International Journal of Islamic and Middle Eastern Finance and

Management
Performance indicators of banks in a total Islamic banking system: the case of Sudan
Abuzar M.A. Eljelly Ahmed Abdelgadir Elobeed
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Abuzar M.A. Eljelly Ahmed Abdelgadir Elobeed, (2013),"Performance indicators of banks in a total Islamic
banking system: the case of Sudan", International Journal of Islamic and Middle Eastern Finance and
Management, Vol. 6 Iss 2 pp. 142 - 155
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IMEFM
6,2 Performance indicators of banks
in a total Islamic banking system:
the case of Sudan
142
Abuzar M.A. Eljelly
Research Department, Capital Market Authority, Riyadh, Saudi Arabia, and
Downloaded by Universitas Islam Negeri Sultan Syarif Kasim Riau At 22:01 06 January 2016 (PT)

Ahmed Abdelgadir Elobeed

Department of Accounting and Financial Management,
School of Management Sciences, University of Khartoum, Khartoum, Sudan

Abstract
Purpose – The purpose of this paper is to describe the common performance traits of banks
operating in a whole Islamic banking system in Sudan. Sudan is among the few economies in which a
whole Islamic banking system is in place.
Design/methodology/approach – Nine banks representing the most active and large banks are
used as a sample for this analysis. The study applied factor analysis to a large set of financial ratios
that are commonly used in financial analysis of banks.
Findings – The study found that six factors are able to explain most of the variation of the financial
ratios used in the study. These factors ranked according to the percentage of variation explained are:
liquidity risk, coverage, efficiency (utilization), profitability, capital adequacy, and control. The study
also tested for the stability of these factors over time and found that both the extracted factors and
their loadings are stable over time.
Practical implications – Thus, this study provides a reduced set of indicators of performance of
Islamic banks that operate in a total Islamic banking system that may be beneficial to a large group of
stakeholders and parties that have interest in Islamic banking.
Originality/value – This study provides an opportunity to interested researchers in the area of
Islamic banks about an important aspect of a total Islamic banking system, such as Sudan.
Keywords Islamic banks, Sudan, Performance indicators, Financial ratios, Factor analysis
Paper type Research paper

