The use of "CAMELS" in detecting financial distress of Islamic banks in Malaysia

Abstract

The current study uses CAMEL (Capital Adequacy, Asset Quality, Management Quality, Earnings Efficiency, and Liquidity) ratings system, with the addition of Shari'ah Compliance Ratio (CAMELS) in order to detect the financial distress of Islamic banks in Malaysia. Using neural network, the study analyses data collected from the 17 Islamic banks' annual reports for the period 2006 to 2010. It was found that all Islamic banks have higher ETA ratios which portray a good performance of capital adequacy and are less likely to face financial distress. As for asset quality, all Islamic banks did not have the possibility to face financial distress as they are able to handle their non-performing loans throughout the years. Meanwhile for management quality, all Islamic banks show lower ratios in paying salaries to their employee. Earning efficiency for all Islamic banks show better performance and will be less likely to face financial distress in terms of return on assets but not for return of equity. Liquidity indicates that the Islamic banks have a large number of loans but they have sufficient liquid assets in order to cover their liabilities and commitments. Lastly for Shariah Compliance, Islamic banks have complied with all rules and regulations that have been regulated by Bank Negara Malaysia's Shari'ah Advisory Council. © by author(s); CC-BY.