## Dubai Islamic Bank

Financial Analysis for the Fiscal Period that Ended on 30 September 2012 in AED’ 000.

### Liquidity Ratios

Current Ratio = Total Current Assets / Total Current Liabilities

Total current assets=93,050,371

Total current liabilities=70,490,459

Current ratio=93,050,371/70,490,459=132%

A high liquidity ratio implies that the bank has more current assets than current liabilities. Hence, it is in a good position to service the short-term liabilities.

Quick Ratio = (Total Current Assets – Inventories) / Total Current Liabilities

Total inventories= 498,074

Total current assets=93,050,371

Total current liabilities=70,490,459

Quick Ratio= (93,050,371-498,074)/ 70,490,459=131%

It is nearly equal to the current ratio but includes the inventories. It measures the ability of a bank to service the short term loans using current assets where cash is the most preferable. The 13.1 percentage quick ratio indicates the bank’s current assets are 31% more than the short-term loans. Hence, it can service the loan without posing any financial risk to equity holders.

Debt to Equity Ratio = Total Debt / Total Equity

Total Debt=4,200,346

Total Equity=10,719,510

Debt to Equity ratio= 4,200,346/10,719,510=39.2%

This measures the ratio of creditorsâ€™ wealth to the equity holdersâ€™ wealth. Creditors, in this case, include suppliers, employees, lenders, and government authorities. It is used to measure the financial strength of the bank about cash income and outgoes. The ratio of 39.2% implies that the bank has 39.2% more equity holders’ wealth than the creditors.

Debt to Assets Ratio = Total Debt / Total assets

Total Debt=4,200,346

Total Assets= 93,719,510

Debt to Assets Ratio=4,200,346/93,719,510=4.5%

This is a measure of the bank’s financial strength concerning its assets and debts. It is a good measure of financial position where a higher amount of assets than total debts indicates that the bank is financially stable.

Net cash flow = Net Income +/- non-cash items (e.g. -equity income + minority interest in earnings of subsidiary + deferred income taxes + depreciation + depletion + amortization expenses)

Net Income= 966,847

Equity income=17,058

Depreciation and Amortization=100,073

Accumulated Depreciation=98,832

Income from Non-Cash items= (-17,058+100,073+98,832) =181,847

Net Cash Flow=966,847+181,847=1,148,694

This indicates that the bank has a positive financial growth in the performance of the last fiscal period.

Return on Assets (ROA) = Profit after taxes / Total Assets

Profit after Taxes=303,629

Total Assets=93,719,510

Return on Assets= 303,629/93,719,510=0.3240%

This is a measure of assets that contributed to the growth of the bank’s financial strength. It indicates that 0.324% proportion of the bank’s profit is as a result of utilized assets.

Return on Equity (ROE) = Profit after taxes / Shareholders Equity (book value)

Net Profit/Profit after Tax= 303,629

Total Equity=10,719,510

Return on Equity (ROE) =303,629/10,719,510=2.832%

This measures the proportion of profit that is as a result of equity’s contribution. In this case, the bank’s total equity contributed 2.832% growth of the net profit in the 2011/2012 fiscal year.

Earnings per Common Share (EPS) = (Profits after taxes – Preferred Dividend) /(# of common shares outstanding)

Net Profit/Profit after Tax= 303,629

Preferred Dividend = 256

No. of common shares Outstanding=2,941.2

EPS= (303,629-256)/2,914.2=104.101

This measures the percentage of growth of common shares. It indicates that the bankâ€™s common share grew by 4.101%

Total Assets Turnover = Sales / Average Total Assets

Sales=498,074

Average Total Assets=93,719,510

Total Assets Turnover=498,074/93,719,510=0.5315

This is a measure of the ratio of sales/ property for sales to the total assets. In this case, the total assets contributed to 0.5315 of the sales in the year 2011/2012.

