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Kurdistan Regional Government- Iraq/ Council of Ministers / Ministry of Higher
Education & Scientific Research / Salahaddin University / Erbil / College of
Administration and Economics / Department of Finance and Banking
The Impact of Profitability Measures on Financial
Performance an evaluation of a bank's performance
Case Study in Kurdistan Bank - Erbil
Prepared by:
Shakar Tariq Reband rashad
Saman Muhamad Rebaz Nazim
Omar Fakhraden Salh Sami
Supervisorerd by
Dr. Kawa Wali
2020 - 2021
عێراق - رێمي كوردستانتى ههحكومه
زيران نى وهنجومهئه
ى زانستى وهتوێژينه تى خوێندنى باڵا و زارهوه
ولێر هه-دينلاحهتى زانكۆى سه رۆكايه سه
ئابوورى به ريه وه بردن وكۆلێژى
العراق /حكومة أقليم كوردستان مجلس الوزراء
العلمي وزارة التعليم العالي والبحث أربيل /رئاسة جامعة صلاح الدين
الادارة والاقتصاد كلية
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This study dedicated to our beloved parents and family for their love,
endless support, encouragement and sacrifices
Researchers
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Praise be to Allah to help us to accomplish this work, peace and blessings be upon His Noble
Prophet, we would like to offer thanks and appreciation to our lecturer and supervisor Dr. Kawa
Wali, for his support, guidance. We would not be able to make it this far without your help and
support, thanks for your time, effort, patience and your trust in us. Finally, we would like to
thank the head, lecturers of the finance and banking department, our dear colleagues, and all
those who helped us all the way through the research.
Researchers
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Contents
Chapter 1: Introduction………………………………………………………5
1.1 Research Question ........................................................................................ 5
1.2 Research Objectives ...................................................................................... 6
1.3 Research Significant ..................................................................................... 6
1.4 Hypotheses Development ............................................................................. 8
Chapter 2: Literature Review ............................................................................ 9
2.1 Performance Analysis: .............................................................................. 9
2.2 Areas and Importance of Financial Performance Analysis: ............... 10
2.3 Factors Affecting Performance of Banks: ............................................. 12
2.4 Measures of Bank Performance: ............................................................ 13
2.4 Islamic Bank:............................................................................................ 14
2.5 Theoretical Basis of the Concept of Islamic Banking: ......................... 14
2.6 Distinguishing Features of Islamic Banking: ........................................ 15
2.7 Objectives of Islamic Banking: ............................................................... 17
2.8 Islamic Banking for Development: ........................................................ 18
2.9 Profitability of Islamic Banks : ................................................................ 18
Chapter 3: PRACTICE ANALYSIS……………………………………….
.Error! Bookmark not defined.
3.1 Data Analysis: ............................................................................................ 7
3.2 Profitability measures' status ................................................................... 8
3.3 Descriptive Statistics .................................... Error! Bookmark not defined.
3.4 Testing Hypotheses and Analysis of variables ....... Error! Bookmark not
defined.
Chapter 4: Conclusion & Recommendation ...... Error! Bookmark not defined.
4.1 Conclusion: ................................................... Error! Bookmark not defined.
4.2 Recommendation: ........................................ Error! Bookmark not defined.
Reference: .......................................................................................................... 28
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Abstract
The research concept revolves in essence around (the effect of
profitability ratios on the financial performance of the Kurdistan International
Bank for the period from (2015-2017) a quantitative and descriptive comparative
analysis) in light of the profitability ratios according to the number of commonly
used financial indicators in this regard, and the study focuses on the financial
performance for the period from (2015-2017).
This study aims to show the return indicators (evaluation) of Kurdistan Bank that
have been studied and listed on the Iraq Stock Exchange. Explain the importance
of this activity, analyze the level of profitability and the effectiveness of the
measures followed to maximize profits and try to reach scientific and practical
results that would help the financial decision maker in the concerned bank to
verify the nature of the relationship. Between performance appraisal and
profitability indicators.
