H07: There is no significantly different effect of ownership structure on banks’ cost efficiency between the
conventional and Islamic banking systems.
HA7: There is a significantly different effect of ownership
structure on banks’ cost efficiency between the
conventional and Islamic banking systems.
H08: There is no significantly different effect of ownership structure on banks’ profitability between the
conventional and Islamic banking systems.
HA8: There is a significantly different effect of ownership
structure on banks’ profitability between the conventional and Islamic banking systems.
3 Methodology
3.1 Data Collection and Sampling
This study uses a dataset of 32 CBs and IBs operating in the
UAE, from 2005 to 2015. The financial data are collected for
each bank from the database of Orbis Bank Focus—Bureau
Van Dijk (A Moody’s Analytics Company). Financial
statements and annual reports of the banks in the sample are
downloaded from their official website and the Central Bank
of UAE in case of missing data for some banks. For banks
and banking institutions to be included in the sample they
have to meet the following conditions:
1. The banks are located in the country UAE, the branch’s
origin or the regional head office should be in the UAE;
2. The bank’s status is active;
3. Financial activity is banking;
4. The accounting standards used by the banks are the
International Financial Reporting Standards (IFRS);
5. The Basel Accord II is implemented on the financial
reporting and the financial statements;
6. The consolidated financial statements are either audited
or restated;
7. The total assets are more than five million of the local
currency AED, or the net income is more than AED 50
million.
The data set covers 352 observations from 32 banks and
banking institutions all based in the UAE, for 11 years
(2005–2015). The sample is composed of 27 banks that are
listed (regulated and supervised by the Central Bank of
UAE) and five unlisted banks (a percentage of 84.38% and
15.63%, respectively). The bank ownership’s structure
includes 25 National banks (78.13%) and seven Foreign
banks (21.88%). The data set comprises 22 CBs and 10 IBs,
which represent 68.75% and 32.25%, respectively. The
sample of CBs includes 242 observations, and the sample of
IBs consists of 110 observations which sum up to a total of
352 observations. Table 2 displays the list of banks included
in the sample and the total number of banks in the sample
categorized by their listing status (listed vs. unlisted), ownership (national vs. foreign), and type (conventional vs.
Islamic) as well as the total and the percentage of each
category. Table 2 also represents the average number of
years of observations per bank which is calculated by the
total number of observations for 11 years (2005 –2015)
divided by the total number of variables (20).
3.2 Data Analysis
The data set is cleaned by tabulating the values and frequencies, setting up and unifying the value types, and
dropping the variables with a high frequency of missing
values or embedded blanks. The cleaned data set contains
text string (bank, type, and specification), numeric yearly
date (int) for the years 2005–2015, numeric (double) for the
ratios and numeric (byte) for the dummy variables. The data
is analyzed by using the statistical package software
STATA IC 15.0. Highlighting the differences in the governing principles and rules between CBs and IBs discussed
in the literature review results in some differences in their
financial ratios and performance measures. The difference in
the financial instruments used by each type of banking
system is reflected in their financial statements; therefore, the
calculations of the Islamic financials are different from the
conventional ones as follows: (1) Net income (EBIT) is
calculated as net income before taxes and before Zakat;
(2) Deposits are the customers’ payments for investing
purposes which includes saving and current accounts,
Murabaha, Mubadala, and MT Wakala; (3). Loans as Islamic
financing instruments are Murabaha, Musharakah, Mudarabah, Ijarah, Istisna, Salam, and Wakalt; and (4) Interest
income is the income from the Islamic financing instruments
fees, and interest expenses are profit distributions to customers (Miah and Uddin 2017). As the previous empirical
studies conflict in their results, the main purpose of this
study is to investigate the performance of UAE banks in
terms of cost efficiency and profitability, and to compare
between CBs and IBs from a more comprehensive perspective by measuring the impact of specific bank-level
characteristics, capital adequacy, risk, and ownership structure on their performance.
To measure the banks’ performance, we select the following indicators as dependent variables: cost efficiency and
profitability that can be measured by observable variables
(Tahir and Haron 2010); therefore, based on the available
financial data we use Cost to Income Ratio (CIR) and Net
Banking System in the MENA Region: A Comparative Analysis …
65
conventional and Islamic banking systems.
