Mar
18
2012

Essay: Banking terms

Sample Essay

Total loans over total assets calculates the liquidity of bank assets tied to loans: the higher the TL/TA ratio, the less liquid the bank. Bank operations rely seriously on loans. Islamic banks, however, activate on a profit and loss basis which is interest-free lending. Moreover, latest studies on conventional banks found a positive relationship between TL/TA and profitability (Demirguc-Kunt and Huizinga, 1997) (Demirguc-Kunt, et al., 1999). TL/TA is included in the thesis of profitability as an independent variable to judge against the performance of interest loans and the interest free lending. Which expected to have a positive relation with profitability.

Deposits are added in this thesis to measure the impact of liabilities on profitability. Deposits are also considered to be the major source of bank funding. Deposits are included as an independent variable, and can be compared to added ratios by dividing by total assets. (Hassan, et al., 2004) added deposits in their analyses which found a negative relation with profitability. D\TA expected to have a negative relation with profitability. On the other hand, (Metwally, 1997) included deposits to total assets to examine the suggestion that interest-free Islamic banks face difficulties in attracting deposits, moreover tested the suggestion that profit-loss sharing results in higher return on deposits than income from interest based banks but he did not find a significant relation between deposits and profitability.

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