The study extended to the International Kurdistan Bank, and we used two
methods: observational and descriptive analysis to explain the financial results of
Kurdistan Bank in Erbil from 2015 to 2017. The bank’s financial statements such
as the income statement and the balance sheet, and the success measure (ROA)
or (ROE) that can be used to help in Measuring the bank’s profitability, as well
as deriving and evaluating interest rates for the two years (2015-2017).
The study reached a number of conclusions and recommendations, the most
important of which are: The instability of the external environment in addition to
the economic environment of the studied bank leads to inevitable fluctuations in
its profitability that may expose it to loss or profit. The most prominent
recommendations were to provide an internal control system to assess financial
performance, and to review and evaluate this system periodically (monthly or
quarterly) in order to ensure the suitability and effectiveness of performance .
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CHAPTER 1
INTRODUCTION AND RESEARCH FRAMEWORK
Due to the changing banking environment, profitability, which is one of
the most important criteria to measure performance of banks have come under
intense pressure. Profitability is critical to the survival of commercial banks.
Firstly, dividends are paid from profits (cash profits) and secondly, profit is an
important source of retained earnings. Retained earnings are residual profits after
dividends are paid. These earnings are important component of bank capital for
its sustainability (Alkhazaleh, 2014).
Financial performance analysis is a study of relationship among the various
financial factors in business as disclosed by a single set of statement and a study
of the trend of these facts as shown in a series of statements. By establishing a
strategic relationship between the item of balance sheet and income statements
and other operative data, the financial analysis unveils the meanings and
significance and allows its user a better understanding of a firm's position and
overall performance. Evaluating the financial performance of business allows
decision makers to judge the results of business strategies and activities in
objective monetary terms. It also helps to evaluate and decision-making process
for business operation. Normally the ratios are used to determine the financial
performance an organization (Athanasoglou, 2008).
While accounting and financial indicators can provide important
information related to a bank's financial performance, the relationship between
many variables related to the success of the bank is measured, for example assets,
income, benefits, market value, number of employees, investments, and
customers. The study will focus on the financial performance of the Kurdistan
Bank, especially during the period of relative economic recovery, especially after
the elimination of the Islamic State in Iraq and Syria, which may have had a
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significant impact on the bank’s performance. Data were collected from the
annual report for the period 2015-2017
1.1 Research Question
The main objective of the Kurdistan bank is to comprehensiveness in
banking services through expanding the modes of investment, funding, and
banking services and products. Investing the available financial resources in the
best method that realizes higher revenues and profits in comparison with the risks
incurring from the banking transactions.
Working on the design and implementation of high-quality banking goods,
services, and technologies in accordance with Islamic Sharia. This financial
performance review of banks can be extremely useful in determining the
determinants of financial performance and developing plans for improved
performance. This research is intended to address the following issues:
1. What is the current status of selected bank efficiency metrics and bank-specific
variables?
2. What are the bank-specific variables that influence bank performance?
1.2 Research Objectives
The specific objectives for the study are as follows:
1. To investigate the current standing of selected bank performance metrics and
bank-specific causes.
2. Assess the factors influencing the International Kurdistan Bank's financial
results.
1.3 Research Significant
This study is significant for providing an improved understanding of the
determinants of international of Kurdistan banks' profitability and their precise
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effect on overall performance. Financial performance of a firm affects the interest
of its stakeholders. The stakeholders refer to trade creditors, bondholders,
investors and management and other user of financial statements. Trade creditors
are interested in the liquidity of the firm, bondholders are interested in the cash
flow ability of the firm, investors are interested in present and expected future
earnings as well as stability of these earnings and management is interested in
internal control, better financial condition and better performance of firm.
Therefore, the conclusions drawn from this study are beneficial and
valuable for Islamic banks in formulating the right operational policies that enable
them to generate sustainable profitability, which is essential for them to maintain
ongoing activity. The conclusions are also crucial for the investors by improving
their understanding of how to take the right investment decision that enables them
to obtain fair returns. Finally, it is also useful for researchers and academicians in
the field of finance, economics and banking for carrying out further studies in this
area.
1.4 Methodology
1.4.1 Research Design
Investigative study there are three familiar types of research approaches to
business and social research namely- inquiry within qualitative, and mixed
method approach. Though, each approach has its own strengths and limitations.
