An earlywarning system for Islamic banks performance

Abstract EN

There is increasing demand for predicting the performane of Islamic banks due to the vital importance of any problem that may face these banks before it materializes and negatively affects their performance and their financial status.

This will save on the costs of bad performance or failure to depositors, owners and the economy.

Thus, a need arises for an early warning system which will identify the possible causes of bad performance, detect potential problem banks, facilitate surveilence of banks as well as reduce its costs and make possible proper timing of examining problem banks as well as scheduling the remedical procedures.

This research aims at benefiting from the previous research efforts on the subject to develop a preliminary model for the prediction of the performance level of Islamic banks (i.e.

an early warning system), hoping that this will be a cornerstone for further development and improvisation, specially as more information and data become available or accessible.

To achieve such objective Discriminant Analysis technique will be utilized, whereby a Discriminant Function will be designed comprising the significant characteristics (financial ratios) as explanatory variables and the profitability rate as dependent variable.

Discriminant scores are then extracted and used to distinguish between high performance and low performance groups of banks, thus forming a possible early warning system for the prediction of future performance of the observed banks.

The prediction power of such a system is finally tested and conclusions drawn.