Bank Parikrama

Volume XLII, Nos. 3 & 4, September & December, 2017 (pp. 156-180)

Evaluation of Accounting and Market Performance: A

Study on Listed Islamic Banks of Bangladesh


- Nusrat Jahan
- M. Ayub Islam*

Abstract
This study compared accounting performance of Islamic banks with their market performance and
also assessed the effect of firm-specific determinants and cross-sectional effect on accounting and market
performance. This study selected all six listed Islamic banks of Chittagong Stock Exchange and the data
were collected for the period of 2009 to 2013. This study reported that Social Islamic Bank Limited
exhibits superior accounting performance whereas Islami Bank Bangladesh Limited holds better market
performance. However, banks exhibiting superior accounting performance reported to have inferior market
performance. Further, random-effect model for ROA reports that there exist significant entity or cross-
sectional effect on ROA; and operational efficiency and bank size are significantly negatively associated
with ROA. However, random-effect model for Tobin’s Q failed to ascertain entity or cross-sectional effect
on Tobin’s Q and also reveals that firm-specific determinants have no significant impact on Tobin’s Q.

Key Words: ROA, Tobin’s Q, Random-effect model, size, operation efficiency

JEL Classification: C50, G21, L10
1. Introduction
Banks are financial institution that acts as financial intermediaries to pool
financial resources from surplus units and allocate them to deficit units for
investment purposes which ultimately results in economic growth of a country.
Rapid financial deregulation, consolidation, technological advances and
financial innovation are forces that lead to the development of new financial
product or instrument or an entirely new financial intermediary system. This
development is visible as Islamic banking is fast becoming a widely accepted
alternative mode of banking system in the global banking industry. Islamic
Banking system has also been playing a crucial role in mobilizing deposits and
financing key sectors of the economy in Bangladesh since its inception in 1983.

*The authors are Assistant Professor, School of Business, Chittagong Independent University,
Chittagong and Professor, Department of Accounting and Information Systems, Chittagong
University, Chittagong. The views expressed in this article are the authors' own. 

1
 At the end of the year 2013, out of 56 commercial banks in Bangladesh, 8
Private Commercial Banks operated as full-fledged Islamic banks, and 16
conventional banks including 3 Foreign Commercial Banks were involved in
Islamic banking through Islamic banking branches. The Islamic banking
industry continued to show strong growth since its inception as reflected by the
increased market share of the Islamic banking industry in terms of assets,
financing and deposits of the total banking system. Against this backdrop,
application of different measures of evaluation will help examining the
profitability and market performance of Islamic banking system in the banking
sector of Bangladesh.

2. Problem Statement
Performance for a business firm usually refers to the stock price
development, profitability and current valuation (Melvin and Hirt, 2005). Thus,
performance is a proxy indicator to determine a firm’s financial or market
related performance, which is mostly measured by non-frontier based financial
ratios such as profitability ratio and price to book ratio. Typically, bank
performance maybe defined as the reflection of the bank resources used in order
to achieve its objectives. The current study evaluates the performance of Islamic
banks of Bangladesh by simultaneously applying both accounting-based and
market-based measures of performance. The growth of Islamic banking system
in the financial sector of Bangladesh motivated the researcher to carry out this
research. Further, literature review also reveals that there are no studies till date
which evaluated and compared both accounting and market performance of
commercial banks in Bangladesh and also examined the equivalency of both
measures of performance. Henceforth, this research would be undertaken to fill
in these research gaps and thereby contribute to the existing pool of literature on
bank performance. It has been conferred in literature review that there are some
internal factors that affect the accounting and market performance of
commercial banks such as the bank’s size, assets management, leverage ratio,
operational efficiency ratio, portfolio composition, and credit risk (Almazari,
2011). Most literature on banking has expressed that bank-specific factors
originate from banks financial statements and external determinants reflect the
economic and legal factors that affect the operation and performance of
financial institutions. This study will also assess the impact of selected firm-

2
specific factors such as size, operational efficiency, asset utilization and credit
risk on both the accounting and market performance of Islamic banks of
Bangladesh. Though the determinants of bank’s performance have been well
explored in different literatures but there are no studies that focus on
comparative accounting and market performance of Islamic banks of
Bangladesh. This study would fill a void in the banking performance literature
by assessing whether the Islamic banks which are reported to be doing better in
terms of financial performance also reported to have comparable market
performance.

