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College of Banking and Financial Studies (www.cbfs.edu.om) Working Paper Series

MEASURING THE FINANCIAL GROWTH OF ISLAMIC BANKS AND

THE COMPLIANCE TO MAQASID AL-SHARIAH:

AN INDUSTRY WIDE ASSESSMENT

Mughees Shaukat

Hibathul Careem FerosKhan

WORKING PAPER

No. 104/2015-16

Postgraduate Studies and Research Department College of Banking and Financial Studies

PO Box 3122, Ruwi, Postal Code 112 Muscat, Sultanate of Oman

January, 2018

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Table of Contents

Abstract 1

1 INTRODUCTION 1

2 THE MAQASID AL- SHARIAH APPROACH. 3

3 ANALYSIS OF FINANCIAL AND MAQASID AL SHARIAH

PERFORMANCE OF ISLAMIC BANKS 4

3.1 THE FINANCIAL PERFORMANCE RATIOS FRAMEWORK 4

3.2. THE MAQASID AL-SHARI’AH RATIOS FRAMEWORK 6

3.3. OVERVIEW OF SEKARAN’S CONCEPTS OF

OPERATIONALIZATION METHOD. 7

3.4. THE MAQASID PERFORMANCE RATIOS (PR). 9

4. Discussion of Results. 11

5 CONCLUSIONS ERROR! BOOKMARK NOT DEFINED.

REFERENCES 16



WORKING PAPER No. 104/2015-16


THE COMPLIANCE TO MAQASID AL-SHARIAH1: AN INDUSTRY WIDE

ASSESSMENT

Mughees Shaukat* and Hibathul Careem FerosKhan

ABSTRACT

In the wake of meteoric growth of Islamic Finance, Islamic banking industry is elevating most

noticeably. However, how much of the elevation is based on and driven by keeping in view the

connections and deliverance to Maqasid Al-Shariah, needs evaluation. This can be achieved by

analyzing and assessing the gap, if any, between the recent financial growth of Islamic banks and

its compatibility with Maqasid Al-Shariah fulfillment. By the use of financial performance ratios

and the novel application of the Maqasid ratios, the study applies, on a country wise global sample,

the ‘Financial growth to Maqasid Al-Shariah-FGMS’ grid matrix model, rating the jurisdictions

based on the performance on both scales. The study revealed interesting results. As per the

findings, GCC and Malaysian Islamic banks, are relatively the best performers on both scales;

rated as ‘A’. The rest of the sample performance is rated ‘C’ accordingly i.e. high on financial

growth but low on deliverance to Maqasid Al-Shariah objectives. It is further recommended, that

the given approach/model could be adopted formally as an industrywide tool to continually gauge

the performance on both grounds, particularly for Maqasid Al-Shariah.

Keywords: Islamic Banks, Financial growth, Maqasid Al- Shariah, the Maqasid ratios, FGMS

Grid Matrix, Ratings

ACKNOWLEDGEMENTS:

This research was supported by the College of Banking and Financial Studies, Sultanate of Oman

under Internal Research Grant (2015-16).

*Corresponding Author: [email protected]

1 The study is an expansion of the base papers done by Omer.M.M (2006/07) and by Shaukat.M (2010/11).




THE COMPLIANCE TO MAQASID AL-SHARIAH: AN INDUSTRY

WIDE ASSESSMENT

1. INTRODUCTION

Initially conceived in response to a faith-based logic of conforming to the principles of Shariah in

all spheres of life, the astounding growth of Islamic banking industry, representing 80% of the

whole Islamic finance industry, has helped Islamic finance to surge at an average annual growth

of 21% globally. This can be further supported by the latest World Islamic Banking

Competitiveness Report, 2015. The report shows that for the first time in history in 2013, the

combined profit of participation banks crossed the US$10b mark. By 2019, collective profits

would touch US$37b as the industry continues its double-digit annual growth. The report further

stated that:

International Islamic banking assets with commercial banks set to exceed US$778b in

2014.

The global profit pool of Islamic banks is set to triple by 2019.

Islamic banking assets in six core markets Qatar, Indonesia, Saudi Arabia, Malaysia, UAE,

Turkey on course to touch US$1.8t by 2019.

Global Islamic banking assets witnessed a compounded annual growth rate (CAGR) of

around 17% from 2009 to 2013.

Islamic banks in Saudi Arabia, Kuwait and Bahrain represent more than 48.9%, 44.6% and

27.7% market share respectively.

Positive progress has been has made in Indonesia, Turkey and Pakistan, with 43.5%, 18.7%

and 22.0% CAGR respectively from 2009-2013.



Highlights

International participation Banking Assets.

Source: World Islamic Banking Competitiveness report, 2015.

