of confidence and trust between enterprises and the community Financial quantification of
community work Sources of funds used for
community activities Description of community
programmes Is the organisation committed to
supporting community organisations Any mention of commitment to
local economic development Creating job opportunities
Is there a description of
charitable activities done Charitable donation expenditure
Sources of funds used for
charitable donations Does the bank support employee
involvement in charities Amount spent on donations
through employee schemes Balance of charity fund
Description of use of charity fund
Does the organisation sponsor any U 1
community programmes Amount spent on School, art or
sport sponsorship Does the organisation sponsor any U 1
educational events Does the company sponsor work
experience programmes for students
Does the company sponsor
education and scholarships for students Has the organisation been
involved in establishing educational institutions Is the organisation involved in any U 0
arts related activities Expenditure incurred in
Number of public complaints
against organisation Details of any past litigation
Details of any potential litigation
Defects in any services provided
Does the organisation comply
with an ethical code of conduct Is this ethical code of conduct
sector specific Is this ethical code of conduct
organisation specific Has this ethical code of conduct
been described Is there an ethical committee
Are employees trained in ethical
policies Does the organisation comply
with customer protection legislation Policy and compliance mechanism U 0
for consumer privacy Number of customer complaints
regarding breaches of privacy Number of customer complaints
regarding loss of data Woman branch
Employees appreciation
Number of employees
Equal opportunitiy policy
Employees welfare
Training: monetary
Reward for employees
Nature of donation to protect
Environtment Amount donated on protecting
environtment Details of the project financed
which caused harm for environtment Environtmental policy statement
1 1 1 0 0 0 0 1 1 1 1 TOTAL
UNIVERSAL (89
ITEMS)
PARTICULAR (60
ITEMS)
VARIABLES
ITHMAAR
MEEZAN
10 1 12 13 14 15 10 11 12 13 14 15 CAPITAL
ADEQUACY
RATIO
COST TO
INCOME RATIO
RETURN ON
ASSET
(AVERAGED)
RATIO OPTIMISM
CERTAINTY
52 514 46 50 50 51 45. 39. 50. 40. 48. 38.
07 7% 35 21 17 65 14 73 43 17 1 71
ADJUSTED
0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 0.5 0.5 0.6 0.5
OPTIMISM
5% 6% 8% 4% 5% 7% 7% 2% 4% 9% 0% 9%
ADJUSTED
0.5 0.5 0.4 0.5 0.5 0.5 0.4 0.4 0.5 0.4 0.4 0.3
CERTAINTY
2% 1% 6% 0% 0% 2% 5% 0% 0% 0% 8% 9%