International Journal of Islamic and
Middle Eastern Finance and
Management
Vol. 6 No. 2, 2013
pp. 142-155
q Emerald Group Publishing Limited
1753-8394
DOI 10.1108/17538391311329833
I. Introduction
Sudan has been classified as one of the few countries in the world (including Iran and
Pakistan) that have been condoning complete (total) Islamic banking. This has been in
effect since 1983, during President Nimeiri’s regime, and formalized with the coming
of the revolution of National Salvation, led by the current President Basheer.
The Comprehensive Peace Agreement (CPA) signed between the government and the
Sudan People Liberation Movement (SPLM) in 2004 calls for two banking systems,
an Islamic one in the North and a conventional one in the South, with close
coordination between the two central banks regarding national monetary policy and
other related issues. In July 2011, the majority of South Sudan voted for secession from
the rest of the country, and formed an independent state. The Sudan banking system
has again become a totally Islamic banking system.
The origin of Islamic banking in Sudan goes back to 1978 when the Faisal Islamic
Bank of Sudan became the first bank to be licensed to operate on Islamic principles
 by the government of President Nimeiri, followed by the Sudanese Islamic Bank in 1982, The case
and the Tadamon Islamic Bank in 1983 (Elkhalifa and Musa, 2004). The popularity of
the Islamic banks led President Nimeiri in 1983 to pass comprehensive Islamic banking
of Sudan
laws, transforming the entire financial system to Islamic banking methods. The Islamic
banks’ performance in the following decades, in the 1980s and the first half of the 1990s,
was not good due to the difficult and poor economic situation, the spread of civil wars in
the country, and the economic boycotts and sanctions led by the USA, against the 143
National Salvation Revolution government. The economy has improved since 1996,
however, due to the efforts made by the government, helped by the signing of the peace
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agreement between the North and the South in 2003, and the commercial production and
export of oil. Gross domestic product growth has averaged 5.5 per cent, and inflation
has fallen from 133 to 16 per cent. Thus, the improved economic conditions have given
an impetus for the Islamic banks to expand their operations and financing.
However, as stated by Dau (2004), the peace agreement which was signed in
Lake Naivasha, Kenya on 7 January 2004, by the Government of the Sudan and the
Sudan People’s Liberation Movement/Army, established a dual banking system during
the interim period, where an Islamic banking system is to continue its operations in
Northern Sudan and a conventional banking system is to be effected in Southern Sudan.
In July 2011, when the south of Sudan became an independent state, the Sudanese
banking system was again interest-free and unified but under different economic
conditions and environment. Most of the oil went South and expectations of economic
slowdown blurred the economic scene in Sudan.
It is stated by Kireyev (2001), in an IMF staff paper, that Sudan has embarked since
1997 upon a program of liberalization of its financial system, which culminated in 2000
in the adoption of a comprehensive program of bank restructuring. The paper describes
vividly the difficulty of financial reform in Sudan; it states:
Financial reform in Sudan is more than a mere sum of its parts. It is a complex fusion of
historical legacy, difficult political compromises, dominating Islamic rules, traditional
mentality, macro stabilization efforts, pure bank restructuring, external liberalization, and
thorny social dilemma.
Furthermore, Elzahi et al. (2003) argue that the transformation of the banking system
to conform to the Islamic financial laws, put their performance in the spotlight.
Currently, financial ratios are often used to measure the overall financial soundness
of commercial banks and their management. Ratios are usually classified into groups
because the use of the numerous financial ratios may bewilder less sophisticated users of
financial information and may result in information overload and thus results in less
effective decision making (Eljelly, 2002). In addition, lack of understanding of the
empirical relationships among the financial ratios limits the ability of objective selection
of subsets of financial ratios (Gombola and Ketz, 1983).
Thus, many attempts have been made to classify financial ratios to reduce the
redundancy between the large numbers of financial ratios. Mainly, three approaches
have been used to achieve the objective of classifying financial ratios (Salmi et al., 1990).
The first approach is called the pragmatic/authoritative approach, which relies on
established business practices and personal views of eminent financial analysts. The
second approach, known as the deductive approach, relies on technical relationships
between different financial ratios (e.g. Du Pont analysis). The third approach,
the inductive approach, uses statistical techniques such as factor analysis to classify
 IMEFM financial ratios. In the latest approach, the factor analysis methodology is used to reduce
6,2 large number of variables (financial ratios) into a smaller number of latent variables, and
then label the latent variables with meaningful labels or names as seems appropriate
from the context.
Thus, this study attempts to use the latest approach to extract and classify financial
ratios into a set of characteristics that describes the traits of performance of Islamic
144 banks in Sudan. The choice of the factor analysis as a grouping technique is due, among
other things, to the objectivity of this statistical technique, relative to other approaches,
and also to the new nature of Islamic banks analysis. Thus, this study may present a set
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of ratios that investors, regulators and followers of Islamic banks may find useful in
understanding the nature and characteristics of Islamic banks. This is especially true in
Sudan, as Sudanese banks face a homogenous set of regulations and rules prescribed by
the Bank of Sudan. In other countries, with the exception of Iran and Pakistan, Islamic
banks work in a rather mixed, and under less clear, set of guidelines and rules.
The remainder of this paper is organized as follows. Section II, that follows
immediately, reviews the relevant literature for similar or related research and studies.
Section III describes the sample and methodology used in this study. Section IV analyzes
the results, while Section V, the last section of the study, concludes this paper.

