Academic journal article Academy of Accounting and Financial Studies Journal

Liquidity, Profitability and Solvency of UAE Banks: A Comparative Study of Commercial and Islamic Banks

Academic journal article Academy of Accounting and Financial Studies Journal

Liquidity, Profitability and Solvency of UAE Banks: A Comparative Study of Commercial and Islamic Banks

Article excerpt

INTRODUCTION

The growth of any economy to a great extent depends largely on the performance of its banking sector. The banking sector works as intermediary linking two parties; who gave the funds and the other party who invested the funds for productive purposes and thereby contributing to economic development. In the financial world, there are two types of banks. One is called commercial banking sector and the other is called Islamic banking sector. The main difference between the two types of bank sectors is the philosophy in which the banking sector depends on. In Islamic banking sector, the interest rate is totally prohibited even it is small or large. Therefore, sometimes, it is called interest-free banking. In the other side, commercial banks are based totally on interest. So, it is called interest-based banks. Nowadays, Islamic banks and commercial banks are working together in a dual regulatory environment and there is a competition between them in attracting potential customers and fulfilling their expectations and developing new instruments and modes of financing which in turn benefits the economy in the long-term.

In the United Arab Emirates, the two types of banks are working together in a very competitive environment. Recently, Islamic banks enhance their position in the world and particularly in the UAE during the global financial crisis 2008. Islamic banks are partially affected by the crisis and outperformed than commercial banks (Athanasoglou et al., 2005; Tabash and Dhankar, 2014). Also, from another side, Islamic banks contributed positively to the growth of the economy of UAE (Tabash and Anagreh, 2017).

The United Arab Emirates (UAE) gives more attention and support for Islamic banking industry. For example, Dubai Emirate is working on to become a hub for Islamic finance industry in the world. The UAE government supports the Islamic banking industry growth through its strategic plan 2021 (Emirates Diary, 2015). Currently, there are twenty-three local banks and twenty-two international banks working in the UAE. Out of the twenty three local banks, seven are fully-fledged Islamic banks working under Islamic standards as appeared in appendix (1) and the rest banks have both system, Islamic and traditional operations (Emirates Diary, 2015).

Islamic banking sector accounts for 80% of total Islamic finance assets. Organisations like "Ernst & Young, 2015", and the Malaysia Islamic Financial Centre (MIFC) have predicted that the size of the Islamic finance market will reach U.S $3.4 trillion by end of 2018, whilst PricewaterhouseCoopers(PwC) predicts a U.S $2.7 trillion market by 2017 (Islamic finance report, 2016). In the most of Middle East region countries, the assets of Islamic banking assets are growing faster than commercial banking assets. There are also a huge demand for Islamic banks products from non-Muslim countries like Malaysia, U.K, Germany and Hong Kong (World Bank report, 2015).

Liquidity, profitability and solvency are the different dimensions of the performance of any bank. Each of these dimensions is equally important as it plays a vital role in the maintenance of the bank financial viability. If the bank is financially viable it would be able to survive for a long time in the future. The 2008 global financial crisis has made a query on the persistent and increasing fragility of the financial institutions not only in U.S. but also at a global level. Banks have weak capital structure to provide liquidity to interested parties on time. Due to this capital structure, banks are often at the spot in the financial crisis (Diamond and Rajan, 2001). Therefore, the recent global financial crisis has brought to the surface the importance of bank performance and profitability both at national and international level.

The banks has an increasing significance in emerging countries because banks are the major source of finance and funding for the majority of firms and are main depository to encourage people for the saving (Athanasoglou et al. …

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