This study investigated the performance of Islamic banks within Saudi Arabia over a period of 5 years ending 2017

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Assuring that all banking operations are carried out effectively and profitably requires measuring the strengths and weaknesses of the banks through which their financial performance can be judged (Abdul Razak et.al, 2008). This research project is concerned with the measurement of the performance of the Saudi Arabian Islamic banks by using a financial ratio analysis (FRA), data envelopment analysis (DEA), and theMaqasid Index (MI). As a matter of fact, this study accumulates sufficient data and information from the Islamic banks of Saudi Arabia. A total of 13 Islamic banks were selected for this study from the period of 2012-2017. The findings of this research reveal the effectiveness and efficiency of the Saudi Islamic banks. Moreover, relevant information was obtained regarding the financial conditions of the Islamic banks and the overall administrative performance which would indicate the benefits of the managers, regulators, and investors. 

 Problem statement of the study

The concept of Islamic banking is financial activity which complies with the terms and conditions of the Islamic law. This type of financial activity is considerably different from the conventional banking activity due to several issues like interest and credit sales, scriptural basis, time value of money, Islamic trading laws, different types of lending processes, and early debt payments (Ibrahim, 2015). These differences would tend to bring about distinctive results regarding the financial performances of Saudi Islamic banks.

It is essential to measure the financial performance of the Islamic banks of Saudi Arabia so that different weaknesses or loopholes in their financial operations and customer engagement process can be identified and to acknowledging possible remedies (Abdul Razak et.al, 2008). The researcher of this study adopted various models which helped in judging the overall financial performance and administrative functionalities of the Islamic banks.

Through such methods, bank managers can obtain sufficient data regarding the anticipated profitability margin. Thus, this study provides an in-depth understanding of an effective solution so that the future performances and strengths of the Saudi Islamic banks could be judged (Bhuian, 1997).

 Research questions

There are several points and facts which the researcher wanted to uncover while carrying out the investigation process. Those aspects are summed up in the form of the following research questions:

? What are the different financial ratios adopted for measuring the financial performance of the Saudi Islamic banks?

? Which performance measurement tools have been used to judge the efficiency of the Islamic banks?

? How are the financial performance and productivity margins of the Islamic banks measured through the Sharia law in Saudi Arabia?

Aim and objectives of the research

The prime aim of this research project is to evaluate different ways in which the financial performance of the Islamic banks can be measured in Saudi Arabia. In order to serve this purpose, the researcher attempted to fulfil the following objectives:

? To study about different financial ratios that the Islamic banks of Saudi Arabia adopt for measuring their financial performance

? To explore how Sharialaw measures the financial performance and productivity status of the Saudi Islamic banks

? To understand the role of different measurement tools for evaluating the performance of the Islamic banks

 Rationale of the study

The main reason for choosing this topic is to obtain relevant information regarding the financial performance of the Saudi Islamic banks by using proper performance measurement tools and methods. This is because Saudi Arabia takes only those banks into consideration which obey the principles of Islamic laws within the territory. Thus, the researcher wishes to investigate the efficiency of the Islamic banks in relation to their financial activities and the Saudi economic condition (Ibrahim, 2015). 

Through this study, various financial ratios were used to measure their profitability and productivity levels. In the discussion, information about FRA, DEA, and MI methods are also evaluated and derived to judge the financial performance of the Islamic banks. Moreover, the researcher generated findings regarding how the Saudi Islamic banks comply with the Sharia laws and principles for enhancing and improving their performance standards and capabilities in the future (Almazari, 2014). 

Background of the Research

Saudi Arabia could be deemed as the home of all Islamic banks, and these banks operate with different legislative guidelines and structures. These banksmainly concentrate on retail operations and some of them also do conventional banking. Multiple Islamic banks are present in Saudi Arabia such as Al Rajhi Bank, Arab National Bank, Bank Aljazira, Samba, Alnima, Banque Saudi Fransi, Albilad, Saudi British Bank, Saudi Investment Bank, and the National Commercial Bank and, overall, they have good growth status (Abdul Razak et.al, 2008). As per asset value, Saudi Islamic banks maintain good performance. In Saudi, all banks must be Islamic. As per the analysis, Islamic banks have been experiencing continuous growth as the financial sector of the nation flourishes. Based on Islamic law, overall return of finance is judged and controlled by ownership. As per Islamic law, interest is not added at the time of lending money and financial speculation is strictly controlled in this process. In the last eight years, banking sectors around the world have faced different types of challenges such as fluctuation in the prices of interest rates, but Islamic banks of Saudi have not faced a single issue due to this structured and unconventional process (Odeduntan and Adewale, 2015).

Saudi banks have been a benchmark of gaining profit away from interest rates. On the basis of return, these banks have been successful compared to other non-Islamic banks, and this issue has enhanced the interest of investors (Srairi,  2010). By 2017, it was found that Islamic banks could experience 18% growth annually, and it was predicted that by 2018 this growth will be 20% (Rusydiana and Firmansyah, 2018). There are six main markets present for Islamic banks, and by 2019 the overall asset value of Saudi Islamic banksis expected to be $683 billion which would be one third of rest of the Islamic banks (Rusydiana and Firmansyah, 2018). 

There are various rules and regulations present in Islamic banks which must have to be followed. The first principle is margin trading: according to this, all sorts of interest are forbidden from borrowed money. The concept of short selling is illegal in Islamic law, as it violates the normal protocol of selling any financial instrument, which prohibit selling what is borrowed. Day trading is an important concept absent in Islamic banks which indicates that an owner shouldn’t hold ownership for a very short period of time as this is completely un-Islamic (Ibrahim, 2015). If buyers want to purchase any stock, they need to make an agreement called forward where they must pay a specific amount at a future date. Options provide a flexible time frame for buyers to think or decide on their purchase. One of the interesting contracts is swaps,where two parties can exchange their buying products or financial instruments. This is a brief general overview of Islamic banks in Saudi Arabia and by following these principles; Islamic banks have experienced success in Saudi Arabia (A?mad, 1987). 

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