II. Literature review

Many observers in the past overlooked the importance of industries and economic
sectors as important predictors of economic performance. In the words of Lewis (2004):
Many people look for the causes of poor economic performance primarily in macroeconomics.
An evaluation of economic performance requires an analysis at the level of individual
industries, such as automotive, steel, banking and retailing.
This line of thought lends more importance to studies that focus on important and core
sectors of the economy, such as the banking sector. The latest financial crisis, and the
slow recovery from its devastation, both passed through the banking industry. Islamic
banks and finance received increased attention and are coming under close scrutiny.
Many interested parties and observers, including political, social and religious leaders,
have called for consideration and serious study of Islamic banking and finance as
possible saviors and rescuers of the global financial system.
Measurement of bank performance has been at the center of many studies and
research before and after the latest financial crisis. But does the performance
measurement process of Islamic banks differ from that of its conventional counterparts?
Some researchers and observers argue that Islamic banks should be considered as a
different industry when compared to conventional banks, since they have different
objectives, rely on different concepts and philosophy, and have different operations and
organizations. A study by Nor Ahmed and Haron (1998) found many similarities
between the return on capital of conventional banks and the return on capital of Islamic
banks. They also found similar impacts of a set of independent variables (including
capital ratios, interest rates and inflation) on the profitability of both conventional
and Islamic banks. However, the areas in which Islamic banks are different from
conventional banks include their inability to use interest in lending and
borrowing activities which reduces the competitiveness of Islamic banks.
Furthermore, the restriction on using interest rate products results in Islamic banks
 facing liquidity constraints and inability to use risk management products. However, The case
the issue of competitiveness is not applicable in Sudan since the banks operate in a total of Sudan
Islamic banking system, in which all banks face the same set of constraints.
But what measures of performance to use? A study by Coit and Karr (1996) shows
that the management of commercial banks in the USA are inclined to use more
sophisticated measures of performance that go beyond the traditional return on equity
(ROE). Reliance on multidimensional measures, including balanced scorecards, has 145
become a common practice in different industries, including the banking industry. This
trend is expected to continue, especially in the aftermath of the latest banking crisis,
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which revealed that the old business models, with all their apparatus and tools, need to
be reexamined for suitability and relevance.
Factor analysis, in particular, has been used to group financial ratios for industries
other than the banking industry. Early attempts to use factor analysis to produce
meaningful classes of ratios are presented in a study by Pinches et al. (1973), where
financial ratios of a sample of industrial firms in the USA were factored into seven
ratio groups that showed stability over time. Johnson (1978, 1979) examined the
cross-sectional stability of factors where two samples of manufacturing and retail firms
in the USA were used for comparing the stability of the extracted factors of each sector in
1972, in the first study, and 1972 and 1974 for the latest study. The results of those two
studies showed that there is cross-sectional stability between the two economic sectors.
Pinches et al. (1975) used 39 ratios they identified in an earlier study, in an attempt to test
the stability of factors that summarize the treated ratios. The study found instability in
factor loadings in the form of changes in the ratios that represent the extracted factors.
Other studies address the issue of inter-temporal stability of factor loadings by
examining data over many years. This aspect was the focus of an empirical study
carried out by Ezzamel et al. (1987). The study used a sample of British manufacturing
companies over a relatively longer period extending from 1973 to 1981. The study was
able to reduce the large number of financial ratios to ten factors that are in turn grouped
into five broad patterns of financial performance. However, the study detected
instability in the extracted factors over those examined periods.
The not-for-profit organizations also received their share of studies that attempted to
use factor analysis to classify financial indicators. However, the major studies were
conducted for hospitals where a different set of financial ratios than the ones usually used
for profit-motivated firms were used. A study by Cleverley and Rohleder (1985) applied
factor analysis to 29 ratios of hospitals in the USA, and extracted a number of factors that
fitted the sampled ratios. A similar study by Countee et al. (1988) applied the factor
analysis technique to a sample of 114 US hospitals. Five factors were extracted that were
able to explain a very significant percentage of the variation in the examined ratios.
On the other hand, a study by Chu et al. (1991) across the three industries of hospitals,
manufacturing and retail, found that five factors were able to emerge as common factors
between the three industries. However, other unique factors were needed for firms within
the hospitals sector. Thus, the study points to the influence of industry type on the
common factors that emerged. A relatively recent study by Zeller et al. (1996), on a very
large sample of US hospitals, found that eight factors were needed to describe the
information contained in the financial ratios of hospitals included in the analysis.
The large number of factors was due in part to the differences in ownership, location and
objectives of the large number of different hospitals (2,189 hospitals) analyzed in the study.
 IMEFM However, in the financial sector there are a sheer number of studies that set out to
6,2 address the ratio classification issue in the manner that was conducted in other
industries. Eljelly (2002) applied the factor analysis technique to financial ratios of
the publicly traded commercial banks in Saudi Arabia, and found that six factors
that explain 83 per cent of the variation in financial ratios emerged from the analysis.
The extracted factors are: profitability, risk, financial structure, internal growth,
146 shareholders’ wealth, and liquidity. Tests of time series stability of factors show
that the extracted factors are stable over time, with little or no variation in factor
loadings.
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However, a valid question may arise, as to the extent Islamic banks’ performance
resembles that of their conventional counterparts. There are mainly two views on this
matter. One view believes that the two types of banks are similar with respect to
performance analysis and evaluation. For example, a study by Chong and Liu (2009)
argued that Islamic banking practice in Malaysia is not different from conventional
banking. Therefore, the Islamic banks are to be treated in a similar way to conventional
banks as far as financial analysis is concerned. However, one should bear in mind that
Islamic banks in Malaysia exist side by side with the commercial banks in the same
competitive market. Therefore, they may resort to the same tactics and tools to keep
themselves abreast. However, as argued by Čihák and Hess (2008) this is not the case in
Sudan, as it is the only country, in addition to Iran, that has its entire banking system
based on Islamic finance principles. The second view is that the Islamic banks and
conventional banks are different. A study by Hassan and Bashir (2003) found that there
are many noticeable differences between the two types with respect to capital-assets
ratio, operations ratios, and liquidity ratios.
Thus, based on these conflicting views and in light of the above reviewed literature,
this study attempts to apply the factor analysis technique to a chosen set of financial
ratios that are deemed necessary for reflecting the performance of Islamic banks in
Sudan. The primary objective is to summarize those ratios in objective and rational
groupings that make sense to the measurement of Islamic banks in general.