However, despite the impressive current and projected growth estimates, the Islamic banking

industry continues to face criticism. It is felt that the operations of the current Islamic banking

industry (IBI) are not in complete consonance with the rules of Shariah and fail to fulfill the

‘Maqasid Al-Shariah’: the raison deter of their existence. The aim of the present study is to

empirically examine the strength of the criticism and analyze the performance of Islamic banks

globally, assessing the gap, if any, between the recent financial growth of Islamic banks and its

compatibility with Maqasid Al-Shariah fulfillment. By the use of financial performance ratios and

the novel application of the Maqasid ratios, the study applies the freshly designed FGMS grid

matrix and accordingly rates the jurisdictions practicing Islamic banking. The following section

two provides an introduction to the Maqasid Al-Shariah and discusses its relevance as a prime tool

for judging Shariah compliance and fulfillment of its basic objectives. This will be followed by

section three, which will not only introduce the financial and Maqasid ratios framework, but will

also provide estimates for the whole sample on both scales. The country wise data on Islamic banks

was collected mainly from Bank Scope and the respective financial statements. Constrained by the

data availability, the study selects the time span from year 2008-2015 in an attempt to ensure

consistency of data. The selection of financial estimates used for the purpose of the study follows

the same argument. The study encompassing nearly the whole Islamic banking sector globally,

covers as many Islamic banks for which the relevant data was available. Based on the

estimates/ratios given in section three, section four provides analysis of the results, country wise

as well as region wise. The same section then introduces the FGMS grid matrix and uses it to rate

the countries and regions with regards to their relative performances. Section five concludes the

study.

2. The Maqasid Al- Shariah Approach.


http://www.ey.com/EM/en/Industries/Financial-Services/Banking---Capital-Markets/EY-world-islamic-banking-competitiveness-report-2014-15


Shariah principles can best be understood from an angle it is destined for, namely the purposes

and objectives of Islamic law (maqasid Al-Shariah). This will prove more effective since it allows

Islamic financial institutions to match their products and commercial viability more accurately to

the demands of Islamic ethics and morality and hence justice (‘adl). This is because the maqasid

of Shariah serves to do two essential things, namely tahsil, i.e. the securing of benefit (manfaah)

and ibqa, i.e. the repelling of harm or injury (madarrah) as directed by the Lawgiver. In this

respect, innovation in Islamic finance and all endeavors to test the legality of an activity must

readily comply with the purpose (maqasid) of the Shariah. Based on the argument, it is worthy

to examine what constitutes the maqasid Al-Shariah. One purpose of the Shariah is the

preservation and protection of the basic necessities (daruriyat) of man without which life would

probably be filled with anarchy and chaos and thus become meaningless. Basic necessities in

Islamic law are religion (Din), Life (Nafs), Family (Nasl), Intellect ('Aql) and Property (Mal). For

example, the prohibition on drinking wine (khamr) is based on two reasons. First, the intoxication

effect will make one lose his senses. This prohibition therefore serves to repel the harm of losing

one's senses. The second is the protection of the intellect which also means preservation of

benefits.

In relation to the protection of property (al-mal), the prohibition of riba serves to repel the harm

incurred by the payment of interest as it depletes one's property. Thus, by prohibiting riba, the

harmful effects (madarrah) of poverty and widening of the income gap can be pre-empted.

Likewise, the positive Quranic attitude towards exchange and commercial activities (al-bay’)

serves to secure the benefits of mutual help and equitable transactions ordinarily evident in the

business environment. People engaging in business will take a natural path in dealing with risk

and return as both move in a harmonious fashion. By conducting al-bay and thus deriving benefits

from it, it can make the business of money lending less profitable than trading. The Maqasid of

Shariah will also assure that an Islamic financial institution will provide services that can repel

the harm (madarrah) commonly found in the Western mode of financing. If the harm is still

obvious in the new Islamic financing product, it must be eliminated at all cost. Otherwise, the

product will not reflect the true ideals of Islam. For example, hedging against price volatility is

an important ingredient in business today. Manufacturers who buy raw material as inputs are on

the lookout to buy them at the cheapest cost possible. Some will buy forward, i.e. buy the

commodity now to be delivered and paid for at a specific future date. The price is set on the spot

on the day the contract is arranged. There are serious disagreements among Shariah scholars on

this matter. Some say this kind of forward contract is permissible as it has fulfilled the

requirements of a valid contract while others say the contrary as the contract is akin to gambling

(maisir) and therefore invites harm and injustice (zulm).