3. Measurement of Firm’s Performance

The firm’s success is basically explained by its performance over a
certain period of time and employing the appropriate criterion of evaluation
enables the comparison of firm’s performance over different time periods and
also within the industry. Researchers have been investigating to determine the
measures of performance that can encompass all aspects of performance of a
firm. However, no specific criterion with the ability to measure every financial
aspect of an organization has been proposed till date. Measurement of
performance can offer significant invaluable information to allow management
to monitor performance, report progress, improve motivation and
communication and pinpoint problems (Waggoner et al. 1999). Further, it is in
the firm’s best interest to evaluate its performance over time or with others in
the industry. Although there are wide varieties of evaluation criterion brought
forward by past researches to assess the financial performance of a firm,
however, in this study, measurement of performance evaluation are categorized
into accounting-based and market-based performance criterion.

3.1 Accounting-Based Performance Measurement

Accounting-based measures of performance focus most commonly on
company’s profitability. The financial ratios including return on assets (ROA),
return on equity (ROE) and net interest margin (NIM) are commonly used as
accounting-based performance indicators to evaluate profitability condition of
commercial banks. According to Hutchinson and Gul (2004) and Mashayekhi
and Bazazb (2008), accounting-based performance measures reports the
outcome of management actions and hence preferred over market-based

3
measures when the relationship between corporate governance and firm
performance is investigated. As a result, when a company is showing a positive
performance through ROA, it indicates its achievement of prior planned
earnings target (Nuryanah and Islam, 2011). Further, maximization of profit is a
short-run goal of a firm and firms are in reality keener to meeting its short-term
earnings target than long-run goal of shareholders wealth maximization. The
return on asset (ROA) is a substantial performance measure because it is
directly related to the profitability of banks (Kosmidou, 2008; Sufian and
Habibullah, 2009). ROA measures the profit earned per dollar of assets and
reflect how well bank management uses the bank’s real investments and
resources to generate profits (Ben Naceur, 2003). The higher the value of ROA,
the greater is the profitability of banks. Hence, this study employs ROA as an
accounting-based performance criterion to evaluate the performance of Islamic
banks of Bangladesh.

3.2 Market-Based Performance Measurement

A firm’s long-term financial goal is creation of wealth for its shareholders
through maximizing the market price of its shares; and successfully meeting its
short-run earning goals will eventually lead to achieving the long-run financial
goal of a firm. Hence, the second type of performance measurement is in focus,
in this study, is the market-based indicators which are generally Tobin’s Q,
market value added, market value to book value and stock return. The market-
based measurement is characterized by its forward-looking aspect and its
reflection regarding the expectations of the shareholders concerning the firm’s
future performance, which has its basis on previous or current performance
(Wahla et al. 2012; Shan and McIver 2011; Ganguli and Agrawal 2009).
Tobin’s Q refers to a traditional measure of expected long-run firm performance
(Bozec et al. 2010). The employment of market value of equity may reflect the
firm’s future growth opportunities which could stem from factors exogenous to
managerial decisions (Shan and McIver 2011). In addition, a high Q ratio shows
success in a way that the firm has leveraged its investment to develop the
company, which is valued more, in terms of its market-value compared to its
book-value (Kapopoulos and Lazaretou 2007). Chunhachinda and
Jumreornvong (1999) used the Tobin’s Q to measure the competitiveness of
banks and finance companies in Thailand over the period 1990 to 1996. Choi

4
and Hasan (2005) employed the annual stock return and the standard deviation
of the daily stock returns to measure the market based performance of Korean
commercial bank over the period 1998 to 2002. Jonghe and Vennet (2008)
appied the Tobin’s Q to measure the European banks’ franchise value.
Chunhachinda and Li (2011) employed Tobin’s Q to measure and compare the
competitiveness of Asian banks after recovering from the 1997 financial crisis.
Jones et al. (2011) utilize the Tobin’s Q to proxy for the charter value in the
banking industry. Therefore, this study also employs Tobin’s Q as a market-
based performance criterion to evaluate the performance of Islamic banks of
Bangladesh.

3.3 Review of Literature on Performance Evaluation of Commercial Banks

There are a large number of literatures that have evaluated the performance
of commercial banks of Bangladesh from different perspectives and several
studies also examined the determinants of such performance measures. The
following discussion lists few researches that were aimed at evaluating the
performance of commercial banks of Bangladesh.
Hassan (1999) examined the performance of Islamic Bank Bangladesh
Limited and compared that with other private banks in Bangladesh between
1993 and 1994. While the duration of study was short, the result revealed that in
terms of deposits growth and investments growth, performance of Islamic Bank
Bangladesh Limited was better than performance of private commercial banks.
Apart from that, the researcher found that the key Islamic financial products,
mudharabah and musyarakah were not well developed. Siddique and Islam
(2001) undertook a study on commercial banks of Bangladesh for the financial
year 1980 to1995. The study revealed that in every aspect, Trans National
Banks had a commendable performance. But comparing among other groups of
banks which are Nationalized Commercial Banks (NCBs), Specialized Banks
(SPBs), Private Commercial Banks (PCBs), PCBs had preferred achievement
over others aiming profit. On the other hand, Specialized Banks in Bangladesh
had a very poor performance. This meager activity affected the overall banking
sector's performance. Chowdhury (2002) in his study emphasized that
performance of banks requires knowledge about the profitability and the
relationships between variables like market size, bank's risk and bank's market
size with profitability. The study concluded that the banking industry in