III. Data and methodology

The data for this study consists primarily of 19 financial ratios pertinent to nine Islamic
banks in Sudan over the period 1998-2007. These nine banks in our sample are the oldest
and largest banks in the country in terms of authorized and paid-up capital. The second
reason for restricting our study to these large banks is the non-availability of data for the
excluded banks. And even for the nine banks in the sample, the data was not available
for all years. We had to collect the data directly from the published annual reports if they
are available in hard copy form or from the websites of those banks. Difficulty in
obtaining data is common in third world countries, and until recently important data and
statistics are not collected, recorded and maintained. These difficulties in obtaining data
in third world countries hamper efforts of serious research in these economies. Table I
shows some characteristics of the sample banks and Table II shows the years for which
data is available. It worth noting that one study by IMF staff (Kireyev, 2001) delineates
1997 as the year in which serious economic reform started in Sudan, and in 2000 Sudan
embarked upon a liberalization of its financial system, culminating in the adoption of a
comprehensive program of bank restructuring. In 2008 two of Sudan’s commercial
(Islamic) banks made it to the list of the top ten banks in the central African region
 The case
Authorized capital
S.no. Bank Established (L.S million) Paid-up capital (L.S million) of Sudan
1 Faisal Islamic Bank 1978 500 110
2 Sudanese French Bank 1979 300 87.51 ($40 million)
3 Islamic Cooperative 1982 100 49.9
Development Bank 147
4 Nilien Industrial 1993 500 309.6
Development Banking Group
5 Alshamal Islamic Bank 1990 $20 milliona L.S 374 million
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6 Saudi Sudanese Bank 1984 600 430

7 Albaraka Sudanese Bank 1984 $200 milliona $42.6 Milliona
8 Omdurman National Bank 1,000 523
9 Farmers Commercial Bank 1999 400 60.164
a
Notes: Figures reported in dollars by banks; Nilien Industrial Development Banking Group was a
result of a merger between Nilien Bank (established 1964) and Sudanese Industrial Bank (established
1961); the Farmers Commercial Bank was a result of a merger between Farmers Bank for Investment
and Rural Development (established 1992) and the Sudanese Commercial Bank (established 1960); all
banks in the table, established, before 1983, except Faisal Islamic Bank, were originally established as
conventional banks, later converted to Islamic banks in 1983, when President Nimeiri decided to Table I.
Islamize the banking system and the Penal Code of Sudan; $US ¼ L.S 2.10 2 L.S 2.5 (approximate The sampled Sudanese
average during 2008-2009) Islamic banks