When the issue is examined from the contract (‘aqd) perspective alone, i.e. applying rules of

contract in determining legality, it may discount the very purpose of the Shariah and hence unable

to repel the harm it is initially intended to do. If it can be proven that forward contract is free from

harm either from the gambling element or ambiguities (gharar), then it should prove beneficial

to Islamic finance and hence be adopted by Islamic financial institutions. However, if it is found

valid (sahih) from the 'aqd perspective but has been shown to have adversely affected the general

welfare, it shall then remain prohibited since it has failed to repel the harm, thus defeating the

very purpose of the Shariah. Fulfilling the Maqasid Al-Shariah should therefore serves as the

underlying principle of Islamic financial innovations as it safeguards rulings based on fiqh from

moving into unwanted territory. The purpose (maqasid) of Shariah and the rulings on contracts



or business activity should not conflict with each other. If it does, the maqasid shall stand above

the rulings of contracts or activity. This is because the former is based on the Divine Law while

the latter is founded on human understanding (fiqh). In this manner, the legality of a financial

contract is judged not only from the contract (aqd) aspect but equally important its economic and

social impacts (i.e. benefits and disbenefits) to the general public. For example, if Islamic

financial products are found to pull people to fall into debts and bankruptcy, how can we explain

it as a worthy alternative to conventional financing? On the contrary Islamic products should

enhance economic growth, reduce poverty and bring happiness to human beings.

The recent subprime crisis in the United States should be a lesson to Islamic banking. Sale of

mortgage loan called for the issuance of CDOs by special purpose vehicle (SPV) companies. The

securitization of loan receivables by the SPV is an issue in Islamic finance. While Shariah allows

securitization of physical assets, it prohibits the sale murabaha receivables although Malaysian

Shariah scholars had allowed this. Although subprime crises is not caused solely by securitization

but instead by bad credit appraisal in loan origination. Islamic banks that runs on credit financing

is still exposed to credit risk. In this way, the benefits and dis-benefits of using products involving

deferred payments such as murabahah should be examined in academic research so that the

disbenefits of murabahah is proven substantially less than interest bearing. In summary, the

parameter of fulfilling ‘Maqasid Al-Shariah’, leads to a conclusion that this approach lays at the

heart of the very foundations of Shariah compliance, encompassing all the pivotal Shariah aspects,

blending them into a single tool.

3. Analysis of Financial and Maqasid Al Shariah performance of Islamic Banks.

3.1. The Financial performance Ratios Framework.

It is customary in banks to evaluate the achievement of pre-determined goals and objectives;

knowledge of which is important for all stake holders: owners, Investors, debtors, creditors,

government, depositors, bank managers and regulators. The performance of banks gives

directions to the stake holder for decision making. For example it gives direction to the debtor

and the investor to make decision that either they should invest money in bank or elsewhere.

Similarly, it flashes direction to bank managers whether to improve its deposit service or loan

service or both to improve its finance. Regulator and government are also interested to know for

its regulatory purposes. The factors reiterate that performance evaluation is an important pre-

requisite for sustained growth and development. With this in view, the study evaluates the

performance of the country wise sample by focusing on the following financial performance

estimates. The estimates covers the (i) Profitability, (ii) Liquidity and (iii) Risk and Solvency

position of the Islamic banks. The following states the measure used for each purpose2.

i) Profitability Ratios:

The profitability can be judged by the following criteria.

Cost to income (C/IN) = cost/total income

2 As is given earlier, in order to maintain the consistency of the data available and the analysis, the above estimates

were resorted to as best proxies for each category.



Return of equity (ROE) = Profit after tax/ equity capital

Return on asset (ROA) = Profit after tax/ total asset

ROA and ROE are the indicators of measuring managerial efficiency. ROA is net earnings 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. A high C/IN indicates

that a bank is less cost efficient and makes relatively less income with a given expense.

ii) Liquidity Ratios:

Net Loans / Tot Dep & Bor (NL/D&B): higher rate will indicate that firm has some

liquidity issues.

Loan deposit ratio (L/D): Higher rate will show firm has liquidity issues.

iii) Risk and Solvency Ratios: A bank is solvent when the total value of its asset is greater than its liability. A bank becomes

risky if it is insolvent. The following are the commonly used measures for a risk and insolvency.

Impaired Loans (NPLs) / Gross Loans (NPL/GL): this will help to look at the solvency.

Higher ratio indicate that firm has higher risk of insolvency.

Reserves for Impaired Loans / Gross loans (RIL/GL): high rate will show firm is prepared

and will mitigate the risk of insolvency.

Equity / Total Assets (E/TA): higher percentage of equity will show that firm is financed

more by equity and less exposed to insolvency.

Net Loans / Tot Assets (NL/TA): higher rate indicate higher risk.

Equity / Liabilities (E/L): higher rate will indicate solvency.