5
Bangladesh is experiencing a major transition for the last two decades. The
author recommended that the banks that endure the pressure arising from both
internal and external factors prove to be profitable. Hasan and Omar (2006) in
their study made a comparative performance analysis between state-owned and
privately-owned commercial banks of Bangladesh over the period between
2006 and 2010. ROA and ROE were used to measure profitability and Net
profit and net asset efficiencies relative to total employment and total number of
branches are used to measure operating efficiency. The results suggest that
state-owned banks are as efficient as private banks but private banks have much
higher mean values relative to public bank.
Jahangir et al. (2007) stated that the traditional measure of profitability
through stockholder’s equity is quite different in banking industry from any
other sector of business, where loan-to-deposit ratio works as a very good
indicator of banks' profitability as it depicts the status of asset-liability
management of banks. But banks' market size and market concentration index
along with return to equity and loan-to-deposit ratio grab the attention while
analyzing the banks’ profitability. Chowdhury and Islam (2007) stated that
deposit, and loans and advances of nationalized commercial banks (NCBS) are
less sensitive to interest changes than those of specialized commercial banks
(SCBs). They also suggest that higher return on equity (ROE) is noticeable as it
is the primary indicator of bank’s profitability and financial efficiency.
Nimalathasan (2008) undertook a comparative study of financial performance
of banking sector in Bangladesh using CAMELS rating system. The study was
done on 6562 Branches of 48 Banks in Bangladesh for the financial year 1999
to 2006. The study revealed that out of 48 banks, 3 banks were rated 01 or
Strong, 31 banks were rated 02 or satisfactory, 7 banks were rated 03 or Fair, 5
banks were rated 04 or Marginal and 2 banks obtained 05 or unsatisfactorily
rating. 1 Nationalized Commercial Bank (NCB) had unsatisfactorily rating and
other 3 NCBs had marginal rating. Chowdhury and Ahmed (2009) in their paper
investigated the performance of private commercial banks and revealed that all
the commercial banks are able to achieve a stable growth of branches,
employees, deposits, loans and advances, net income, earnings per share during
the period of 2002 to 2006. Rushdi (2009) in his study compared the
performance of Islamic Bank Bangladesh Limited with Janata bank Limited in
terms of accounting profitability, partial productivity and total factor

6
productivity over the period from 1983 to 2006. The study confirms that the
IBBL performed excellently in terms of labor and capital productivity and TFP
over the study period. Sufian and Habibullah (2009) reported in their study that
bank specific characteristics, in particular, loan intensity, credit risk and cost
have positive and significant impacts on profitability of Bangladeshi banks,
while non-interest income exhibits negative relationship with bank profitability.
This study found that size has a negative impact on return on average equity
(ROAE) while it has positive impact on return on average assets (ROAA) and
net interest margin (NIM). Safiullah (2010) in his study emphasized on the
financial performance analysis of Conventional and Islamic banks to measure
their superiority. The research result based on commitment to economy and
community, productivity and efficiency, signifies that interest-based
conventional banks are doing better performance than interest-free Islamic
banks. But performance of interest-free Islamic banks in business development,
profitability, liquidity and solvency is superior to that of interest-based
conventional banks. Sarker and Saha (2011) investigated the performance of
NCBs, PCBs, FCBs and SCBs through highlighting their profitability, branch
productivity, employee productivity and overall productivity and also by using
SWOT mix during the period of 2000 to 2009. Sufian and Kamarudin (2012)
identified bank specific characteristics and macroeconomic determinants of
profitability of 31 commercial banks over the period of 2000 to 2010. The study
bring out five bank specific determinants that are important in influencing
profitability which are capitalization, non-traditional activities, liquidity,
management quality, and size of the bank. Besides, this study found, three
macroeconomic determinants significantly influence profitability including
growth in GDP, inflation and concentration.
Jahan (2012) evaluated randomly selected six commercial banks of
Bangladesh by using widely used indicators of banks’ profitability, which are
ROA, ROE and ROD. This study investigated the impact of efficiency ratio,
asset utilization ratio, asset size and ROD as a determinant of banks’
profitability measured by ROA. The results of regression analysis found that
operational efficiency, asset size and ROD to be positively related and asset
utilization to be negatively related to ROA, but these associations are
statistically insignificant. Haque (2013) investigated the financial performance
of five private commercial banks in Bangladesh for the period 2006 to 2011