Moreover, certain types of social research problems call for specific approaches.
Hence, in selecting an approach one should take in to account that nature of the
research problem, the personal experience of the researcher and the audience for
whom the report will be written. Considering the research problem and
objectives, the qualitative nature of the data collected, qualitative research
approach found to be appropriate for this study. Descriptive and analytical
research designs have been used in this study.
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1.4.2 Data Collection
In order to obtain the data needed to complete search and to reach the results with
the achievement of study objectives, and as case study the researcher adopted the
theoretical side of the study, the researchers relied on many resources, such as
books, magazines, studies and the other resources.
1.4.3 Hypotheses Development
H0: Profitability ratios such as return on asset and return on equity are not primary
ratios to assess the financial performance of banks.
H1: In order to determine banks' financial performance, profitability measures
such as return on asset and return on equity are key ratios.
1.5 Study structure
Chapter 1 provides an introduction and framework for the study. Chapter 2 sheds
light on a literature review of several studies to describe and analyze recent
progress in relation to this study. The third chapter introduces the experimental
part of the study, in addition to data analysis, descriptive statistical issues, and
presentation of important findings. Finally, Chapter Four presents conclusions
and recommendations.
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CHAPTER 2
LITERATURE REVIEW
2.1 Performance Analysis
The Business Dictionary defines performance as "the accomplishment of a
given task measured against preset known standards of accuracy, completeness,
cost, and speed. In a contract, performance is deemed to be the fulfillment of an
obligation, in a manner that releases the performer from all liabilities under the
contract" (Bhandari, 2016).
The word 'performance' means 'the performing of an activity, keeping, in
view the achievement made by it.' In other words, 'performance' means 'the role
played by an arrangement keeping in view the achievement made by it.' In the
context of banks, it takes into account the way of their progress. Financial
performance analysis is a study or relationship among the various financial
factors in business as disclosed by a single set of statement and a study of the
trend of these facts as shown in a series of statements (Bhattarai, 2018). By
establishing a strategic relationship between the item of balance sheet and income
statements and other operative data, the financial analysis unveils the meanings
and significance of such items. Moreover, Financial performance analysis is a
process of evaluating the relationship between components parts of a financial
statement to obtain a better understanding of a firm's position and performance
(Ahuja & Majumdar 1998).
Financial performance is the process of measuring the results of an
organization policies and operations in terms of monetary value. These results are
reflected in the firm's profitability, liquidity or leverage. Evaluating the financial
performance of business allows decision makers to judge the results of business
strategies and activities in objective monetary terms. Normally the ratios are used
to determine the financial performance an organization. A well designed and
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implemented financial management is expected to contribute positively to the
creation of a firm's value (Padachi, 2006). "Financial analysis is to analyze the
achieved statement to see if the results meet the objectives of the firm, to identify
problems, if any, in the past or present and/or likely to be in the future, and to
provide recommendation to solve the problems" (Pradhan, 1986).
Various different researchers and writers have different idea and definition
about performance. However, majority of the researchers have used the term
performance to express the range of measurements of transactional efficiency on
input & output efficiency. Hence, financial performance is the process of
measuring the results of an organization policies and operations in terms of
monetary value. In other word, financial performance analysis is a study of
relationship among the various financial factors and identifying the financial
strengths and weaknesses of the firm by properly establishing the relationship
between the items of as disclosed by a single set of financial statement and a study
of the trend of these facts as shown in a series of statements. By establishing a
strategic relationship between the item of balance sheet and income statements
and other operative data, the financial analysis unveils the meanings and
significance of such items. Financial performance analysis is a process of
evaluating the relationship between components parts of a financial statement to
obtain a better understanding of a firm's position and performance (Kosmidou,
2006).
2.2 Areas and Importance of Financial Performance Analysis
Financial Performance analysis includes analysis and interpretation of
financial statements in such a way that it undertakes full diagnosis of the
profitability and financial soundness of the business. The financial analysis
program provides vital methodologies of financial analysis (Murerwa, 2015).