3.2. The Maqasid Al-Shari’ah Ratios Framework.

Most of the discussions by modern Muslim scholars on the objectives of Islamic banking, appear

to have fallen short of dwelling in depth into the theoretical framework underlying the objectives

of Islamic economics, banking and finance. For example, Kamel (1997) opines that unless the

impact of the implementation of IB is reflected in economic development, creation of value added

factor, increased exports, less imports, job creation, rehabilitation of the incapacitated and training

of capable elements, the gap between the Islamic and conventional banks would be narrower. It

is also concluded that IB would strive for a just, fair and balanced society; it is community

oriented and entrepreneur friendly emphasizing productivity and expansion in real economy; and

it will promote brotherhood and cooperation (Dusuki, 2005) citing (Chapra, 1985, 1992; Ahmad

2000; Chapra 2000a, 2000b; Siddiqui 2001; and Naqvi 2003). Chapra (1985) has outlined the

following distinctive features of Islamic banks, among others: abolition of interest, adherence to



public interest, catalyst for development, promotion of economic well-being, establishment of

social and economic justice, and equitable distribution of income.

Ibn ‘Ashur mentions that while the general objectives of Al-Shariah, are to promote welfare (Jalb

al-Masalih) and avoid vices (Dar’ al-Mafasid) (Ibn ‘Ashur, 1998, p.190), the specific objectives

of the Shariah should include the preservation of order, promotion of human welfare, prevention

of corruption, establishment of justice and, maintaining stability and harmony (al-Risuni, 1992).

Meanwhile ‘Ilal al-Fasi includes in his classification objectives such as reforming the human

mind, developing the earth, managing benefits for all, preserving order and system of livelihood,

establishing justice and, utilizing Allah’s natural resources (Ibid). A more refined form of the

specific objectives of Al-Shari’ah is provided by Abu Zaharah (1997). He classified them into

three broad areas, namely:

Tahdhib al-Fard (Educating the individual)

Iqamah al-`Adl (Establishing justice)

Jalb al-Maslahah (Promoting Welfare)

This study shall adopt Ibn ‘Ashur’s definition of the general objectives of Shariah and Abu

Zaharah’s above classification of specific objectives as the basis for the objectives of Islamic

banking.

3.3. Overview of Sekaran’s concepts of Operationalization Method.

Given the identification and selection of the three broad objectives of measuring fulfillment of

Maqasid Al-Shariah, the study will resort to the Sekaran’s method (2000, pp.176-195) to

operationally define these objectives of Islamic banking into measurable items. This is done by

looking at the behavioral dimensions denoted by the concept. Sekaran’s method breaks down

abstract notions or concepts (C) into observable characteristic behaviors, which she termed as

dimensions (D). The dimensions are then further broken down into measurable behaviors that she

referred to as elements (E). She cited the example of thirst as a ‘concept’. The behavior of thirsty

people is to drink a lot of fluid (Dimension). The degree of thirst can be measured by the number

of glasses drunk by each thirsty individual (Element). Sekaran’s model can be illustrated as

follows where D denotes Dimensions and E, Elements.



Using Sekaran’s method, the three (3) broad objectives of IBs, namely (i) educating individuals,

(ii) establishing justice and (iii) Maslahah are operationally defined. Each of these objectives or

concepts (C) are then translated into broad characteristics or dimensions (D) and finally into

measurable behaviors or elements (E) as follows:

Table 1

Operationalizing the Objectives of Islamic Banking 3

CONCEPTS

(OBJECTIVES)

DIMENSIONS ELEMENTS PERFORMANCE

RATIOS

SOURCES

OF DATA

1. Educating

Individual

D1. Advancement

Of

Knowledge

E1.Education

grant

R1. Education grant/total

income

Annual

Report

E2.Researc h R 2. Research expense/total

expense

Annual

Report

3 See Appendix I for Shariah endorsements for the given measures.



D2. Instilling new skills

and improvements

E3.training R 3. Training Expense/total

expense

Annual

Report

D3. Creating

Awareness of

Islamic banking

E4.Publicity R 4. Publicity expense/total

expense

Annual

Report

2. Establishing

Justice

D4. Fair dealings E5. Fair

Returns

R 5. Net Income/Risk

Weighted Asset

Bank Scope

D5.Affordable products

and services

E6. Affordable

price

R 6. Non-Performing

Loans/Gross Loans

Bank Scope

D6. Elimination of

injustices

E7. Interest free

product

R 7. Interest free income/

total income

Bank Scope

3. Public

Interest

D7. Profitability E8. Profit ratios R 8.Net profit/ total asset Bank Scope

D8. Redistribution of

income & wealth

E9. personal

income

R 9. Zakah/ Net

Income

Annual

Report



D9. Investment in vital

real sector

E10. Investment

ratios in real

sector

R 10. Short Term

Funding/Total Assets

Bank Scope

3.4.The Maqasid performance Ratios (PR).

From the Table 2 above, four ratios, namely 1) educational grant/total income ratio, 2) research

expense/total expense ratio, 3) training expense/total expense ratio and 4) publicity expense/total

expense ratio are assigned as measures to the first objective of Educating Individual. Hence, the

higher the budget that the bank allocates for these four indicators, the more the bank is concerned

about achieving educating individuals in its program. This is also good for the bank to enhance

the quality of its human resource and at the same time work towards creating informed customers

about its objectives and product.

