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Evaluating the Performance of Islamic Banks Using a Modified Monti-Klein Model

Author

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  • Novriana Sumarti

    (Faculty of Mathematics and Natural Sciences, Institut Teknologi Bandung, Jl Ganesha 10 Bandung, Jawa Barat 40132, Indonesia)

  • Indah G. Andirasdini

    (Master Program, Deparment of Mathematics, Institut Teknologi Bandung, Jl Ganesha 10 Bandung, Jawa Barat 40132, Indonesia)

  • Nidya I. Ghaida

    (Undergraduate Program, Deparment of Mathematics, Institut Teknologi Bandung, Jl Ganesha 10 Bandung, Jawa Barat 40132, Indonesia)

  • Utriweni Mukhaiyar

    (Faculty of Mathematics and Natural Sciences, Institut Teknologi Bandung, Jl Ganesha 10 Bandung, Jawa Barat 40132, Indonesia)

Abstract

The development of Islamic banking continues to increase in many Muslim (majority) countries. Substituting interest with profit shares in the assets of a given Islamic bank as one of the bases of operation has many interesting implications, one of which is the need for more involved risk and return measures. In this paper, we take a balance sheet analysis-based approach to formulating profit in order to assess the performance of an Islamic bank. Then the implementation of this approach is demonstrated using data provided by Indonesia’s financial services authority, known as the OJK. We develop formulae for the calculation of profit share between funding and financing funds as well as the appropriate rates of return. The resulting figures are then used to construct statistical models for short-term forecasting of the volumes of funding fund from the depositors and financing fund for business people who need funds for their investment projects. The approach we develop is innovative for Islamic banks and would be a welcome addition to their performance assessment toolkit. One of the results of our model indicates an increasing pattern on the equivalent rates of returns for funding and financing funds every year, which is caused by the fact that the reported income from the financing fund seems to have been accumulated from the beginning until the end of year in the Islamic bank.

Suggested Citation

  • Novriana Sumarti & Indah G. Andirasdini & Nidya I. Ghaida & Utriweni Mukhaiyar, 2020. "Evaluating the Performance of Islamic Banks Using a Modified Monti-Klein Model," JRFM, MDPI, vol. 13(3), pages 1-21, March.
    • Handle: RePEc:gam:jjrfmx:v:13:y:2020:i:3:p:43-:d:327515
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    References listed on IDEAS

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    1. Rahman, Matiur, 2019. "Islamic banks with mutuality and neutrality: A balance-sheet-based theoretical framework," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 3-8.
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    5. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, April.
    6. Hennie Van Greuning & Zamir Iqbal, 2008. "Risk Analysis for Islamic Banks," World Bank Publications - Books, The World Bank Group, number 6923.
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