1. Areas of Financial Performance Analysis:
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In Financial Performance Analysis, we often focus on the firm's production
and productivity performance (total business performance), profitability
performance, liquidity performance, working capital performance, fixed assets
performance and fund flow performance. To evaluate the performance of
commercial banks, various financial ratio analysis tools can be used, such as:
profitability analysis, liquidity analysis, working capital analysis and financial
structure analysis.
2. Importance of Financial Performance Analysis:
Financial Performance Analysis unveils the financial health and stability
of a firm. It helps in determining the current position and in planning for
upcoming business plan. The key factor indicating a firm's growth and future
potentiality is the level of profitability achieved. So, there is a direct relationship
between utilizing financial resources and the profit generation for a firm.
Importance of use of financial data varies according to the specific interest of the
party involved and their interest is affected by the financial performance of a firm.
So, the financial performance analysis is important for different reasons:
• Shareholders: Shareholders are the owners of the company. Time and
again, they may have to take decisions whether they have to continue with
the holdings of the company's share or sell them out. The financial
statement analysis is important as it provides meaningful information to
the shareholders in taking such decisions. Shareholders are also interested
in present and expected future earnings as well as stability of these earnings
as they have invested their money on it.
• Management: Management team is responsible for taking decisions and
formulating plans and policies for the future. They, therefore, always need
to evaluate its performance and effectiveness of their action to achieve the
company's goal. Therefore, staying informed about the performance of the
company is crucial to the management team of firm. So, their areas of
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interest is focused in internal control, better financial condition and better
performance where information about the present financial condition,
evaluation of opportunities in relation to this current position, return on
investment provided by various assets of the company etc.
• Creditors / Depositors: Since, creditors/depositors are the liquidity
providers of the bank. They seek for the safety of their deposits. The
sufficient liquidity management will in better result in performance. So,
the performance of bank is important for them for making decision on
whether to hold or extend the deposit limits etc.
• Investors: Investors always seek for the potential profitable opportunities
to invest their fund so that they could secure their capital and get the
reasonable.
2.3 Factors Affecting Performance of Banks:
Different studies undertaken on the performance of banks suggest that
performances of banks are affected by both internal and external factors. (Shaher,
Kasawneh & Salem, 2011) studied twenty-three factors that affect the
performance, out of which they have narrowed down the top five factors that
affect the performance of banks, which are: Banks characteristic, Competition
environment, Economic indicator, Regulation and legal environment and Country
risk. (Mohana, 2012) suggests that the so called bank specific factors because
depending on the likely impact they have on the profitability of the bank they can
be reinforced (positive treatment) or weakened (negative treatment) by the
management of the bank. The major internal factors that affect performance of
banks include: capital structure, asset quality, management efficiency, earning
quality, liquidity, bank size, technology, human capital, loan performance and
income diversification among others. Moreover, some of the factors that affect
the performance of the bank could be under the control of banks management and
the others could be beyond management’s control. Those factors which could be
under the control of the management are called internal or bank specific factors
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likewise, those factors which are beyond the management’s control are referred
as external or macroeconomic factors and these factors are related to the industry
and macroeconomic factors of the country. These factors such as bank
concentration, inflation, GDP growth, effective tax rate, interest rate, among
others (Nirmal, 2004).
2.4 Measures of Bank Performance:
Among the large set of performance measures for banks used by academics
and practitioners alike, a distinction can be made between traditional, economic
and market-based measures of performance. Traditional performance measures
are similar to those applied in other industries, with return on assets (ROA), return
on equity (ROE) or cost-to-income ratio being the most widely used. In addition,
given the 13 importance of the intermediation function for banks, net interest
margin (NIM) is typically monitored (Pandey, 2016).
• Return on Asset (ROA): The return on assets (ROA) is the net income for the
year divided by total assets, usually the average value over the year. The ROA
reflects the ability of a bank’s management to generate profits from the bank’s
assets employed for the business. This is probably the most important single ratio
in comparing the efficiency and operating performance of banks as it indicates
the returns generated from the assets that bank owns. This ratio is calculated as
net profit after tax divided by the total assets.
• Return on Equity (ROE) Ratio of Return on Equity (ROE) is an internal
performance measure of shareholder value, and it is by far the most popular
tool. Return on equity is the return to shareholders on their equity. describes
that return on equity measures a corporation's profitability by revealing how
much profit a company generates with the money shareholders have invested.