Return on Investment (ROI) = Net Income/Total Assets

Net Income=966,847

Total Assets=93,719,510

Return on Investment=966,847/93,719,510=1.032%

This is a ratio of net income to the total assets of the bank. It indicates that the bankâ€™s total assets contributed to 1.032% of the net income in the fiscal year 2011/2012.

Return on Assets (ROA) = Net Income/Total Assets

Net Income=966,847

Total Assets=93,719,510

Return on Investment=966,847/93,719,510=1.032%

This is a ratio of net income to the total assets of the bank. It indicates that the bankâ€™s total assets contributed to 1.032% of the net income in the fiscal year 2011/2012. It is equal to the return on investments.

Net Working Capital= Current Assets â€“Current Liabilities

Total current assets=93,050,371

Total current liabilities=70,490,459

Net Working Capital=93,050,371-70,490,459=22,559,912

This is a measure of the bankâ€™s liquid assets within the period of less than twelve months.

Acid-Test Ratio= (Cash +Accounts Receivable+ Short Term Investments)/ Current Liabilities

Total Cash =12,922,484

Accounts Receivable=4,766,314

Short-Term Investments=54,659,758

Current Liabilities=70,490,459

Acid-Test Ratio= (12,922,484+4,766,314+54,659,758)/ 70,490,459=1.02

This is a measure of the bankâ€™s ability to liquidity short term liabilities in order to service a due short-term loan. A1.02 acid-test ratio indicates than liquid current acids are 0.02 more than the short-term liabilities or loans.

### Profitability Ratios

Net Profit Margin = Profit after taxes / Sales

Net Profit/Profit after Tax= 880,410

Total Sales=498,074

Net Profit Margin= 880,410/498,074=176.76%

This is a measure of the profitability of sales or total assets for sales in relation to the net profit. This indicates that profit from total sales over the 2011/2012 fiscal period form76.76percentage of the net profit.

Gross Profit Margin=Profit before taxes/Sales

Profit before taxes=889,931

Sales=498,074

Gross Profit Margin=889,931/498,074=178.7%

This is a measure of the profitability of sales or gross assets for sales in relation to the net profit. This indicates that profit from total sales over the 2011/2012 fiscal period form78.7percentage of the gross profit.

Return on Equity=Return on Equity = Net Income/Shareholder’s Equity

Net income=880,410

Shareholderâ€™s equity= 797,826

Return on Equity=880,410/797,826=110.35%

This is a measure of the contribution of equity to the profit of the bank. Results indicate that 10.35%of the bankâ€™s total profit was a contribution of equity.

Overhead Ratio= Operating Expenses / (taxable net interest income + operating income)

Operating expenses= 1,951,465

Taxable net interest income= 0.00

Operating income=1,798,754

Overhead Ratio=1,951,465/1,798,754=108.5%

This is a measure of the contribution of operating income to the net income in relation to the operating expenses. Results indicate that the bankâ€™s operating income formed 8.5% of the net income.

Operating Margin= Operating Income/ Net Sales

Operating income=1,798,754

Net sales=assets held for sale= 498,074

Operating Margin=1,798,754/498,074=3.611

Return on debt= net profit/total debt

Net profit=880,410

Total debt=4,200,346

Return on debt= 880,410/4,200,346=20.96%

This is a measure of returns on the debt fund in relation to the net profit of the bank over the last fiscal year. Results indicate that the debt fund formed 20.96% of the net profit.

Return on Equity= Net profit/total equity

Net profit=880,410

Total Equity=10,719,510

Return on Equity= 880,410/10,719,510=8.21%

This is a measure of returns on equity funds in relation to the net profit of the bank over the last fiscal year. Results indicate that the equity fund formed 8.21% of the net profit.

Return on Invested Capital= (Total Income-Dividends)/Total Capital

Total income=3,750,219

Dividends=256

Total Capital= total assets + liabilities= 93,719,510+83,122,905=176,842,415

Return on Invested Capital= (3,750,219-256)/176,842,415=2.12%

This is a measure of returns on invested capital in relation to the total income of the bank over the last fiscal year. Results indicate that invested capital formed 2.12% of the total income.