Three ratios: 1) Net Income/Risk Weighted Asset, 2) Non-Performing Loans/Gross Loans and 3)

interest free income/ total income ratio are identified for measuring the second objective of

Establishing Justice. High rate of the ratio of bad debt to gross loans indicates widening gap in

income distribution due to indebtedness. Usually the banks will end up imposing penalties or

repossessing the assets or projects. Likewise, high ratio of Interest free income to total income

contributes positively towards minimizing the income and wealth disparity, since interest

basically transfers wealth from the poor to the rich. Hence the bank must ensure the kind of

product they offer, do not create high probabilities of default.

Lastly, three PR are selected for the third objective – Maslahah. They are 1) Net profit/total asset,

2) Zakah paid/net asset and 3) Short Term Funding/Total Assets. High profitability shows that

the bank is enjoying high financial maslahah and, high Zakah to net asset ratio shows transfer of

income and wealth to the poor and the needy, thereby helping to bridge the inequality gap.

Similarly, short term funding to total assets ratio indicates if the bank is directly investing more

or less in long term projects, often proxied for contribution to the real sector investments. Such

sectors include agriculture, mining, fisheries, construction, manufacturing and small and medium

scale businesses, etc. The importance of these real economic sectors has direct implications to the

wider population, especially those in the rural areas and the long term capital formation of a

country.



Table 2: Financial Performance Ratios Estimates

C/IN ROE ROA NL/D&B L/D NPL/GL RIL/GL E/TA NL/TA E/L

GCC

Bahrain 74.6 2.67 1.49 57.1 141 15.6 8.92 17.4 40.9 90.6

Saudi Arabia 50.3 17.4 2.68 67.9 84 4.52 4.98 16.8 61.4 19.6

Qatar 26.3 20.5 3.55 74.6 93.9 2.27 2.13 7.88 59.3 23.4

Kuwait 41.8 11 1.46 65.1 87.8 4.08 4.61 10.5 53.3 15.8

UAE 46.3 11.9 1.51 73.6 87.3 9.54 7.11 13.5 60.7 17.3

SOUTH ASIA

Bangladesh 56.9 14.2 -0.21 75.7 85.5 12.6 6.96 8.97 67.1 1.9

Iran 66.8 16 1.11 64.4 95.5 5.71 3.22 10 55.7 11.1

Pakistan 97.8 21.3 -1.62 84.6 61.5 6.52 3.46 9.04 42.2 24.5

SOUTH EAST

ASIA

Malaysia 58.2 13.3 0.25 62.7 81.5 4.95 3.7 15.4 55.1 15

Indonesia 64.5 6.71 1.26 87 230 8.99 5.06 7.71 65.1 38.4

Thailand 113 -91.4 -2.59 86.7 82.7 15.2 3.73 13 66.1 21.4

EUROPE

Britain 303 -17 -3.48 26.5 74.3 11.8 30.2 4.13 4.08 203

TURKEY &

OTHERS

Turkey 66 12.3 1.56 88.5 100 5.7 3.3 14.4 72.8 11.8

Jordan 57.2 8.92 1.35 95.7 156 19.5 7.35 8.32 50.3 35.2

Sudan 69.8 17.7 2.78 45.1 94.5 1.3 5.7 16.3 31.2 21.2

Tunisa 48.1 8.56 1.7 57.6 73.8 5.81 6.34 10.4 48.9 28.9

Syria 56.7 3.75 0.32 25.5 55.7 22.8 8.87 16.6 26.8 25.4

Yemen 73.2 5.78 0.39 20.9 98.8 8.63 6.37 4.89 33.5 15.1

Egypt 70.8 -5.58 -0.26 55.8 59.2 19.19 18.63 3.86 46.2 5.83

AVERAGE 75.8 16.1 1.55 63.9 97.0 9.60 7.40 11.0 49.5 32.9



Table 3: Performance Ratios (PR) for fulfillment of Maqasid Al-Shariah Objectives

COUNTRIES PRs of the 1st Objective,

Average Ratios (%)

PRs of the 2nd Objective,

Average Ratios (%)

PRs of the 3rd Objective,

Average Ratios (%)