S.no. Bank 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
p p p p
1 Faisal Islamic Bank p p p p p p p
2 Sudanese French Bank p p p p
3 Islamic Cooperative
Development Bank p p p p p
4 Nilien Industrial
Development Banking
Group p p p p p p p
5 Alshamal Islamic Bank p p p p p p
6 Saudi Sudanese Bank p p p p p p p p Table II.
7 Albaraka Sudanese Bank p p p p p p p p The years for which
8 Omdurman National Bank p p p p p p p financial reports are
9 Farmers Commercial Bank available

in African Business (2008) survey (namely the Bank of Khartoum and Faisal Islamic
Bank of Sudan), where one of them (Bank of Khartoum) came in the second place.
The study uses 19 financial ratios listed and defined in Table III, which is frequently
referred to as necessary indicators of performance. This number is greatly restricted
by the non-availability of data regarding market related ratios. Although all large
banks are listed on the Khartoum Stock Exchange (KSE), there is no active trading
market for most of them. Further, there is no large following for these banks and most
stockholders are founding owners or holding shares for other than pure investment
and trading reasons. Hamza (1997), for example, showed that public company
ownerships are dominated by social, religious, and political networks, rather than by
pure economic and financial grounds. Also, most banks and listed companies do not
 IMEFM
No. Ratio Abbreviation
6,2
1 Cash/total deposits CASH/DEP
2 Current assets/current liabilities CA/CL
3 Owners’ equity/total assets OE/TA
4 Owners’ equity/total deposits OE/DEP
148 5 Reserves/total deposits RES/DEP
6 Deposits/total liabilities DEP/TL
7 Total debt/total assets TD/TA
8 Short term investments/total deposits S.T. INV/DEP
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9 Investments/total assets INV/TA

10 Liquid assets/total assets LA/TA
11 Change in investments DINV
12 Earnings per share (net profit/# outstanding shares) EPS
13 Return on equity (net profit/owners equity) ROE
14 Return on assets (net profit/total assets) ROA
15 Investments/total deposits INV/DEP
Table III. 16 Asset utilization (total revenue/total assets) UTZ
Financial ratios used: 17 Change in non-interest expenses DNIE
definitions and 18 Administrative expense (admin exp/total revenue) ADM
abbreviations 19 Net profit margin (net profit/total revenue) NM

give much consideration for declaring or paying dividends. Thus, this eliminates a host
of ratios, including but not restricted to, dividend yield, dividend payout, price to book,
price earnings ratio, dividend per share, and dividends to capital paid.
Tables I and II show that there is a total of 56 bank years included in this study,
due to the unavailability of data. In factor analysis it is highly advisable to have a sample
to variable ratio of 5:1, however, a ratio of 2:1 and even lower is acceptable (Hair et al.,
1987). To check the adequacy of the sample for factor analysis, researchers resort to
Bartlett’s sphericity and Kaiser-Meyer-Olkin (KMO) tests of sample adequacy. As it is
shown later, both tests show that the sample used in this study is quite adequate as
reflected in the high significance of the values reported for these statistics.
Thus, factor analysis is applied to the 19 ratios, for which complete records are found
among all banks included in the sample. As in Eljelly (2002), principal component
analysis method of factor analysis is used since the objective in this study is to
summarize most of the information contained in the original variables in as few factors
as possible. Further, this study uses the oblique (correlated) rotation method rather than
the orthogonal rotation method. Financial ratios are correlated to a large extent since
they often use the underlying accounting information, and oblique methods take
correlation into account.

