Financial performance of Islamic and conventional banks in Oman: A comparative analysis

Abstract

Abstract The performance assessment of banks aims to ensure that the resources at their disposal are used effectively. It is a systematic process in which all the records, accounting, and other data are taken into account. The bank's financial performance analysis is an essential method of identifying its deficiencies and strengths at various operations. Its aim to provide the required details to take practical remedial steps to ensure that the bank achieves revenue by staying in the competitive market and making profits. It provides an information system for planning, monitoring, and decision-making. Based on the literature review, the CAMELS method is considered a supervisory tool to evaluate bank efficiency based on various factors. Banks' financial soundness is measured by regulators using both on-site and off-site monitoring systems. Transparency, evolution, and change are all promoted by the CAMELS rating system in all financial institutions. Also, this approach explicitly defines the structural strengths and challenges of financial institutions. This study evaluates conventional and Islamic banks' performance in Oman using the CAMELS analysis for 2015-2019. It also measures the factors affecting Oman’s commercial and Islamic banks' performance, using two variables, the bank's size, and the bank's age. The study utilized the Stata software. The study’s sample is the Islamic and conventional banks in the sultanate of Oman, including six conventional banks and two full-fledged Islamic Banks. Islamic Banks are Bank Nizwa and Alizz Islamic Bank. The traditional local banks in Oman are Bank Muscat, National Bank of Oman, Bank Dhofar, Sohar International, Ahli bank, and Oman Arab Bank. After analyzing all eight banks using CAMELS components, the results show each bank's performance level in the sample. The results show that conventional banks perform better than Islamic banks in Oman. Although Islamic Banks are good in many aspects, it is fragile in some others like asset quality, earning efficiency and liquidity. In general, this rating analysis is acceptable for the banks in the sample. However, it requires supervisory supervision to ensure the continuity and validity of fundamental banking integrity and provide clear instructions to management. To check whether the bank size and bank age affect the performance of the CAMELS composite rating. The result shows that Islamic banks have a positive and not significant coefficient at level 5%, but significant at level 10%. Suppose the rate is high in the CAMELS rating, which represents the bank's feeble financial performance. Thus, this result confirms that Islamic banks in Oman are underperforming the conventional banks. The bank size shows a negative sign coefficient. Results of the table show that with the increase in bank size, the CAMEL rating decreases. This indicates that banks with a larger size are more financially robust. However, the coefficient of bank size is significant at 10%. However, the coefficient of log age is significant at 10%. This study recommends and urges the Omani Central Bank to increase the monitoring and screening of all Islamic banks in Oman. Moreover, it suggests Oman's central bank uses the (CAMELS) mechanism to regularly track operations and field offices for banks operating to ensure access to a stable banking sector. The banks themselves may use CAMELS to monitor their performance, and then the required actions need to be taken.

Date of Award	2021
Original language	American English
Awarding Institution	HBKU College of Islamic Studies