The amount of net income returned as a percentage of shareholders equity.
Net income is for the full fiscal year (before dividends paid to common stock
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holders but after dividends to preferred stock). This ratio is calculated as net
profit after tax divided by the average total shareholder's equity fund.
• Net Interest Margin (NIM) Angbazo (1997) Explains that net interest margin
represents the difference between the generated interest income and the
interest expense relative to the interest earning assets. The margin is set by the
intermediaries at the level that covers all the costs and risks that are related to
financial intermediation. An optimal margin should generate enough income
to expand the capital base as the bank expose itself to more risk. In other word,
NIM is the difference between the interest income less interest expense
divided by total loan and advances. NIM reflects the cost of banks
intermediation services and the efficiency of the bank. This ratio is calculated
as net interest income divided by the average loan and advances.
2.4 Islamic Bank:
It appears from the above definitions that Islamic banking is a system of
financial intermediation that avoids receipt and payment of interest in its
transactions and conducting operations in a way that it helps achieving the
objectives of an Islamic economy. Alternatively, this is a banking system whose
operation is based on Islamic principle transactions of which profit and loss
sharing (PLS) is a major feature ensuring justice equity in an economy. That is
why Islamic banks are often known as PLS-banks (Abderrezak,, 2008).
2.5 Theoretical Basis of the Concept of Islamic Banking:
Conventional banking is essentially based on debtor-creditor relationship
between depositors and the bank in the one hand and between the borrowers and
the bank on the interest is considered as the price of credit, reflecting the
opportunity cost of money. Islam, on the other hand, considers loan to be given
or taken, free of charge, to meet contingency and that the creditor should not lake
any advantage of the borrower. The money is lent out on the basis of interest,
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more often it happens that it leads to some kind of injustice. The first Islamic
principle underlying such kinds of transactions is that “deal not unjustly and ye
shall not be dealt with unjustly”. Hence, commercial banking in an Islamic
framework is not based on debtor-creditor relationship (Abdul-Majid, 2010).
The second principle regarding financial transactions in Islam is that there
should not be any reward without risk-taking. This principle is applicable both
to labor and capital. As no payment is allowed to labor unless it is applied to
work, no reward for capital should be allowed unless it is exposed to business
risks. Thus, financial intermediation in an Islamic framework has been
visualized on the basis of the above principles. Consequently, financial
relationships in Islam have been participatory in nature. Several theorists
suggest that commercial banking in an interest-free system should be
organized on the principle of profit and loss sharing. The institution of interest
is thus replaced by a principle of participation in profit and loss. That means,
a fixed rate of interest is replaced by a variable rate of return based on real
economic activities. The distinct characteristics which provide Islamic
banking with its main points of departure from the traditional interest-based
commercial banking system are: (a) the Islamic banking system is essentially
a profit and loss sharing system and not merely an interest-free (Riba) banking
system; and (b) investment (loans and advances in conventional sense) under
this system of banking must serve simultaneously both the interest of the
investor and those of the local community. The financial relationship as
pointed above is referred to in Islamic jurisprudence as Mudarabah (Abdullah,
2007).
2.6 Distinguishing Features of Islamic Banking:
An Islamic bank has several distinctive features as compared to its
conventional counterpart. Six essential differences as below: (Abdul-Majid,
2010)
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1. Abolition of Interest (Riba): Since Riba is prohibited in the Holy Quran
and interest in all its form being akin to Riba as, confirmed by Fukaha and
Muslim economists with rare exceptions, the first distinguishing feature of
an Islamic bank must be that it is interest-free, while the abolition of Riba
would be the first and essential difference between the conventional
interest-based commercial banks and Islamic banks, if would not the
constitute the only difference between them. The nature, outlook and
operations of an Islamic bank would have to undergo a complete
transaction.
2. Adherence to Public Interest: Activity of commercial banks being
primarily based on the use of public funds, public interest rather than
individual or group interest will be served by Islamic commercial banks.