7
under four dimensions: (1) profitability (2) liquidity (3) credit risk and (4)
efficiency. The study concluded that there is no specific relationship between
the generation of banks and its performance. The performances of banks are
dependent more on the management’s ability to formulate strategic plans and
the efficient implementation of its strategies.
The above review of past literatures indicates that a comparative study between
accounting performance and market performance of commercial banks are yet
to be taken in the context of Bangladesh. Hence, the novel feature of current
study is expected to broaden the scope of performance evaluation of
commercial banks of Bangladesh by shedding light into this less researched area
of performance evaluation.
4. Research Objectives
The broad objective of this study is to investigate the accounting
performance, market performance of Islamic banks of Bangladesh and also to
examine the impact of firm-specific factors on performance of Islamic banks.
The specific objectives of this study are as follows:
1) To evaluate and compare the accounting performance of Islamic banks with
selected sample banks average.
2) To evaluate and compare the market performance of Islamic banks with
selected sample banks average.
3) To examine whether measures of accounting and market performance of
selected Islamic banks generate comparable results.
4) To assess the extent to which observed variations in accounting performance
of selected Islamic banks are explained by firm-specific factors.
5) To assess the extent to which observed variations in market performance of
selected Islamic banks are explained by firm-specific factors.
6) To investigate the effect of cross-sectional differences on ROA and Tobin's
Q of selected Islamic Banks.

5. Research Methodology
5.1 Population, Sample and Sources of Data
This empirical study is based on secondary quantitative data that covers a
period of five years from 2009 to 2013. Data required for estimating
accounting-based and market-based performance measure and also proxy for
selected bank-specific determinants are collected from the annual reports of

8
selected banks. There are 56 commercial banks in Bangladesh, of which 8 are
Islamic banks. Among these eight Islamic banks only six are listed in stock
exchanges in Bangladesh. Market capitalization data are required for measuring
market performance; hence, the sample of this study constitutes all six Islamic
banks listed on Chittagong Stock Exchange.

5.2 Hypothesis Formulation

The following null hypotheses are developed to fulfill the research objectives:

5.2.1 Hypothesis I
The first hypothesis devises the relationship between firm-specific factors
which are bank size, operational efficiency, asset utilization and credit risk with
accounting performance, measured by ROA. The first null hypothesis is
formulated below:
H1o: There exists no significant relationship between the firm-specific
determinants and ROA of selected Islamic banks.
The first null hypothesis is tested by examining the significance of beta
coefficient of random effect model for ROA which is estimated by Generalized
Least Squares (GLS) regression estimator. If the calculated probabilities of all
beta coefficients of selected determinants are less than 0.05 level of significance,
then the first null hypothesis (H1o) will be rejected.

5.2.2 Hypothesis II
The second hypothesis formulates the relationship between firm-specific
factors which are bank size, operational efficiency, asset utilization and credit
risk with market performance, measured by Tobin’s Q. The second null
hypothesis is formulated below:
H2o: There exists no significant relationship between the firm-specific
determinants and Tobin’s Q of selected Islamic banks.
The second null hypothesis is also tested by examining the significance of
beta coefficient of random effect model for Tobin’s Q which is estimated by
Generalized Least Squares (GLS) regression estimator. If the calculated
probabilities of all beta coefficients of selected determinants are less than 0.05
level of significance, then the second null hypothesis (H2o) will be rejected.

9
5.2.3 Hypothesis III and IV
Hypothesis III and IV are extensions of hypothesis I and II respectively,
which are formulated to examine whether cross-sectional or entity differences
have any influence on dependent variable measured by ROA and Tobin’s Q.
The third and fourth null hypotheses are formulated below:
H3o: There exists no cross-sectional or entity effect on ROA of selected Islamic
banks.
H4o: There exists no cross-sectional or entity effect on Tobin’s Q of selected
Islamic banks.
The third and fourth null hypotheses are tested by examining the
significance of estimated random effect model for ROA and Tobin’s Q as a
whole. If the calculated probability of Wald chi-square test is less than 0.05
level of significance, signifying that the estimated model for ROA is statistically
significant as a whole, then the third null hypothesis (H3o) will be rejected. If
the calculated probability of Wald chi-square test is less than 0.05 level of
significance, signifying that the estimated model for Tobin’s Q is statistically
significant as a whole, then the fourth null hypothesis (H4o) will be rejected. A
statistically significant random-effect model for ROA and Tobin’s Q would
suggest that there exists significant entity or cross-sectional effects on
accounting performance and market performance of selected Islamic banks.