### Solvency Ratios

This ratio measures the ability of a company to settle long-term debts.

It is computed using the formula; solvency ratio= (net profit+ depreciation)/ total liabilities

Net profit=880,410

Depreciation=25,371

Total liabilities= short term liabilities+ long term liabilities= 83,122,905

Solvency ratio= (880,410+25,371)/83,122,905=1.08%

The ratio of net profit to the liabilities is very small hence the bank has weak solvency ability. The bank made a profit that is far less than required to service the liabilities in the fiscal period 2011/2012.

### Financial Risk Ratios

Debt to total capital

This measures debt proportion given total capital of the bank.

=total debt/total capital

Total debt=4,200,346

Total capital= total equity +total debt=10,596,605+83,122,905=93,719,510

Debt to total capital= 4,200,346/93,719,510=4.48%

This implies that equity holdersâ€™ debt to capital is nearly zero and therefore the bank has zero financial debt risk.

Times Interest Earned= earnings before interest and tax expenses on interest

Earnings before interest and tax=3,750,219

Expenses on interest=0.00

Times interest earned= 3,750,219

This is also referred to as the coverage ratio and it indicates the degree of protection to creditors. It covers the risk of interest payments. However, the Islamic Bank of Dubai charges no interest on debtors and pays no interest to creditors as well.

Cash flow to debt= income from operations/total debt Income from operations= 1,798,754

Total debt=83,122,905

Cash flow to debt= 1,798,754/83,122,905=2.16%

This measures the amount of cash that the company generates from operations that are purposely undertaken for servicing the debts.

Capital expenditure ratio= cash flow from operations/capital expenditures

The capital expenditure ratio provides information on the amount of cash balance after servicing debts using capital wealth.

Cash flow from operations=3,750,219

Capital expenditures=1,951,465

Capital expenditure ratio=3,750,219/1,951,465=1.922

This implies that the bank generates 1.922 more than required cash to service the debts.

## Bank of Baroda, Dubai

### Liquidity Ratios

Current Ratio = Total Current Assets / Total Current Liabilities

Total current assets=446909, 08, 24

Total current liabilities=444979, 96, 50

Current ratio=4,469,090,824/444979, 96, 50=100.4%

A high liquidity ratio implies that the bank has more current assets than current liabilities. Hence, it is in a good position to service the short term liabilities.

Quick Ratio = (Total Current Assets – Inventories) / Total Current Liabilities

Total inventories= 10224, 73, 02

Total current assets=446909, 08, 24

Total current liabilities=444979, 96, 50

Quick Ratio= (446909, 08, 24-10224, 73, 02)/ 444979, 96, 50=98.14%

It is nearly equal to the current ratio but includes the inventories. It measures the ability of a bank to service the short term loans using current assets where cash is the most preferable.98.14% quick ratio indicates the bank’s current assets are 1.87% more than the short term loans. Hence it can service the loan without posing any financial risk to equity holders.

Debt to Equity Ratio = Total Debt / Total Equity

Total Debt=152502, 81, 31

Total Equity=83209, 40, 01

Debt to Equity ratio= 152502, 81, 31/83209, 40, 01 =18.3%

This measures the ratio of creditors to the equity holders. Creditors, in this case, include suppliers, employees, lenders and government authorities. It is used to measure the financial strength of the bank in relation to cash income and outgoes. The ratio of 1.83% implies that the bank has 18.3% more equity holders’ wealth than the creditors.

Debt to Assets Ratio = Total Debt / Total assets

Total Debt=152502, 81, 31

Total Assets= 447321, 46, 70

Debt to Assets Ratio=152502, 81, 31 /447321, 46, 70=34.1%

This is a measure of the bank’s financial strength in relation to its assets and debts. It is a good measure of financial position where a higher amount of assets than total debts indicates that the bank is financially stable.

