Test Your Knowledge on Financial Ratios Used in Islamic Banking

Financial Ratios for Evaluating Islamic Banks' Performance

• Return on Asset (ROA) measures net operating income as a percentage of average assets and provides an indicator for evaluating managerial efficiency.
• Return on Equity (ROE) measures net operating income as a percentage of average total equity or net assets, indicating how a bank can generate profit with shareholders' investments.
• Return on Deposit (ROD) measures net operating income as a percentage of average total deposits, revealing how well the Islamic bank uses its deposits to generate profit.
• Operational Sustainability, also known as operational self-sufficiency, is operating revenue as a percentage of operating and financial expenses.
• Profit Margin measures net operating income as a percentage of total revenue, showing how much of the revenue earned goes to the bottom line.
• Profit Expense Ratio is profit divided by total expenses, indicating the efficiency in cost management.
• Liquidity Ratios measure the capability of a bank to meet its short-term obligations and include Cash Deposit Ratio (CDR), Loan Deposit Ratio (LDR), Current Ratio (CR), and Current Asset Ratio (CAR).
• Risk and Solvency Ratios include Debt Equity Ratio (DER), Debt to Total Assets Ratio (DTAR), Equity Multiplier Ratio (EM), and Loan to Deposit Ratio (LDR), indicating the financial strength and credit risk of a bank.
• Operating Expenses Ratio consists of operating expenses as a percentage of the average portfolio, revealing how much the Islamic bank spends to maintain its outstanding financing portfolio.
• Cost per Client shows how much it costs the Islamic bank to serve clients.
• Staff Productivity Ratios calculate the size of the caseload and how much financing is managed by a single bank officer.
• Net Income to Average Assets is the gross margin on an Islamic bank's financing and investment activities, indicating the difference between income and expense.