Academic literature on the topic 'Banks and banking in Islamic countries'

Comparing to conventional bank, Islamic banking industry in Indonesia relatively still in the early development stage. Islamic bank is different with conventional bank, and therefore there is a special regulation for Islamic bank. Research conducted in 22 countries (including Indonesia), shows that Islamic banking and has differences with conventional banking in term of business orientation, efficiency, asset kuality and stability. But other research 13 countries (not including Indonesia), show that Islamic banking’s performance is lower than conventional banking (Ariss, 2010). Islamic banking in Indonesia has a unique characteristic. Most of Islamic banking in Indonesia is converted from conventional bank, owned by conventional bank or originated from a conventional bank. Some resource of Islamic bank comes from conventional banking even some of them still using resource from their conventional bank as their parent. This result raises a question, whether in the context of Islamic banking in Indonesia, its performance is significantly different from conventional banks. To answer the research questions above, we do a t-test on ROA and ROE Islamic banks and conventional banks from 2009-2014. The results showed that there was no significant difference between the financial performances of Islamic banks with conventional banks, except for 2014. In 2014 Islamic bank’s ROE is lower than conventional banks. This research opens the opportunity to study the factors that could cause a difference in the performance of Islamic banks vs conventional banks.

Islamic banks has development in many aspects in practical performance of banks function, this was a limited activity in service Banks and commercial processes. Later, it came to They possess financial power and ability to create Islamic loans. They possess financial power and ability to create Islamic loans. Economical union supported by banks is not restricted to a domestic sphere, but has expanded internationally as its operations enjoy fidelity and fulfillment between banking organizations in different countries. As banking systems Islamic banks had developed, they are no longer restricted to role of being financial and service organizations, but have become money market within public sector. Furthermore, they follow up monetary flows and banking securities, by playing positive role of providing the organized money market with enough information about commercial activities. In addition, as a financial mediator who has adequate statistics about other economical units, besides its main role in creating successful development plans and riskless investment.

The development of Islamic banking has been examined. Many researchers have been dedicated to researching how this growth generates microeconomic consequences on financial institution efficiency. This paper embodies a comprehensive analysis of Basel II standard implementation impacts gap in hazards between Islamic and conventional banks in Asia countries (Indonesia, Malaysia, Singapore, Thailand, and Philippines, Brunei Darussalam). Basel II requirements make contributions to expand the distance in hazard between conventional banks and Islamic Banks at the rate of the latter. Four arguments may be supplied to provide an explanation for why Basel II requirements can contribute to making Islamic banks exceptionally riskier than conventional banks. the connection between Islamic banking and hazard is conditional on the regulatory framework. A mapping descriptive examination analyzing the international locations of every form of bank and the 12 months of implementation of Basel II regulation. This method was utilized in the Basel II implementation in a few of the Asia nations of our pattern for the duration of the length of examination from 2015 to 2020. The treatment group consists of banks in nations with an implementation of Basel II for the precise year with a substantial 10%; those findings also are located whilst one by one thinking about small banks and massive banks, therefore, assisting the view that the connection between Islamic Banking And Hazard is conditional to the regulatory framework.

After the last banking crisis in the Western world, which provoked an economic recession in many countries, the attention to Islamic banking has increased. Islamic banking took a more important place in global banking, since the economic and financial crisis there was of smaller scope than in the banks of Western countries. The principles of Islamic banking are based on Shariah requirements, which emerged from the Koran. The most important fact is that Islamic banks cannot seek profit, which does not require any risk or efforts. They do not use any financial instruments, which are not covered by assets (derivatives). On the other hand, Islamic banks, while granting loans, assume all or a part of risk, if in the case of implementation of project some losses appear. They responsibly appreciate the possibility of granting the loans, the main goal of which is to finance projects and promote business development; they share the risk with the clients and value mutual cooperation. The goal of the article is to investigate the peculiarities of Islamic banking. The article investigates the formation of Islamic banking’s main characteristics and principles, its accounting peculiarities and the instruments that are applied. Research methods include the analysis of collected information, comparison, critical assessment and induction.

This paper attempts to estimate the determinants of crises on Islamic banking system during financial crises using early warning system (EWS) with particular focus on the element of profit–loss sharing. Profit–loss sharing has significant impact in reducing crisis probability experienced by the Islamic banking system. This suggests that profit–loss sharing may be considered as one of the risk mitigation techniques for bank to remain resilient during the crises. The results further show that full-fledged Islamic banks have higher chances of experiencing crises relative to the Islamic subsidiaries banks. In addition, economic freedom and overvaluation in the currency are more likely exposed to banks to the crises.