Net cash flow = Net Income +/- non-cash items (e.g. -equity income + minority interest in earnings of subsidiary + deferred income taxes + depreciation + depletion + amortization expenses)

Net Income= 33096, 05, 24

Equity income=3422, 32, 82

Depreciation and Amortization=76, 55, 26

Accumulated Depreciation=353, 00, 90

Income from Non-Cash items= (-3422, 32, 82+353, 00, 90+76, 55, 26) =

Net Cash Flow=33096, 05, 24-2992, 76, 66=30103, 28, 58

This indicates that the bank has a positive financial growth in relation to the performance of the last fiscal period.

Return on Assets (ROA) = Profit after taxes / Total Assets

Profit after Taxes=5006, 95, 62

Total Assets=447321, 46, 70

Return on Assets= 5006, 95, 62/447321, 46, 70=1.12%

This is a measure of assets that contributed to the growth of the bank’s financial strength. It indicates that 1.12% proportion of the bank’s profit is because of utilized assets.

Return on Equity (ROE) = Profit after taxes / Shareholders Equity (book value)

Net Profit/Profit after Tax= 5006, 95, 62

Total Equity=3422, 32, 82

Return on Equity (ROE) =5006, 95, 62/3422, 32, 82 =1.463%

This measures the proportion of profit that is as a result of equity’s contribution. In this case, the bank’s total equity contributed 1.463%growth of the net profit in the 2011/2012 fiscal year.

Earnings per Common Share (EPS) = (Profits after taxes – Preferred Dividend) /(# of common shares outstanding)

Net Profit/Profit after Tax= 5006, 95, 62

Preferred Dividend = 17

No. of common shares Outstanding=1459, 93, 49

EPS= (5006, 95, 62-17)/ 1459, 93, 49 =3.42%

This measures the percentage of growth of common shares. It indicates that the bankâ€™s common share grew by 3.42%.

Total Assets Turnover = Sales / Average Total Assets

Sales/other assets=10224, 73, 02

Average Total Assets=447321, 46, 70

Total Assets Turnover=447321, 46, 70/10224, 73, 02=43.75%

This is a measure of the ratio of sales/ property for sales to the total assets. In this case, the total assets contributed to 43.75% of the sales in the year 2011/2012.

Return on Investment (ROI) = Net Income/Total Assets

Net Income=33096, 05, 24

Total Assets=447321, 46, 70

Return on Investment=33096, 05, 24/447321, 46, 70=7.40%

This is a ratio of net income to the total assets of the bank. It indicates that the bankâ€™s total assets contributed to 7.4% of the net income in the fiscal year 2011/2012.

Return on Assets (ROA) = Net Income/Total Assets

Net Income=33096, 05, 24

Total Assets=447321, 46, 70

Return on Investment=33096, 05, 24/447321, 46, 70 =7.40%

This is a ratio of net income to the total assets of the bank. It indicates that the bankâ€™s total assets contributed to 7.4% of the net income in the fiscal year 2011/2012. It is equal to the return on investments.

Net Working Capital= Current Assets â€“Current Liabilities

Total current assets=444979, 96, 50

Total current liabilities=11400, 45, 92

Net Working Capital=444979, 96, 50-11400, 45, 92=433579, 50, 58

This is a measure of the bank’s liquid assets within a period of fewer than twelve months.

Acid-Test Ratio= (Cash +Accounts Receivable+ Short Term Investments)/ Current Liabilities

Total Cash =21651, 45, 46

Accounts Receivable=33096, 05, 24

Short-Term Investments=83209, 40, 01

Current Liabilities=444979, 96, 50

Acid-Test Ratio= (21651, 45, 46+4,766,314+54,659,758)/ 70,490,459=1.02

This is a measure of banks ability to liquidity short term liabilities in order to service a due short term loan. A1.02 acid-test ratio indicates than liquid current acids are 0.02 more than the short term liabilities or loans.