IV. Results and discussion

Table IV shows descriptive statistics of the ratios used in the final analysis as input to
the factor analysis. These statistics serve two purposes. First, they give general sense of
the levels of these ratios for the sampled banks during this period, as well as the variation
within the sample. Second, they can be compared later in the analysis when the whole
sample is divided into sub-samples for the purpose of testing for time series stability
of factors and factor loadings. Overall, the table shows that there is variation in these
ratios between banks as reflected in the high values of the ratios’ standard deviations.
 The case
No. Ratio Mean SD n
of Sudan
1 CASH/DEP 0.6067 0.25 56
2 CA/CL 1.26 0.458 56
3 OE/TA 0.086 0.044 56
4 OE/DEP 0.1803 0.088 56
5 RES/DEP 0.324 0.308 56 149
6 DEP/TL 0.633 0.148 56
7 TD/TA 0.842 0.151 56
8 S.T. INV/DEP 0.513 0.28 56
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9 INV/TA 0.248 0.0177 56

10 LA/TA 0.27 0.114 56
11 DINV 0.43 0.706 56
12 EPS 220 561 56
13 ROE 0.08 0.584 56
14 ROA 20.008 0.12 56
15 INV/DEP 0.55 0.273 56
16 UTZ 0.063 0.027 56 Table IV.
17 DNIE 0.181 0.20 56 Financial ratios used:
18 ADM 0.698 0.276 56 means and standard
19 NM 20.025 0.534 56 deviations

Table V, on the other hand, shows the results of applying the principal component method
of factor analysis to these ratios, where six factors emerged as the grouping that explains
most of the variation in the ratios. The extracted six factors in sequence of relative strength
of explained variance are: liquidity risk, coverage, efficiency (utilization), profitability,
capital adequacy, and control. The overall explained variance is 73.78 per cent,

Factor name Variable loadings on factors Factor loading (%)

F1: liquidity risk S.T. INV/DEP 0.950 18.53

INV/DEP 0.946
CA/CL 0.790
F2: coverage CASH/DEP 0.843 16.63
D INV 0.773
DEP/TL 0.520
F3: efficiency (utilization) UTZ 0.853 13.04
ADM 0.750
EPS 0.713
TD/TA 0.523
F4: profitability NM 0.861 11.79
ROA 0.789
F5: capital adequacy RES/DEP 0.780 8.30
OE/DEP 0.743
OE/TA 0.642
F6: control DNIE 0.782 5.51
Total variance explained (%) 73.78
Sample statistics Table V.
KMO 0.493 The results of factor
Bartlette x 2 529.87 analysis – the whole
Significance ( p-value) 00.00 sample
 IMEFM with liquidity variables dominating with 18.53 per cent and coverage (quasi liquidity) of
6,2 16.63 per cent. Profitability ranks distant fourth with only 11.79 per cent of explained
overall variance. This result confirms previous findings (Elzahi et al., 2003) in that
profitability is not of paramount concern to Islamic banks in Sudan, due to their high
concentration; rather it is liquidity and the related investment risk control that matter most.
It is worth noting that Islamic banks are not able to borrow from the international money
150 markets, as the latter extends interest-based loans. That may explain why liquidity comes
out on top of the important factors of performance indicators.
Table VI shows the inter-factor correlation matrix, where it is clear that all entries in
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the matrix are quite small and insignificant, pointing to the orthogonality of the factor
solution and that the factors are highly independent from each other. Table VII further
shows the high correlation that exists among the variables (ratios) that are loaded on
any one of the six factors. All correlation coefficients are large and highly significant,

Factor 1 2 3 4 5 6

1 1
2 0.0058 1
3 0.003 0.07 1
Table VI. 4 0.08 0.103 0.069 1
Component correlation 5 0.011 20.147 0.028 0.028 1
matrix 6 0.051 0.035 0.224 0.06 0.0194 1