R1 R2 R3 R4 R5 R6 R7 R8 R9 R10

GCC

BAHRAIN 0.98 0.91 1.89 n.a. 0.01 15.6 50.6 0.15 2.5 63

SAUDI ARABIA 0.65 0.45 1.57 n.a. 3.20 4.52 35.6 3.17 2.9 81

QATAR 0.93 0.55 1.70 n.a. 4.22 2.27 24.0 4.38 1.7 76

KUWAIT 0.26 n.a. 1.48 n.a. 1.78 4.08 31.7 1.96 1.1 80

UAE 1.1 0.87 1.77 n.a. 1.69 7.02 27.7 1.92 2.2 78

SOUTH ASIA

BANGLADESH n.a. n.a. n.a. n.a. 0.01 12.6 22.6 1.18 n.a. 88

IRAN n.a. n.a. n.a. n.a. 2.17 5.71 48.7 2.54 n.a. 78

PAKISTAN 0.33 0.09 n.a. n.a. 0.12 6.52 21.3 0.01 n.a. 95

SOUTH EAST

ASIA

MALAYSIA 1.1 1.07 1.94 n.a. 0.50 4.95 17.0 0.82 2.4 90

INDONESIA n.a. n.a. 0.63 n.a. 1.73 8.99 23.9 2.49 n.a. 86

THAILAND n.a n.a. n.a. n.a. -4.19 15.2 24.2 -4.17 n.a. 100

EUROPE

GREAT BRITAIN n.a. n.a. n.a. n.a. -12.6 11.8 55.8 -12.3 n.a. 56

TURKEY &

OTHERS

TURKEY 0.44 0.31 n.a. n.a. 1.98 5.77 29.0 2.32 n.a. 79

JORDAN 0.43 n.a. n.a. n.a. 91.5 19.5 43.3 87.4 n.a. 81

SUDAN n.a. n.a. n.a. n.a. 6.36 1.30 62.7 6.17 n.a. 60

TUNISA n.a n.a. n.a. n.a. n.a. 5.81 32.6 n.a. 79

SYRIA n.a. n.a. n.a. n.a. 0.41 22.8 74.7 0.37 n.a. 70

YEMEN n.a. n.a. n.a. n.a. -0.04 2.34 107 -18.5 n.a. 87

EGYPT n.a. n.a. n.a. n.a. -0.28 19.1 40.2 0.56 n.a. 91

AVERAGE 0.69 0.60 1.56 n.a. 4.85 8.63 38.5 4.98 2.13 81

4. Discussion of Results.

Based on the above ratio analysis, it can be seen that Islamic banks from the GCC region over all

appear to be performing better in relation to other jurisdiction. Islamic Banks from Saudi Arabia

appear to lead the way though the ratio of Equity to liability may perceive the Islamic banks there



as more risky, nevertheless this appears well cushioned by other similar estimates making the

banking system relatively sound. Following suit is Qatar, UAE, Kuwait and then Bahrain.

However, liquidity wise, Kuwait is second to Saudi Arabia, followed by UAE, Qatar then

Bahrain. Nevertheless, the Bahraini Banks appears most safe and solvent in comparison. From

the South Asian region, Islamic Banks from Pakistan, in overall, appears to be performing best

in the region although the performance is not as well pronounced as its counter parts in GCC, but

the estimates are strong enough to lead the region relative to Iran and Bangladesh, despite

negative estimate of the overall ROA from 2008-2015. Similar is the situation in South East Asia

with Malaysia in the fore front of financial performance. The performance appear to be in the

same tune as that of Islamic banks in GCC despite the E/L ratio been on the lower side. The

results provide further support to the fact that Banks from GCC and Malaysia appear to be leading

the financial performance of the global Islamic banking system. Moreover, Indonesia appear to

be picking up and estimates like the ROA, RIL/GL and E/L seem to suffice the perception. Islamic

Banks in Thailand however, appears to lag behind the two more mature centers in the same region.

The European region as proxied by Britain may appear to have less liquidity issue and relatively

more secure and solvent in comparison to perhaps other regions and particularly the overall

sample performance, but on profitability scale, the Islamic Banking in Britain appear to be the

worse off. The financial performance from 2008-2015 in Turkey and other regions group is lead

by Sudan in profitability estimates followed by Tunisia, Jordan, Turkey, Yemen, Syria and Egypt.

For better liquidity positions, interestingly Syria lead the way followed by Egypt, Tunisia,

Yemen, Sudan, Turkey and Jorden. For risk and solvency estimates, Sudan appear the least risky

and most solvent overall with Jordon, Tunisia, Syria, Turkey, Yemen and Egypt. In overall, it can

be safely concluded that over the period concerned, Islamic Banks in Sudan are the best

performers in the region in all three financial scales overall viz-a-viz the total sample average.

While the above is the depiction of the financial performance of Islamic banks globally, the

crucial performance on the Maqasid Al-Sahriah fulfillment is gauged in table 3. Given that most

banks fail to report on their contributions/achievements on the first derived objective measuring

Maqasid Al-Shariah fulfillment, it can be implied that the Islamic banks do not take this objective

serious enough for any of the sub-measure/ratios to be shown or even mentioned as disclosures

in financial statements. Nevertheless, only after meticulous efforts, the required estimates from

some GCC and Malaysian Islamic Banks were retrieved4. It can be safe concluded that Malaysia,

Bahrain and UAE are top performers in fulfilling this Maqasid objective. The Islamic Banks in

Qatar, Saudi Arabia and Kuwait are not far behind either.