### Profitability Ratios

Net Profit Margin = Profit after taxes / Sales

Net Profit/Profit after Tax= 5006, 95, 62

Total Sales=384871, 10, 91

Net Profit Margin= 5006, 95, 62/384871, 10, 91=1.3%

This is a measure of the profitability of sales or total assets for sales in relation to the net profit. This indicates that profit from total sales over the 2011/2012 fiscal period form 0.3percentage of the net profit.

Gross Profit Margin=Profit before taxes/Sales

Profit before taxes=6579, 87, 33

Sales=384871, 10, 91

Gross Profit Margin=6579, 87, 33/384871, 10, 91=1.71%

This is a measure of the profitability of sales or gross assets for sales in relation to the net profit. This indicates that profit from total sales over the 2011/2012 fiscal period form 0.71% of the gross profit.

Return on Equity=Return on Equity = Net Income/Shareholder’s Equity

Net income=33096, 05, 24

Shareholderâ€™s equity= 64168, 54, 12

Return on Equity=33096, 05, 24/64168, 54, 12=51.6%

This is a measure of the contribution of equity to the profit of the bank. Results indicate that 51.6%of the bankâ€™s total profit was a contribution of equity.

Return on debt= net profit/total debt

Net profit=5006, 95, 62

Total debt=64168, 54, 12

Return on debt= 5006, 95, 62/64168, 54, 12=7.80%

This is a measure of returns on the debt fund in relation to the net profit of the bank over the last fiscal year. Results indicate that the debt fund formed 7.80% of the net profit.

Return on Equity= Net profit/total equity

Net profit=5006, 95, 62

Total Equity=89979, 76, 92

Return on Equity= 5006, 95, 62/89979, 76, 92=5.56%

This is a measure of returns on equity funds in relation to the net profit of the bank over the last fiscal year. Results indicate that the equity fund formed 5.56% of the net profit.

Return on Invested Capital= (Total Income-Dividends)/Total Capital

Total income=33096, 50, 24

Dividends=134

Total Capital= total assets + liabilities =894230, 54, 94

Return on Invested Capital= (33096, 50 24 -134)/ 894230, 54, 94=3.70%

This is a measure of returns on invested capital concerning the total income of the bank over the last fiscal year. Results indicate that invested capital formed 3.7% of the total income.

### Risk and Solvency Ratios

The ratio measures the ability of a company to settle long-term debts.

It is computed using the formula; solvency ratio= (net profit+ depreciation)/ total liabilities

Net profit=5006, 95, 62

Depreciation=76456, 44, 38

Total liabilities= short term liabilities+ long term liabilities= 446909, 08, 24

Solvency ratio= (5006, 95, 62+76456, 44, 38)/ 446909, 08, 24= 18.23%

The ratio of net profit to the liabilities is very small hence the low solvency ratio. The bank made a profit that is far less than required to service the liabilities in the fiscal period 2011/2012.

### Financial Risk Ratios

Debt to total capital

This measures debt proportion given the total capital of the bank.

=total debt/total capital

Total debt=64168, 54, 12

Total capital= total equity +total debt=154148, 31, 04

Debt to total capital= 64168, 54, 12 /154148, 31, 04=0.4163

This implies that equity holdersâ€™ debt to capital is nearly zero and therefore the bank has zero financial debt risk.

Times Interest Earned= earnings before interest and tax expenses on interest

Earnings before interest and tax=29673, 72, 42

Expenses on interest=5158, 71, 73

Times interest earned= 29673, 72, 42-5158, 71, 73= 24515, 00, 69

This is also referred to as the coverage ratio and it indicates the degree of protection to creditors. It covers the risk of interest payments. However, the Islamic Bank of Dubai charges no interest on debtors and pays no interest to creditors as well.

Cash flow to debt= income from operations/total debt Income from operations= 3422, 32, 82

Total debt=64168, 54, 12

Cash flow to debt= 3422, 32, 82 /64168, 54, 12=5.33%

This measures the amount of cash that the company generates from operations that are purposely undertaken for servicing the debts.