The Islamic banks should use all deposits, which come from the public for
serving public interest and realizing the relevant socio-economic goals of
Islam. They should play a goal-oriented rather than merely a profit-
maximizing role and should adjust themselves to the different needs of the
Islamic economy.
3. Multi-Purpose Bank: Another substantial distinguishing feature is that
Islamic banks will be universal or multi-purpose banks and not purely
commercial banks. These banks are conceived to be a crossbreed of
commercial and investment banks, investment trusts and investment
management institutions and would offer a variety of services to their
customers. A substantial part of their financing would be for specific
projects or ventures. Their equity-oriented investments could not permit
them to borrow short and lend long. This should tend to make them less
crisis-prone compared to their capitalist counterparts. Since the overnight,
call loan or very short-term inter-bank market may be available to them
only to a limited extent, they may have to make a greater effort to match
the maturity of their liabilities with the maturity of their assets.
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4. More Careful Evaluation of Investment Demand: Another very important
feature of an Islamic bank is its very careful attitude towards evaluation of
applications for equity-oriented financing. It is customary that
conventional banks evaluate applications, considers collateral and avoids
risks as far as possible. Their main concern does not go beyond ensuring
the security of their principle and interest receipts. Since the Islamic bank
has in built mechanism of risk-sharing, it would need to be careful more
careful. It adds a healthy dimension in the whole lending business and
eliminates a whole range of undesirable lending practices.
5. Work as Catalyst of Development: Profit-Loss-Sharing being a distinctive
characteristic of an Islamic bank, if fosters closer relations between banks
and entrepreneurs. It helps develop financial expertise in non-financial
firms also enables the banks to assume the role technical consultants and
financial advisors and act as catalysts in the process of industrialization and
development. The bank would take care of all the responsible and agreed
financial needs of their clients thus relieving them of the need to run around
for funds to overcome their normal liquidity shortages.
2.7 Objectives of Islamic Banking:
Using of advanced banking technology applications and keeping pace with
their developments continuously to secure achievement of banking services
with efficiency and effectiveness. Acting to attract deposits and funds from
entities and individuals and realizing continuous growth rates therein. But the
objective of Islamic bank when viewed from the context of its role in an
economy, its specific objectives may be enlisted as following: (Abedifar,
2013)
1. To offer contemporary financial services in conformity with Islamic
Shariah;
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2. To contribute towards economic development and prosperity within the
principles of Islamic justice;
3. To facilitate efficient allocation of resources;
4. To help achieving stability in the economy;
Offer Financial Services:
Interest-based banking considered to be practicing riba in financial transaction
has Islamic banking is clearly meant for creation of provision for Shariah
approved financial transactions
2.8 Islamic Banking for Development:
Islamic banking is claimed to be more development oriented than its
conventional counterpart. The mechanism of Profit-Sharing is build-in
development promoter since it establishes a direct relationship between the
benefit of the bank and the entrepreneurs (Abdullah, 2007).
Optimum Allocation of Recourses:
Another important objective of Islamic banking is the optimum allocation
resources. The basic mechanism of Islamic banking system is such that
financial resources are allocated to projects which are considered to be more
profitable. The means, in the case of Islamic banking profitability of projects
works as deciding factor as to where the financial resources will go and to
what extent.
2.9 Profitability of Islamic Banks :
The most widely used method to examine the profitability of a firm is ratio
analysis. The profitability ratios that are believed to well represent a bank’s
financial status and that have been used by authors of the field such are return
on assets (ROA), return on equity (ROE) and return on deposits (ROD). High
result in any of those ratios indicates higher profitability of the bank. Those
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abovementioned ratios are utilized in the current research and each ratio is
briefly explained hereinater.
Return on assets (ROA) ROA indicates how much net income is generated
per each IQD of bank assets. Higher ROA indicates higher returns made by
the Islamic bank on each unit of assets (Casu et al., 2006).
Return on equity (ROE) ROE shows how much net wealth each IQD invested
by the shareholders generated. Higher ROE means more wealth was created
per each unit invested (Al-Amri, 2009).
Return on deposits (ROD) ROD shows how much net wealth was created for
each IQD deposited by the bank’s customers. Higher ROD indicates more
wealth for each IQD deposited.
