competitive advantage in Banking

· Ratio of net profit after tax over average assets

· ROE (Return on Equity)

· Ratio of net profit after tax over average equity

Literature Review

The first appear of Banks as know today was at reconnaissance era Italy – Venice at Sixteenth century. Bank is extraction from Banko which the table is were merchandisers set around it to finish their deals.

At 1619, Banco di giro established in Italy. This bank issued deposit receipt for gold and silver deposits which facilitates interchange of goods and services. These receipts were accepted for exchanges at markets as same as today money or bank notes.

As time passed, Banks add new services and products to it is portfolios and existence of banks expands too from Europe to whole world. In Arab world, Egypt Bank was the first commercial bank in the region established at Cairo in the late Nineteenth century.

Bank services are important in modern economies. The appearance of national currency enforces the existence of central banks to manage and issue currencies. Central Banks also issue, license and apply controls on banks. Banks duties is important for the following reasons:

· Funding investments

· Saving depositors money

· Exchange currencies

· Money transfer

· Cash withdrawal

According to activity classification, banks divided into two types:

· Investment Banks – dedicated for certain customers and work mainly as wealth management

· Commercial Banks – Provide services for public

Commercial banks can be classified according to Islamic rules to:

· Conventional banks – depends mostly on interest business

· Islamic Banks – use Islamic religion as a reference of business activity

Islamic finance tools which Sharia-Compliant are:

· Musharakah or Mudarabah which mean sharing of profit and loss with borrowers. It is certain type of partnership

· Istisna and Salam like cash advances for the manufacture of assets and cash advances for the purchase of agricultural produce

· Ijara which is Islamic leasing

Since 1970s, Islamic banks emerged after decades of conventional banks domination to provide Islamic alternative for peoples of Islamic countries. In Saudi Arabia, AL Rajhi company for finance and trading starts at 1978 as a first Islamic Bank in Saudi Arabia.

Bank Aljazeera is the second Islamic bank in Saudi Arabia. The bank was established at 1975 as conventional bank but at 2006 all bank activities and operation changed completely to Islamic-compliant.

Bank Albilad is the third Islamic bank in Saudi Arabia and the last one is Bank AlInma which established at 2007.

Many studies investigate and digging deeper for Islamic banks performance.

Hasiki (2013) examined 18 conventional and 9 Islamic banks in Turkey, Egypt and United Arab Emirates in the period from 2008 to 2012.He find out that there are no significant difference between conventional and Islamic banks in efficiency and profit. Beck et al. (2013) explored the business model, effectiveness, and stability of more than 500 conventional and Islamic banks in more than 20 countries from 1995 to 2009. They found considerable differences between Islamic and conventional banks in terms of business models.

Almadoudi, Zainab Mashhour (2013) Study mainly concern was profitability between banks in Saudi Arabia at King Abdul Aziz University. the researcher come out with increasing in the percentage of investment at intelligence property at Rajhi bank than Samba group. Also, capital risk at Samba bank is higher than Rajhi Bank because conventional banks depend on governmental bills more than Islamic bank

Siddiqui (2008) conduct a research on Islamic banks in Pakistan. The study selects the bigger two Islamic banks in Pakistan which are Meezan and Albaraka. The calculated Return on Assets and Return on Equity ratios for two banks discovered the profitability of Islamic banks are better than average in banking industry.

Methodology

This study employed statistical measurements between Islamic banking and conventional banking. It splits the data into two sets on the basis of type of bank.

Comparing financial ratios between conventional banks and Islamic banks for the last 3 financial years will be used to answer the questions:

Is there a difference between Islamic and conventional performance?

Do Islamic banks depend on religious people to survive and grow, or they have their compete and survive methodology and tools?

We will try to answer the questions by using secondary source of information exist at reliable resources. Our resources including official governmental agencies and banks verified websites.

Results

Figure 1 Tadawul.com.sa

Figure 2 Tadawul.com.sa

Figure 3

Figure 4

Conclusion

Return on asset (ROA) show the profit company earned comparing to total assets. The value of adequate ROA is different based on industry and economical condition but in general higher value is better.

According to The Federal Financial Institutions Examination Council (FFIEC), USA banks average ROA is 1.21% which means Saudi banks has superiority over USA banks with average equal to 3.71%. ROA in USA is different significantly among banks based on bank scale. FFIEC classify banks according amount of assets to banks with more than billion Dollar assets and banks with less than billion-dollar assets. Bigger banks have less ROA comparing to smaller ones. Assets in Saudi banks in our study are less than one billion dollars. Due different in economy size between Saudi Arabia and USA and limited international operations in Saudi banks the banks classified as small in USA are considered big in Saudi.

USA do not have Islamic banks in order to compare with Saudi Islamic banks but some neighbors’ countries like Jordan and Bahrain.

Islamic Bank of Jordan ROA (0.39%) is lower than average of Jordan Banks (1.43). Jordan has only one Islamic bank while other Islamic financial services works as units under conventional banks or branches of foreign banks. The low ROA ration of Islamic bank on Jordan may reflect the total economy situation since Jordan economy is small and face shrinking and economic depression within recent years.

Saudi Islamic banks income comes from Murabah while conventional banks depend on interest income which may interpret the huge difference between Islamic and conventional banks in ROA. Another think is that conventional banks invest heavily on governmental bills which participate in low ROA.

Return on equity (ROE) is a performance measure by dividing net income on shareholder equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE may consider net assets income.

ROE in both Islamic and conventional banks in Saudi Arabia are closed to each other unlike ROA which have huge difference.

Higher ROE means the profitability of bank is better for owners or shareholders and vice versa. Total average of ROE at Saudi banks are 12% while according to FFIEC is 8.8 % at USA banks. The same classification of USA banks according to scale as mentioned above in the ROA section, The USA banks which have similar scale of Saudi banks (under 1 billion assets) have 10.78 which is close to total average of Saudi Banks 12% and closer to Saudi conventional banks 11.46 % than Islamic banks which have 12.72% ROE.

In general, Saudi banks profitability is better than international average which representing economical strong situation and investment environment. Saudi Arabia Monetary Agency plays a vital role in these indicators by controlling interest rate and other financial instruments for banks. Another reason is limited number of banks in Saudi Arabia comparing to other countries which reflect SAMA policy in concentrating on the quality not quantity. Saudi banks are 13 national banks without foreign banks. Some neighbor countries with less populations and GDP have more than a double number of Saudi banks. Foreign banks branches working in Saudi Arabia have limited operations due to their selective strategy of clients and limited number of branches which mainly one, two or three branches and only at major cities.

The outperformance of Islamic banks may refer to religious spirit of Saudi people disregarding the benefits and services of both types. Muslim people feel comfortable when dealing with Sharia-compliant financial services specially when there is no significant difference,

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