5.3 Measures of Performance Evaluation and Bank-specific Determinants

In line with existing literature, traditional non-frontier based financial ratio,
ROA, would be used to measure accounting performance (Ali et al. 2011) and
Tobin’s Q would be used to evaluate market performance (Siddique and Shoaib
2011). The proxies or ratios used for measuring dependent and explanatory
variables are listed in the following table:
Dependent Description Independent or Description
Variables Explanatory Variables
ROA Net Income /Total Asset Bank Size (size) ln (Total Assets)
Tobin’s Q Market Value of Bank Credit Risk (CR) Classified Investment /Total
/Total Asset Investment
Operational Total Operating Expense
Efficiency (OE) /Operating Income
Asset Utilization (AU) Operating Income / Total Assets
Table 1: Summary of Dependent and Independent Variables

10
5.4 Model Specification
The data collected from sample constitutes a panel database for this study
since it includes both cross-sectional and time-series data for six Islamic banks
over the period of 2009 to 2013. Hence, panel data model is considered
appropriate for this study for investigating the impact of explanatory variables
on accounting performance and market performance of Islamic banks. Random-
effects regression model is preferred for this study with the assumption that
cross-sectional or entity differences may have some influence on dependent
variable. Besides, random–effect model allows generalizing the inferences
beyond the sample used in the model. A random effect model estimated by
Generalized Least Squares (GLS) regression would be used to determine the
association of explanatory variables with performance. The panel data model
for random-effect estimation is expressed as below:
DRi,t =ά + β1(Size)i,t+β2(CR)i,t + β3(OE)i,t + β4(AU)i,t+ Ɛi,t
Where, Dependent variable: DRi,t = ROA or Tobin’s Q of bank i at time t
Independent Variables are as follows:
(Size)i,t = Size of bank i at time t
(CR)i,t = Credit Risk of bank i at time t
(OE)i,t = Operational Efficiency of bank i at time t
(AU)i,t = Asset Utilization of bank i at time t
ά = is the intercept
Ɛi,t = is the random error term for firm i at time t
5.5 Statistical Tools Used for Analysis
In this study both descriptive and inferential statistics are used and
parametric tests are applied for hypothesis testing. Descriptive statistics
measures used includes arithmetic mean, minimum, maximum, standard
deviation and trend analysis. Evaluation and comparison of accounting and
market performance are presented through Histogram, where each column
represents a bank, defined by a quantitative variable which are ROA and
‘Tobin’s Q’. To evaluate accounting performance of each bank, five-year
average ROA of each Islamic bank will be compared with the estimated average
ROA of all six listed Islamic banks and this comparison is presented through a
Histogram. Further, to evaluate market performance of each bank, five-year
average ‘Tobin’s Q’ of each bank will be compared with the estimated average
‘Tobin’s Q’ of all six listed Islamic banks and this comparison is also presented

11
through a Histogram. A Line Chart is used to plot five-year average ROA and
‘Tobin’s Q’ of each bank to examine whether accounting and market
performance of Islamic banks generate comparable performance result.
Inferential statistics are applied with the purpose of generalizing the findings of
the sample to the population it represents, and they can be classified as either
parametric or non-parametric. Parametric tests make assumptions about the
parameters or properties of a population, whereas nonparametric tests do not
include such assumptions or include fewer. Parametric inferential statistics used
for testing of hypotheses is a panel data model known as Generalized Least
Squares (GLS) random effect model. For generating descriptive statistics and
conducting panel data analysis, the study uses the statistical software ‘STATA’.
The charts are created using software MS-Excel.
6. Findings and Analysis
6.1 Descriptive Statistics of Panel Data
Table 2 reports descriptive statistics of panel data, where total number of
banks are n= 6, time T= 5 years and total number of observations are N=30. The
overall, between and within value of ROA, Tobin’s Q, asset utilization,
operational efficiency, credit risk and bank size are calculated over 30 bank-
years data.
Variable Mean Std. Dev Min. Max. Obs.
ROA: Overall 0.017459 0.006895 0.0053 0.0354 N = 30
Between 0.004204 0.01278 0.02322 n=6
Within 0.005684 0.00992 0.03199 T=5
Tobin’s Q: Overall 0.198311 0.450993 0.0000085 2.4 N = 30
Between 0.276028 0.000025 0.732 n=6
Within 0.371096 -0.39369 1.86631 T=5
Asset Utilization: Overall 0.046468 0.011015 0.0267 0.07846 N = 30
Between 0.008949 0.0291 0.05433 n=6
Within 0.007230 0.033239 0.07059 T=5
Opr. Efficiency: Overall 0.364743 0.072488 0.2209 0.54 N = 30
Between 0.057469 0.30172 0.4593 n=6
Within 0.049064 0.2544833 0.44838 T=5
Credit Risk: Overall 0.02781 0.013068 0.0094 0.0647 N = 30
Between 0.008371 0.0167 0.04112 n=6
Within 0.010505 0.00887 0.06417 T=5
Bank Size: Overall 6.154747 2.214164 4.6019 11.12 N = 30
Between 2.369443 4.9532 10.9678 n=6
Within 0.250284 5.469367 6.79406 T=5
Table 2: Descriptive Statistics of Panel Data