Factor 1 S.T. INV INV/DEP CA/CL

S.T. INV/DEP 1
INV/DEP 0.95 (0.00) * 1
CA/CL 0.62 (0.00) * 0.598 (0.00) * 1
Factor 2 CASH/DEP INVS/TA DEP/TL
CASH/DEP 1
INVS/TA 20.426 (0.001) * 1
DEP/TL 20.402 (0.001) * 0.445 (0.00) * 1
Factor 3 UTZ ADM EPS TD/TA
UTZ 1
ADM 0.547 (0.00) * 1
EPS 0.477 (0.00) * 0.256 (0.028) * * 1
TD/TA 0.331 (0.006) * 0.676 (0.00) * 0.163 (0.115) 1
Factor 4 ADM NM ROA
ADM 1
NM 20.309 (0.01) * 1
ROA 20.248 (0.03) * * 0.686 (0.00) * 1
Factor 5 RES/DEP OE/DEP OE/TA
RES/DEP 1
OE/DEP 20.316 (0.009) * 1
OE/TA 20.378 (0.002) * 0.547 (0.00) * 1
Factor 6
DNIE
Table VII. DNIE 1 (0.00) *
Intra-factor correlation
matrix Note: Significant at: *0.01 and * *0.05 levels
 indicating that the variable loadings are homogenous and there is a high degree of The case
homogeneity. This result has significant implications for the legitimacy of each ratio to of Sudan
represent the factor.
Time series stability of extracted factors and their loadings has been of great concern
to researchers who attempted to use factor analysis as a classification technique of
financial ratios. As indicated earlier in this study, the results of tests of time series
stability of factors were at best mixed and uncertain. However, in this study, the time 151
series stability test is carried out by running the factor analysis on a second sub-period
sample. It would have been better to use annual samples to test for temporal stability, but
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this is not practical in this study due to the lack of enough data to run the required
analysis without risking and compromising the adequacy of the sample for analysis.
A surrogate test can be achieved by eliminating a year or more from the whole period
sample. Thus, we eliminate the financial ratios data prior to 2004, and used the data after
that for re-applying principal component factor analysis. It is clear from Table II that the
data for almost all years after 2004 and for all banks are available, in contrast to previous
years where many reports were difficult to obtain. Table VIII shows the results of factor
analysis applied on the financial ratios of this sub-period. The test statistics show that
the sample is adequate to run the analysis, reflected in the high value of KMO measure of
sampling adequacy (KMO ¼ 0.443) and Bartlett’s x 2 of 408.58, both of which are
significant at all levels. It is interesting to observe that there is improvement in terms of
the total variance explained, as it increased to 82.91 per cent, indicating more
information contained in the correlation matrix is now accounted for. The most
important finding, however, is the close proximity in the extracted factors, their

Factor name Variable loadings on factors Factor loading (%)

F1: liquidity risk INV/DEP 0.984 24.67

S.T. INV/DEP 0.981
CA/CL 0.879
DEP/TL 0.802
F2: profitability NM 0.987 20.24
ROA 0.953
F3: coverage CASH/DEP 0.891 14.13
LA/TA 0.758
F4: capital adequacy RES/DEP 0.874 10.55
OE/TA 0.819
OE/DEP 0.766
F5: efficiency (utilization) UTZ 0.807 6.95
EPS 0.760
ADM 0.748
TD/TA 0.543
F6: control INV 0.730 6.38
INV/TA 0.699
Total variance explained (%) 82.91
Sample statistics
KMO 0.440
Bartlett’s x 2 408.58
Significance ( p-value) 00.00a Table VIII.
The results of factor
Note: aSignificant at all levels of significance analysis – recent sample
 IMEFM loadings, and their ranking. It is clear that there are no significant differences between
6,2 the two resulting groupings as reflected in Table IX.
Moreover, Table X shows the ratios that are not stable when the sub-sample
period is used. Five ratios are found either to change place between the two samples or
not loaded in any of the factors. Table XI further shows the correspondence between
the financial ratios of the two sub-samples, in terms of their close means and the
152 insignificant t-statistics that test the significance of the means differences. However,
Figure 1 shows more clearly how the two samples are close to each other in terms of the
extracted factors, factors loadings, and the importance of each factor within each
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sample.