For the ratios measuring Maqasid Al-Shariah fulfillment via the second objective, yet again

Islamic Banks in GCC lead the way and Saudia Arabia is the top performer. This is followed by

Qatar, Kuwait, UAE and Bahrain. Nevertheless, Bahrain is leader when it comes to portion of

interest free income over total income. Iran is the leader in achieving the Maqasid via objective

No.2. Pakistan in number two is South Asian group in this account followed by Bangladesh. This

makes sense given Iran possess a single banking system. Indonesia surprisingly outclasses the

Islamic Finance power house Malaysia on these estimates putting Thailand as number 3 in the

4 The ratios, measuring Objective No.1 in Table 3, for the regions, were found to be a periphery of information which

ever bank reported such estimates. Although the authenticity cannot be fully gauged, nevertheless for the purpose of

the study, the given numbers are the best available for measuring performance on such accounts.



South East Asian sample. Islamic Banking in Britain though show a good performance on the

non-interest income ratio but lags seriously behind on the other two scales pertaining to objective

No.2 of Maqasid fulfillment. However, Sudan out performers all in comparison to Islamic Banks

in Turkey and the rest of the Islamic Banks in its group. Following suit is Islamic banking in

Jordan, though the ratio of non-performing loans in second highest in its group. Turkey is third

best in achieving the given objective while the rest follows. It is noteworthy that Syrian Islamic

banks although appear not to be performing ideally on these measures, but it is the best performer

globally, when it comes to earning interest free income.

On the scale of the fulfilling Maqasid Al-Shariah via the third and last objective, yet again Islamic

Banks in GCC outperform all globally. The performance is led by Qatari banks followed by Saudi

Arabia, UAE, Kuwait and Bahrain. However, Saudi Arabia leads when it comes to re-distribution

of income and wealth with 2.9% as average Zakat distribution followed by Bahrain, UAE, Qatar

and Kuwait. The only other country to perform closer to GCC states in income and wealth

redistribution is Malaysia in South East Asia. The rest of the global sample somehow fail to

provide such estimates. Nevertheless the south Asian group is led by Iran, in overall performance

with regards to Objective No.3, seconded by Bangladesh and Pakistan. The South East Asian

leader, in better fulfilling this objective as a whole, however, yet again is Indonesia. The part

sample belonging to‘Turkey and others’ group is led by Jordan, Sudan and Turkey as top three

performers, followed by Egypt, Syria and Yemen. Islamic banking in Britain leaves a lot to be

desired though the contribution to real sector, as measured by the ratio of short-term funding to

total assets, apparently is the highest in the complete sample, given the lowest ratio.

4.1. The Financial Growth to Maqasid Al-Shariah-FGMS Grid Matrix

Given the ratio analysis on the financial viz-a-viz the Maqasid Al-Shariah fulfillment

performance, the study is now in a position to use the novel ‘Financial Growth to Maqasid Al-

Shariah’ grid matrix as given above. The matrix will rate the banks and the regions relative to

each other according to the performances on both aspects. The following explains how the FGMS

matrix for assigning the ratings.



GRID A: The grid interprets HIGH FINACIAL GROWTH ALONG SIDE HIGH SHARIAH

COMPLIANCE/MAQASID AL-SHARIAH FULFILLMENT simultaneously. If a bank or region

performs well on both grounds, it will be considered as best performer: Rating ‘A’

GRID B: Represents the combination of LOW FINANCIAL GROWTH BUT GOES HIGH ON THE

MAQASID AL-SHARIAH ASPECT: Rating ‘B’

GRID C: Illustrates the category of banks who although possess HIGH FINANCIAL GROWTH BUT

WITH LOW SHARIAH COMPLIANCE, hence low deliverance to Maqasid Al-Shariah: Rating ‘C’

GRID D: Represents LOW FINANCIAL GROWTH WITH LOW MQASID AL-SHARIAH

FULFILLMENT: Rating ‘D’

Table 4

COUNTIRES/REGIONS RELATIVE

RATINGS

GCC A

BAHRAIN A

SAUDI ARABIA A

QATAR A

KUWAIT A

UAE A

SOUTH ASIA C

BANGLADESH C

IRAN C

PAKISTAN C

SOUTH EAST ASIA C

MALAYSIA A

INDONESIA C

THAILAND C

EUROPE C

BRITAIN C

TURKEY & OTHERS C

TURKEY C

JORDAN C

SUDAN C

TUNISA C

SYRIA C

YEMEN C

EGYPT C

AVERAGE C



5. Conclusion

The greatest significance of this study is that it proposes the objectives of Islamic banks from the

Maqasid al-Shariah perspective. It has tried to prove a gap in the growth of Islamic banks in

terms of their financial progress and how much is it driven to meet their foundational merits of

Maqasid Al-Shariah fulfillment. Moreover, it has also suggested a methodology that could be

used to measure Islamic banks performance based on the Shariah framework. It used the freshly

designed Maqasid ratios and gauged globally the Islamic banks performance on their foundational

scale viz-z-viz financial growth. The study then introduced the ‘Financial growth to Maqasid Al-

Shariah’- FGMS- Grid Matrix’ which later rated the banks, the regions and the overall sample as

per the relative performances on both grounds.