12
 The overall average ROA is 0.017459 and overall standard deviation of 30
observations is 0.006895. Minimum and maximum statistics reports, overall
ROA calculated for 30 bank-years data varied between 0.0053 to 0.0354. The
between standard deviation of ROA calculated across six banks is 0.004204.
Between standard deviation of ROA calculated for each bank, on an average,
varies across bank by 0.01278 to 0.02322. Within standard deviation of ROA is
0.005684, indicating deviation from each bank’s five years average and it varies
between 0.00992 to 0.03199. The overall standard deviation of ROA calculated
for 30 bank-years data is 0.006895. Between standard deviation of ROA
indicates that the variation that exists in ROA across banks is 0.004204 and it is
almost close to that of observed within a bank over time which is 0.005684.
Descriptive statistics also reports overall, within and between mean, maximum,
minimum and standard deviation for Tobin’s Q, asset utilization, operational
efficiency, credit risk and bank size. From panel data set, the random-effect
model is generated.

6.2 Evaluating and Comparing the Accounting Performance of Selected

Banks
Banks’ profitability is a vital issue of contemporary banking field that grace
its role by emphasizing on the financial soundness of banks. This study assumes
that the banks’ performance is represented by their ability to generate
sustainable profitability as measured in this study by ROA.

0.02322
0.025 0.02086
0.01796 0.017092 0.0175
0.02 0.01278 0.01284

0.015

0.01

0.005

0
5 Years Avg.

EXIM SIBL IBBL AlArafah FSIBL Shahajalal Sample Banks Avg.

Chart 1: Comparison of Individual Bank's Average ROA with Six Banks’ Average

13
 Chart 1 reports Return on Asset (ROA), which is an indicator of how
profitable a company is, relative to its total assets. ROA is calculated by
dividing a company's annual earnings by its total assets and displayed as a
percentage. Sometimes, ROA is also referred as "return on investment". ROA
gives an idea as to how efficient management is at using its assets to generate
earnings. ROA for public limited companies can vary substantially and will be
highly dependent on the nature of industry. This is why, when using ROA as a
comparative profitability measure, it is best to compare it against the ROA of a
similar company. The ROA figure gives investors an idea of how effectively the
company is converting the money it has to invest, into net income. The higher
the ROA ratio, the better will be the profitability, because the company is
earning more money on less investment. The average ROA of all listed Islamic
banks set as benchmark in this study is 1.75%. Compared to this benchmark
ROA, Social Islami Bank (SIBL) reports average ROA of 2.322%, indicating
that this bank is relatively better compared to other five Islamic banks at
converting its investment into profit. However, compared to benchmark ROA,
the minimum ROA is reported by Islami Bank Bangladesh Limited (IBBL) and
First Security Islami Bank Limited (FSIBL), which are 1.278% and 1.284%
respectively.

6.3 Evaluating and Comparing the Market Performance of Selected Banks

Using Tobin’s Q as a measure of market performance, the study seeks to
examine the relative performance of selected sample banks. Tobin's Q is the
ratio of the market value of a firm to the replacement cost of the firm's assets
(Tobin, 1969).

14
 0.73200
0.80000

0.70000

0.60000

0.50000

0.40000
0.21000 0.19832
0.30000 0.18000
0.00002
0.20000 0.06780
0.10000
0.00004

0.00000
5 Years Avg.

EXIM SIBL IBBL AlArafah FSIBL Shahajalal Sample Banks Avg.

Chart 2: Comparison of Individual Bank's Average Tobin’s Q with Six Banks’ Average
Tobin’s Q as a measure of firm’s performance is not used as often as either
accounting rate of return or price to cost margins (Carlton and Perlof 2005).
According to Tobin’s Q, if a firm is worth more than its value based on what it
would cost to rebuild it, then excess profits are being earned. These profits are
above and beyond the level that is necessary to keep the firm in the industry.
Tobin's Q ratio is based on the work of James Tobin, who suggested that a fairly
priced company ought to have a price equal to its total asset value (Tobin, 1969).
Thus, when Tobin's Q ratio is less than one, it means that the market value of
the company is less than the total asset value, indicating that it is undervalued.
Likewise, when it is more than one, it indicates that the market value is higher
than the total asset value and that the company might be overvalued. Tobin's Q
ratio is also termed simply a ‘Q’ ratio. Firms with high Tobin’s Q ratio, i.e.
greater than one, have been assumed to offer attractive investment opportunities
for investors (Lang et al. 1989) and also expected to have higher growth
potential (Tobin and Brainard 1963; Tobin 1969) and it indicates that
management has been better utilizing the assets of the firm (Lang et al. 1989).
In Chart 2, all the banks have Tobin’s Q less than one, which indicates that the
actual or intrinsic value of the assets of all selected Islamic banks are not
properly assumed by the investors and hence all the banks remained
undervalued in the market. Further, the estimated benchmark, which is the
average Q of six listed Islamic banks calculated as 0.1983, also indicates that