V. Summary and conclusion

This study intended to provide a summarized measure of performance for Sudanese
Islamic banks, using factor analysis. The successful outcome of such a methodology
helps to avoid using numerous individual ratios that are sometimes difficult to use in
depicting performance of firms. Moreover, factor and statistical groupings help
researchers, analysts and regulators to avoid ad hoc and random groupings that are
widely practiced in industry and academia.
The empirical analysis that is carried out in this study on a sample of nine Sudanese
Islamic banks shows that a total of six factors emerged that explained about 74 per cent
of the total variation between the sampled banks with respect to the processed variables.
The emerging variables are:
.
liquidity risk;
.
coverage;

Factor Whole period Sub-sample period (2004-2007)

Liquidity risk (%) 18.53 24.669
Coverage (%) 16.63 14.13
Efficiency (utilization) (%) 13.04 6.95
Profitability (%) 11.79 20.24
Capital adequacy (%) 8.3 10.55
Control (%) 5.5 6.38
Total variance explained (%) 73.78 82.91
KMO 0.493 0.436
Bartlett x 2 529.87 408.58
Table IX. Significance ( p-value) 0.00a 0.00a
Time series adequacy
of the analysis Note: aSignificant at all levels of significance

Ratio Whole sample Sub-sample (2004-2007)

DEP/TL Profitability Liquidity
DINVS No loading Control
Table X. LA/TA No loading Profitability
Ratios with unstable INVS/TA Profitability Control
factor loadings DNIE Control No loading
 The case
Sub-sample period
Whole sample period (recent sample) of Sudan
No. Ratio Mean SD Mean SD t-statistics

1 CASH/DEP 0.6067 0.25 0.5319 0.1866 1.568

2 CA/CL 1.26 0.458 1.415 0.448 2 1.52
3 OE/TA 0.086 0.044 0.0938 0.0538 2 0.68 153
4 OE/DEP 0.1803 0.088 0.1781 0.085 0.113
5 RES/DEP 0.324 0.308 0.3711 0.377 2 0.59
6 DEP/TL 0.633 0.148 0.6739 0.1714 2 1.1
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7 TD/TA 0.842 0.151 0.8394 0.1389 0.08

8 S.T. INV/DEP 0.513 0.28 0.5683 0.268 2 0.9
9 INV/TA 0.248 0.0177 0.2789 0.062 2 2.67
10 LA/TA 0.27 0.114 0.2644 0.0885 0.252
11 DINV 0.43 0.706 0.3044 0.326 1.126
12 EPS 220 561 168.77 390.66 0.495
13 ROE 0.08 0.584 0.0037 0.7617 0.478
14 ROA 2 0.008 0.12 0.0039 0.024 2 0.72
15 INV/DEP 0.55 0.273 0.6088 0.2512 21
16 UTZ 0.063 0.027 0.0573 0.0268 0.938
17 DNIE 0.181 0.20 0.189 0.1917 2 0.18 Table XI.
18 ADM 0.698 0.276 0.664 0.286 0.532 Sub periods financial
19 NM 2 0.025 0.534 0.0263 0.4001 2 0.5 ratios comparison

Factor 1 Factor 2 Factor 3 Factor 4

Factor 5 Factor 6

S.T INN/Dep CASH/DeP UTZ NM RES/Dep ∆ NIE

ADM
INN/Dep ∆ INV ROA OE/Dep
EPS
CA/CL Dep/TL TD/TL OE/TA

0.913 1.0
0.99 0.965 0.99
1.00

INV/Dep NM CASH/Dep RES/Dep UTZ ∆ NIE

Figure 1.
ST.INV/Dep ADM
ROA OE/TA Pearson correlation among
CA/CL EPS respective factors in the
Dep/TL LA/TA OE/Dep TD/TA ∆ INV two sub-samples

.
efficiency (utilization);
.
profitability;
.
capital adequacy; and
.
control.
 IMEFM The weak and insignificant correlations between these emerged factors show clearly
6,2 that they are independent and that each variable describes a different and unique aspect
of performance of these banks. On the contrary, the high and significant intra-factor
correlation structure reflects the homogeneity and cohesiveness of the emerged factors.
In effect, this indicates that each member ratio within each factor is capable of acting as a
measure of that aspect of performance. Finally, the study found that the factor loadings
154 are stable over time.

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Corresponding author
Abuzar M.A. Eljelly can be contacted at: abuzarjelly@yahoo.com

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