Capital expenditure ratio= cash flow from operations/capital expenditures

The capital expenditure ratio provides information on the amount of cash balance after servicing debts using capital wealth.

Cash flow from operations=3422, 32, 82

Capital expenditures=5158, 71, 73

Capital expenditure ratio=3422, 32, 82/5158, 71, 73 =0.663

This implies that the bank generates 66.3% more than required cash to service the debts.

## Profitability Ratio

Islamic banks have higher performance than conventional banks in the United Arabs region. That is reflected by the high profitability ratios of the Dubai Islamic Bank as compared with the Bank of Baroda. It has a high return of equity of 110.35% as compared to Bank of Baroda’s 51.6%. It also has a high return on debt of 20.96%. A high return on debt indicates that the bank is capable of settling all its debts within a fiscal year and making a profit from the debt capital (Kettell, 2011).

## Solvency Ratio

A high solvency ratio indicates a low bankruptcy risk. Maintenance of a high solvency ratio of more than 20% is highly recommended by financial regulatory authorities. Bank of Baroda has a low solvency ratio than Dubai Islamic Bank. That indicates that it has operational constraints in the market. It has a solvency ratio of 18.23% which indicates the bankâ€™s low ability to settle long-term debts (Hanif, 2011).

## Financial Risk Ratio

The two banks have different financial risk ratios. For instance, Dubai Islamic Bank has a debt to total capital of 4.48%, which indicates its stability on debt settlements. On the other hand, the Bank of Baroda has a higher ratio of 41.63%, which is a high risk for the bank (Kintar, 2012).

Bank of Baroda also has a higher cash flow of debt than the Dubai Islamic Bank. This indicates that the bank has higher debts that are evidenced by its borrowing from the mother bank (Bank of Baroda, 2012).

## Interpret your Results

The Dubai Islamic Bank performs better than the Bank of Baroda. There are many factors, which render into that difference in performance. They include culture, religion, and business policies. Islamic culture contributes to the growth of Islamic banks in the UAE because the vast majority of the population in the region are Muslims.

Conventional banks in the region have stuck to business policies that do not conform to the Islamic cultural beliefs. They rely on interests as a source of income whereas religious beliefs of the population oppose such policies. That renders the banks either losing customers or getting a few. That explains one of the main reasons that Dubai Islamic Bank performed better than the Bank of Baroda.

Secondly, the two banks are located in Dubai which acts as the UAE’s main trade hub. Hence, there is a large customer base for the two banks because of many trading activities in the region. Islamic Bank of Dubai relies heavily on the rich Islamic traders whereas Bank of Baroda and other conventional banks rely on Non-Islamic traders.

## Summarize your Findings

The United Arabs Emirates is an Islamic region where business policies conform to the Islamic religion. Multinational business organizations willing to invest in the region have to readjust their policies to gain a large market share in the region. In most cases, financial institutions that normally charge interest on loans and grants are the most affected (Rehman, 2008).

However, other types of businesses run with fewer struggles if at all they do not interfere with residentsâ€™ cultural and religious beliefs.

The bank of Baroda relied heavily on the Indian bank for financing and investments because of the difficulties of running a business in the Islamic region. That shows that multinational financial institutions rely on their mother banks in their home countries for financing due to hardships in operating in the region (Rehman, 2008).

## References

Bank of Baroda. (2012). *Annual Report 2011-12.* Web.

Hanif, M. (2011). Differences and Similarities in Islamic and Conventional Banking. *International Journal of Business and Social Science 2*(2), 166-175.

Kettell, B. (2011). *Introduction to Islamic Banking and Finance.* New York: John Wiley & Sons.

Kintar, T. (2012). Report on Review of Interim Financial Information. *Dubai Islamic Bank*, pp. 56-98.

Rehman, A. (2008). *Dubai and Co: Global Strategies for Doing Business in the Gulf States.* New York: McGraw Hill Professional.