15
the Islamic banks remained undervalued in the stock market during the period
of study. However, compared to this estimated yardstick, the relative market
performance of Islami Bank Bangladesh Limited (IBBL) and Al-Arafah Islamic
Bank are reportedly better.

6.4 Comparing Accounting Performance with Market Performance of

Selected Banks
Accounting performance and market performance both act as an indicator
of a firm's success or failure in a business environment. Therefore, the
following Line Chart 3 is used to examine whether the banks, exhibiting
superior accounting performance, are also reported to be doing better in the
stock market. Therefore, this study reveals whether the results of accounting
performance measured by ROA and market performance measured by Tobin’s
Q are comparable or not.
0.8
0.732
0.7

0.6

0.5

0.4

0.3 0.18
0.2 0.21
0.00004016 0.0000249
0.1 0.0678
0.01796 0.017092
0
0.02086 0.02322 0.01278 0.01284
EXIM SIBL IBBL Alarafah FSIBL Shahajalal

ROA TobinsQ
Chart 3: Comparison of Accounting (ROA) and Market Performance (Tobin’s Q)
The result reported in Chart 3 indicates that though accounting performance
of Islami Bank Bangladesh Limited (IBBL) is reported to be inferior having
least ROA of 1.278% but its market performance is better compared to six listed
banks as reported by highest Tobin’s Q score of 0.732. However, superior
accounting performance is reported for Social Islami Bank Limited (SIBL) with
average ROA of 2.322% but market performance of the same bank reported by
Q score of 0.0678 is quite inferior compared to Islami Bank Bangladesh

16
Limited (IBBL), Shahajalal Islami Bank Limited and Al-Arafah Islami Bank
Limited. Comparison depicted in Chart 3 suggest that that since the yardstick of
accounting and market performance are not comparable, hence, the superior
accounting performance of banks may not necessarily leads to improved market
performance.

6.5 Analysis of Random-Effect Model for ROA and Tobin’s Q

Random-effect model is applied to observe how the variations in
accounting performance and market performance of Islamic banks are explained
by different firm-specific factors and also to examine whether cross-sectional or
entity differences have any influence on dependent variables. The result of
random-effects model is presented in Table 3 and Table 4.
Random-effect GLS regression Number of observations =30
Number of groups =6
Average observation per group = 5
ROA (dependent variable) Coefficient Z-statistics Probability
Asset Utilization 0.0045563 0.04 0.969
Operational Efficiency -0.09221149 -4.83 0.000**
Credit Risk 0.071243 1.03 0.302
Bank Size -0.0013725 -2.25 0.024**
Constant 0.057348 4.60 0.000
R-square: Within=0.7374
Between =0.3636
Overall= 0.5580
Wald Chi-square F(4) = 47.41 Probability =0.000**
Notes: ** means statistically significant at 5% level of significance
Table 3: Results of Random-Effects Model for ROA
The result of random-effect regression model for ROA is reported in Table
3. In this table, operational efficiency and bank size are found to be significant
explanatory variables of ROA. Table 3 reports that the beta coefficient of bank
size is negative and its association with ROA is statistically significant at 5%
level of significance. Therefore, 1 unit increase in bank size reduces the ROA
by the amount of beta coefficient which is 0.0013725 units. This finding implies
that Islamic banks are failing to take advantage of cost reduction that comes
along with economies of scale. However, the result of this study shows
conformity to prior study by Athanasoglou et al. (2005), which suggest that if
the size of bank becomes larger, phenomenon of the diseconomies of scale may

