Comparison of the solvency levels between conventional banks and Islamic banks.

• Main Authors: Tan, Ying Guang., Tan, Chin Hao., Ong, Eugene Chun Yew.
• Other Authors: Nanyang Business School
• Format: Final Year Project
• Language: English
• Published: 2011
• Subjects: DRNTU::Business::Finance::Bank management
• Online Access: http://hdl.handle.net/10356/44181
• Institution: Nanyang Technological University

In the aftermath of the recent financial crisis, bank solvency levels have been determined as one of the most important factors contributing to a stabilized global economy. As such, this paper endeavours to study how solvency levels differ between Islamic banks and conventional banks. To do so, this report first focus on the liquidity, sources of funding and profitability levels relevant to both banking conventions. Past studies have shown that higher liquidity and profitability levels as well as increased certainty of funding sources can lead to a higher solvency levels. Hence, financial ratios in the form of current ratio, total deposits to total funding ratio and return on assets are used to compare the solvency levels of the banks. In order to benefit investors with different time horizons, financial data is mined and ratios over various time periods are obtained. With the use of the two sample t-test, our results show there is sufficient evidence to conclude that Islamic banks have higher liquidity, profitability and more certain sources of funding as compared to conventional banks. Thus, allowing us to deduce that Islamic banks are generally more solvent than conventional banks. Nevertheless, constraints such as the lack of publicly available financial data for Islamic banks, the different accounting conventions utilized and the presence of survivorship bias limit the accuracy of the study. Despite all these, the results obtained would aid investors’ in their decision making as well as help banks have a better understanding of their own solvency positions.