HA7: There is a significantly different effect of ownership
structure on banks’ cost efficiency between the
conventional and Islamic banking systems.
H08: There is no significantly different effect of ownership structure on banks’ profitability between the
conventional and Islamic banking systems.
HA8: There is a significantly different effect of ownership
structure on banks’ profitability between the conventional and Islamic banking systems.
3 Methodology
3.1 Data Collection and Sampling
This study uses a dataset of 32 CBs and IBs operating in the
UAE, from 2005 to 2015. The financial data are collected for
each bank from the database of Orbis Bank Focus—Bureau
Van Dijk (A Moody’s Analytics Company). Financial
statements and annual reports of the banks in the sample are
downloaded from their official website and the Central Bank
of UAE in case of missing data for some banks. For banks
and banking institutions to be included in the sample they
have to meet the following conditions:
1. The banks are located in the country UAE, the branch’s
origin or the regional head office should be in the UAE;
2. The bank’s status is active;
3. Financial activity is banking;
4. The accounting standards used by the banks are the
International Financial Reporting Standards (IFRS);
5. The Basel Accord II is implemented on the financial
reporting and the financial statements;
6. The consolidated financial statements are either audited
or restated;
7. The total assets are more than five million of the local
currency AED, or the net income is more than AED 50
million.
The data set covers 352 observations from 32 banks and
banking institutions all based in the UAE, for 11 years
(2005–2015). The sample is composed of 27 banks that are
listed (regulated and supervised by the Central Bank of
UAE) and five unlisted banks (a percentage of 84.38% and
15.63%, respectively). The bank ownership’s structure
includes 25 National banks (78.13%) and seven Foreign
banks (21.88%). The data set comprises 22 CBs and 10 IBs,
which represent 68.75% and 32.25%, respectively. The
sample of CBs includes 242 observations, and the sample of
IBs consists of 110 observations which sum up to a total of
352 observations. Table 2 displays the list of banks included
in the sample and the total number of banks in the sample
categorized by their listing status (listed vs. unlisted), ownership (national vs. foreign), and type (conventional vs.
Islamic) as well as the total and the percentage of each
category. Table 2 also represents the average number of
years of observations per bank which is calculated by the
total number of observations for 11 years (2005 –2015)
divided by the total number of variables (20).
3.2 Data Analysis
The data set is cleaned by tabulating the values and frequencies, setting up and unifying the value types, and
dropping the variables with a high frequency of missing
values or embedded blanks. The cleaned data set contains
text string (bank, type, and specification), numeric yearly
date (int) for the years 2005–2015, numeric (double) for the
ratios and numeric (byte) for the dummy variables. The data
is analyzed by using the statistical package software
STATA IC 15.0. Highlighting the differences in the governing principles and rules between CBs and IBs discussed
in the literature review results in some differences in their
financial ratios and performance measures. The difference in
the financial instruments used by each type of banking
system is reflected in their financial statements; therefore, the
calculations of the Islamic financials are different from the
conventional ones as follows: (1) Net income (EBIT) is
calculated as net income before taxes and before Zakat;
(2) Deposits are the customers’ payments for investing
purposes which includes saving and current accounts,
Murabaha, Mubadala, and MT Wakala; (3). Loans as Islamic
financing instruments are Murabaha, Musharakah, Mudarabah, Ijarah, Istisna, Salam, and Wakalt; and (4) Interest
income is the income from the Islamic financing instruments
fees, and interest expenses are profit distributions to customers (Miah and Uddin 2017). As the previous empirical
studies conflict in their results, the main purpose of this
study is to investigate the performance of UAE banks in
terms of cost efficiency and profitability, and to compare
between CBs and IBs from a more comprehensive perspective by measuring the impact of specific bank-level
characteristics, capital adequacy, risk, and ownership structure on their performance.
To measure the banks’ performance, we select the following indicators as dependent variables: cost efficiency and
profitability that can be measured by observable variables
(Tahir and Haron 2010); therefore, based on the available
financial data we use Cost to Income Ratio (CIR) and Net
Banking System in the MENA Region: A Comparative Analysis …
65