17
appear, as it becomes more difficult for management to conduct surveillance
and the higher the level of bureaucracy creates a negative impact on banks
profitability. Further, table 3 reports that the beta coefficient of operational
efficiency is also negative and its association with ROA is statistically
significant at 5% level of significance. Therefore, 1 unit increase in operating
efficiency ratio reduces the ROA by the amount of beta coefficient which is
0.09221149 units. High operating efficiency ratio indicates having higher
percentage of cost compared to income hence signifying poor expenses
management by the bank. This finding is at par with prior studies by Curak et al.
(2012), Alper and Anbar (2011), and Almazari (2014) that have reported that
there is a negative relation between operating inefficiency and profitability.
Hence, this study rejects the first null hypothesis (H1o) and concludes that there
exists significant association between the firm-specific determinants and ROA
of selected Islamic banks. Wald chi-square test is used to show whether all the
coefficients in the random-effect model are different from zero. The estimated
probability of Wald chi-square test is less than 0.05, hence the random-effect
model for ROA as a whole is found to be statistically significant at 5% level of
significance. Hence this study also rejects the third null hypothesis (H3o) and
reports that there exists significant entity or cross-sectional effects on ROA by
selected Islamic banks.
Random--effect GLS regression Number of observations =30
Number of groups =6
Average observation per group = 5
Tobin’s Q (dependent variable) Coefficient Z-statistics Probability
Asset Utilization 4.944365 0.39 0.694
Operational Efficiency 1.400537 0.69 0.489
Credit Risk -9.287875 -1.24 0.216
Bank Size 0.0253017 0.31 0.759
Constant -0.4397097 -0.32 0.746
R-square: Within=0.0648
Between =0.0240
Overall= 0.0491
Wald Chi-square F(4) = 1.62 Probability =0.8049
Notes: ** means statistically significant at 5% level of significance
Table 4: Results of Random-Effects Model for Tobin’s Q

18
 The result of random-effect regression model for Tobin’s Q is reported in
Table 4. Table 4 reports that the beta coefficients of asset utilization, operational
efficiency and bank size are positive but beta coefficient of credit risk is
negative. However, their association with Tobin’s Q is statistically insignificant
at 5% level of significance since their p-values are more than 0.05. Hence, this
study fails to reject the second null hypothesis (H2o) and concludes that there
exist no significant association between the firm-specific determinants and
Tobin’s Q of selected Islamic banks. Wald chi-square test is used to show
whether all the coefficients in the random-effect model are different than zero.
The estimated probability of Wald chi-square test is more than 0.05, hence the
random-effect model for Tobin’s Q as a whole is found to be statistically
insignificant at 5% level of significance. Therefore, this study also fails to reject
the fourth null hypothesis (H4o) and concludes that there is no significant entity
or cross-sectional effects on Tobin’s Q by selected Islamic banks.

7. Conclusion
The principal aim of this study is to compare accounting performance of
Islamic banks with their market performance and also to assess the effect of
firm-specific determinants and entity or cross-sectional effect on accounting and
market performance. This study selects all six listed Islamic banks of
Chittagong Stock Exchange and the data are collected for the period of 2009 to
2013. Current study reveals that, relative to all selected banks, Social Islamic
Bank Limited has superior accounting performance in terms of ROA, whereas
Islami Bank Bangladesh Limited reports better market performance with
Tobin’s Q. However, this research also reveals that banks exhibiting superior
accounting performance reportedly have inferior market performance. It is
reasonable to assume that banks that are able to meet their short-term goals of
meeting targeted profit, will eventually be creating wealth for its shareholders
by maximizing the market value equity. Despite being profitable and with other
fundamentals in place, if a bank’s intrinsic value of assets is not reflected on its
market value or stock price, this may be due to incorrect valuation of that bank
in the stock market. However, the reason behind all selected Islamic banks to be
undervalued in the stock market during the period of this study could also be the
consequence of investors’ lack of confidence on the stability of stock market.
Furthermore, this study reports that there exists significant entity or cross-

19
sectional effect on ROA; and operational efficiency and bank size are
significant explanatory variables of ROA of selected Islamic banks. This
implies size of banks assets and cost control is influential factors in shaping
profitability of Islamic banks. The negative association of ROA with
operational efficiency is justifiable because it indicates that banks are
inefficiently managing expenditures, thus leading to reduction in profitability.
The inverse relationship of bank size and ROA may imply that small banks are
failing to take benefits arising from economies of scale while growing their
business. However, this study fails to ascertain entity or cross-sectional effect
on Tobin’s Q and also reveals that firm-specific determinants have no
significant impact on Tobin’s Q of selected Islamic banks. Finally, on the basis
of selected banks, this study concludes that the accounting performance and
market performance may not necessarily generate comparable results. However,
there remains scope for future researches by including all listed commercial
banks of Bangladesh to substantiate the outcome of this current study.
The expected contribution of this study to the field of bank management is to
assist decision makers in efficient financial resource allocation for Islamic
banks and also to pay more attention to the relevant activities that exert
potential and strong impact on the both accounting and market performance.
This study would also be contributing to the academic field by providing a
comprehensive analysis of two methods for evaluating and comparing banking
performance and also to fill important gaps in literature mentioned earlier.
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