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CHAPTER 3
EMPIRICAL ANALYSIS
3.1 Data Analysis
The aim of this chapter is to review and clarify the obtained data in order to
achieve the study's goal after converting unprocessed data to an understandable
presentation. The data in this chapter have been evaluated and interpreted using
financial and mathematical methods in accordance with the analysis approach
discussed in the third chapter. In the research section, different tables were used
to display the data obtained from various sources, which were then translated into
the necessary tables based on their similarity.
3.2 Profitability measures' status
From 2015 to 2017, this clear line chart depicts the pattern of Kurdistan banks'
financial results as well as the trend. Tables 4.1 and 4.2 illustrate the pattern
banks' financial success over five fiscal years as measured by return on asset
(ROA), return on equity (ROE), and net interest margin (NIM). Similarly, capital
adequacy ratio (CAR), bank size (SIZE), and inflation rate are bank-specific and
macroeconomic variables (INF).
3.3.1 Dependent Variables
The dependent variable is something whose outcome is determined by the other
independent variable. As the experimenter component alters the independent
variables, the influence on the dependent variable is altered, observed, and
registered.
Bank efficiency is usually calculated by ROA, ROE, or NIM. Studies on the
determinants of bank success use one or a combination of these ratios as a metric
of performance in their study. According to the European Central Bank (2010),
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the most often used measures are return on assets (ROA), return on equity (ROE),
and cost-to-income ratio. Furthermore, due to the role of the intermediation
mechanism for banks, net interest margin (NIM) is normally controlled.
3.3.2 Independent variables
The independent variable is the one whose shift in the experiment is unaffected
by every other variable. Unless the researcher or the system shifts, it is stable.
Both internal and external influences influence a bank's efficiency.
Internal factors are those over which the bank's management has authority, while
external factors are those over which the bank's management has no authority.
Four independent variables are used in this analysis for this reason. Two of these
four factors are internal and external to the bank, and we assume that they better
describe the determinants of bank success for the purposes of our analysis.
3.4 Descriptive Statistics
Table 3.1 displays the descriptive statistics for the variables used in the analysis.
The results show that the sample's minimum and maximum output measures in
terms of profitability metrics ROE, ROA, and NIM, as well as other independent
variables in Bank of Kurdistan.
Table 3.1 Description Data of sample Bank
The efficiency of bank has seen an upward trend, as shown in figures 3.1 and 3.2.
Over a three-year sample cycle, the average ROE has steadily declined from
15.81 percent to 17.20 percent. But for 1.72 in 2015, the ROA ranges from 1.93
Bank
Years ROA(y1) ROE(y2) NIM(y3) INF(x1) CAR(x2) SIZE(x3)
Kurdistan
Bank
2015
0.75 11.22 3.04 .16 23.30 7.1
2016
.007 .1412 3.40 .25 23.19 8.2
2017 5.00 .019 3.86 4.5 24.30 8.1
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to 2.09. Similarly, NIM has been steady at 3.11 percent to 3.60 percent. CAR and
bank size are bank-specific independent variables that have a constant yet mild
upward trend. In 2016 and 2017, CAR was 12.25 percent and 14.67 percent,
respectively, and bank scale was 7.86 percent and 9.12 percent.
Table 3.2 Mean (Average) Indicator of Kurdistan Bank
Details
%
2015
2016
2017
ROA = Return on Assets % 1.72 1.93 2.09
ROE = Return on Equity % 15.81 17.20 19.49
NIM = Net Interest Margin % 3.12 3.36 3.60
CAR = Capital Adequacy Ratio % 12.25 13.41 14.67
GDP 4.56 5.51 6.71
INF 5.0 4.5 4.0
SIZE = Bank Size 6.21 7.86 9.12
The ROA mean was 1.72. percent, ranging from minimum percent to maximum
percent, which is satisfactory because ROA of 1.93 to 2.09 percent is considered
decent in general. ROE is also appropriate, with a mean value of 15.81. From
10.84 to 19.49, the CAR mean is 12.25. The INF mean is 5.0 percent, with a range
of 4.5 to 4.0 percent. SIZE and NIM are also fairly changed. Return on assets
(ROA) and net interest margin (NIM) are significantly correlated with gross
domestic product growth rate (GDP) at 0.05 confidence level in positive
direction, and return on equity (ROE) is significantly correlated with annual
inflation rate (INF) at 0.05 confidence level in positive direction, according to the
checked results.