The results of the study has shown variations in the performances of the selected global sample.

It is shown that Islamic banks, though appear to show decent financial growth as a whole, fail to

meet similar standards in delivering to Maqasid Al-Shariah simultaneously. The banks in GCC,

however, are relatively the best performers on their achievements on both scales. As a result, the

jurisdictions in GCC and GCC as a whole is given a rating ‘A’ by the FGMS matrix. Only

Malaysia is able to match the performance of GCC Islamic banks. However, for other

jurisdictions/regions, the story is not the same and banks in those regions, though compete on

financial performance, but fail drastically on the Maqasid scale. The banks failed to report the

estimates for Objective No.1 for Maqasid. As a result, even both there are countries that did do

relatively well but the majority hence the overall sample is rated as ‘C’ as shown in table 4. The

variations in ratings show clear inconsistency and lack of seriousness on the part of the Islamic

banking jurisdictions to focus on delivering to their foundational Shariah objectives alongside

perusing financial growth. As a result, the criticism that Islamic banks are focused only on

growing financially without connecting or complementing the growth by simultaneously

delivering to the objectives of Maqasid Al Shariah, appears true. The discussion however should

not in any way be considered to undermine the progress of Islamic Banks. The contributions in

terms of bringing economic growth through expansion of the financial base is self-evidenced with

the developments in the sector.

It can also be concluded that the study has come at an opportune time for Islamic banks,

advocating a need to revisit their strategies and objectives after nearly four decades in operation.

Since this is an exploratory study, hopefully future research will take it as a point of departure for

developing further the objectives and performance measures of Islamic Banks based on Shariah

framework and the fulfillment of Maqasid Al-Shariah in achieving human falah. This requires, a

move towards goals and policy rather than the mechanistic and legal structure of Islamic Banks.

This will help to establish optimality between venal behavior and sacrificial behavior, and the

choice between the two will be determined by the values of the participants in the sector and the

interest of the larger environment.

WA ALLAH A’LAM



References:

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Islamic Banks” Paper presented at the 2nd International Conference on Administrative Sciences. King Fahd

University of Petroleum and Minerals, Saudi Arabia 19-21 April 2004.



APPENDIX I

Verification of the performance Measures

The IBs performance measures developed from Maqasid Al-Shariah framework has already

captured the views about endorsements of Shariah experts from the Middle East and Malaysia

who are well versed in both the Islamic and conventional banks for verification. These

endorsements, which were already gained in the base paper of which the present study is an

expansion, were achieved at two levels. The first level was in the form of interview. Twelve

experts in the areas of Islamic banking, Fiqh and Islamic economics were interviewed in order to

triangulate the performance measures developed. Nearly all the experts, through the interview,

have verified the appropriateness of the IB performance measures developed. The second level

of verification was in the form of questionnaire. Eighteen experts were requested to assign

weights to the components and to determine whether the performance measures are acceptable.

The averages weights given by the experts are presented in table 5 below:

Table 5

Average weights for the three objectives and ten Elements given by Shariah experts

Objectives Average

Weight

(Out of

100%)

Elements Average

Weight

(Out of

100%)

O1. Education

(Tahdhib al-

Fard)

30

E1. Education

Grants/Donations

24

E2. Research 27

E3. Training 26

E4. Publicity 23

Total 100

O2. Justice

(Al-‘Adl)

41 E5. Fair Returns 30



E6. Fair Price 32

E7. Interest free product 38

Total 100

O3. Welfare (Al-

Maslahah)*

29

E8. Bank’s Profit Ratios 33

E9. Personal Income

Transfers

30

E10. Investment Ratios in real

sector

37

Total 100 Total 100

* Maslahah includes the bank’s interest plus the public interest



About the Authors

1. Mughees Shaukat: is the Head of Islamic Finance in the College of Banking and Financial

Studies, under the Central Bank of Oman, Muscat, Oman. He is a PhD scholar in Islamic

Banking and Finance, Fintech Specialist, MIT, USA and Certified Shariah Advisor and Auditor,

CSAA, AAOIFI.

2. Feroskhan: is Assistant lecturer of finance in the College of Banking and Financial Studies and

Affiliate member ACCA.


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