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Figure 3.1 Capital adequacy ratio CAR
Figure 3.2 Dependent variable ROA
Dependent Variable ROA
Independent Variable CAR
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Figure 3.3 Dependent variable ROE
Table 3 Variables' Correlation
* Correlation is significant at the 0.05 level (2-tailed).
** Correlation is significant at the 0.01 level (2-tailed).
3.5 Testing of Hypotheses and Analysis of variables
The degree of interaction between two variables is represented by this matrix. When the value
of one variable changes, the value of the other changes, this is referred to as correlation.
The calculated correlation coefficients were checked for significance using the t-test at the 0.05
and 0.01 levels, with a degree of freedom of 10. The checked results show that return on assets
ROA
ROE NIM CAR SIZE INF
ROA 1.000
ROE 0.393 1.000
NIM 0.756 0.423 1.000
CAR 0.065 -0.423 -0.081 1.000
SIZE 0.0871 -0.308 0.141 0.111 1.000
GDP 0.345* -0.325 0.032 0.212 0.312
INF 0.148 0.425 *, ** -0.142 -0.335 0.277 1.000
Dependent Variable ROE Dependent Variable ROE
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(ROA) and net interest margin (NIM) are considerably higher, therefore the Null hypothesis
will be rejected and alternative hypothesis accepted.
According to the checked results, return on assets (ROA) and net interest margin (NIM) are
significantly correlated with gross domestic product growth rate (GDP) at 0.05 confidence level
in positive direction, and return on equity (ROE) is significantly correlated with annual
inflation rate (INF) at 0.05 confidence level in positive direction.
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CHAPTER 4
CONCLUSIONS AND RECOMMENDATIONS
4.1 Conclusions
The aim of this research was to look into the factors or determinants that affect
and effect bank efficiency by using profitability as a performance metric. The
following metrics were used: return on asset (ROA), return on equity (ROE), and
net interest margin (NIM). Three metrics have three dependent variables. For the
years 2015 to 2017, two categories of explanatory variables were used as
independent variables: capital adequacy ratio (CAR) and bank size (SIZE) as
bank basic independent variables and inflation rate (INF) as macroeconomic
variables.
Using the research method Coefficient of Correlation measure, it can be seen that
the inflation rate (INF) has a favorable relationship with the return on equity
(ROE). This finding shows that the higher the GDP growth rate, the higher the
return on asset (ROA) and net interest margin (NIM), and vice versa.
Similarly, if the inflation rate (INF) rises, so will the bank's return on equity
(ROE). Internal variables such as capital adequacy ratio (CAR) and bank size
(SIZE) also have an effect, although to a lesser degree and in an inconsistent
manner. According to the outcomes of the above relationships, the gross domestic
product growth rate (GDP) is the most important factor influencing profitability.
4.2 Recommendations
1. The Kurdistan International Bank for Investment and Development should
focus on activities that generate higher bank returns than other activities and
provide the best banking facilities to encourage customers to deposit with the
bank.
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2. To provide an internal control system to evaluate financial performance, and
to review and evaluate this system periodically (monthly or quarterly) in order to
ensure the suitability and effectiveness of performance.
3. The management of the Kurdistan International Bank for Investment and
Development should focus on the balance between liquidity and profitability and
not leave idle cash in the fund, which affects the decline in the profitability index.
4. The necessity to focus Kurdistan International Bank for Investment and
Development on short-term investments due to the revenues they generate, and
this is what the bank’s final accounts showed during the comparison period.
5. The necessity of introducing the accounting staff in the bank to training courses
to increase their knowledge and develop it in the field of conducting bank
performance evaluation studies in order to conduct future studies that would
incur.
List of Abdications
ROA Return on Assets
ROE Return on Investment
CAR Capital Adequacy Ratio
GDP Gross Domestic Product
INF Inflation Rate
NIM Net Interest Margin
SIZE BANK Size
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