Purpose This paper aims to compare Islamic and commercial banks in the region of Middle East and North Africa (MENA) in terms of profitability and stability. Design/methodology/approach The study combines both the descriptive and analytical approaches. It considers panel data sets and adopts panel data econometric techniques. Findings The determinants of banks profitability and stability are different according to bank’s type. The results show that Islamic banks are more profitable than commercial banks, while on the other hand, commercial banks are more stable than Islamic banks. It is also concluded that banks profitability and stability are determined through some bank’s characteristics variables and macroeconomic variables in addition to the financial crises. MENA commercial and Islamic banking was affected by the financial crises in terms of profitability and stability. Additionally, larger banks are more stable than smaller banks, and off-balance sheet activities increase banks’ vulnerability for both commercial and Islamic MENA banks. Research limitations/implications The most prominent limitation is the lack of data, as we had to exclude some variables because of missing observations. As a result, the authors could not use data envelopment approach and stochastic frontier approach to evaluate banks efficiency in MENA countries rather than the financial ratios. Practical implications Commercial banks need to enhance their capitalization to improve their profitability. Additionally, Islamic banks need to improve the risk assessment and adopt some of the available risk management tools. Moreover, the banking system should take advantage of relatively higher Islamic banks profitability and use the unexploited profit opportunities through spreading into those countries with limited availability, such as the North African countries. Originality/value This study address both banks profitability and stability in an emerging region that includes banks of different types (Islamic and commercial) which are located in different counties that allows accounting for operational and institutional differences.

The measurement of bank profitability has an essential role in the banking sector’s success and is an indicator for predicting financial distress. This study aims to look at the determinants of the profitability of Islamic banks by including the bank’s internal and macroeconomic variables. The study focuses on Islamic banking in 10 countries with the most prominent Islamic finance sector during the 4th quarterly data period from 2016 to the 4th quarter of 2021. The data analysis method in this study uses panel data fixed effect model analysis. The results showed that the bank’s internal variables, namely bank size, capital adequacy, liquidity, and banking stability, are important factors that affect profitability. Interesting findings show that increased financial inclusion variables and labor productivity can encourage high profitability growth. Meanwhile, GDP and inflation also affect banking performance from the macro sector. The study implies that Islamic bank needs to manage the internal financial condition properly to achieve and maintain the performance. In addition, to increase the performance the bank needs to heighten the human resources capacity while the financial authorities are required to issue the policies to support the development of Islamic banks.

Indonesia is among the few countries that adopts dual banking system where Islamic banks run in parallel and compete with conventional banks. Although under such a system banking competition would be expected to be high, data tend to show the opposite case, as three Islamics banks acquired 65 percent of market share in Indonesia. This study, therefore, attempts to determine the degree of banking competition in Indonesia by employing the Panzar-Rosse Model for 2003-2008 period. The study also analyses the competitive behaviors of Islamic banks and compares it with those of its conventional counterparts. The estimated model suggests that monopolistic competition exists in the overall banking industry—the degree is even slightly higher for Islamic banking, where the market is characterized by aggressive competition for funding, quality human resources, and financing. Such competition occurs due to, among others, small market size, low consumer base, lack of product variations, and lack of competent human resources. These should be a major concern for all Islamics banking stakeholders for developing a better Islamic banking industry, particularly in Indonesia.

Purpose The purpose of this paper is to find out the importance of the tag “Islamic” in the title of banks. This will help to determine the future strategy of Islamic banks, while expanding to the countries where Islamic banking is seen as a religious banking and not an as an alternative approach to the conventional banking. Design/methodology/approach Adopting convenience sampling, a total of 596 customers of both Islamic and conventional banks were surveyed from four regions of Saudi Arabia (Makkah, Madinah, Riyadh and Dammam) using a self-structured questionnaire on a five-point Likert scale. Findings The results concede that Islamic banks without the tag “Islamic” and conventional banks have same customer satisfaction. There are some factors other than the tag “Islamic” which are driving customers towards Islamic banking. Those factors include physical aspects of the bank, level of satisfaction with the services, dealing and attendance by the staff and safety and security of the bank. Besides, the application of fundamental principles of Islamic banking works as a key motivation for customer satisfaction with Islamic banking. Practical implications Applying the tag “Islamic” is not as important as implementing the principles of Islamic banking. Islamic banks can survive and compete well even without using the “Islamic” tag if they implement the prime principles of Islamic banking and work on improving the factors highlighted by this study. This study can prove to be helpful in the expansion of Islamic banking in the countries where religious banking is not generally preferred by customers. Originality/value This is the first study to find out the customer satisfaction in a dual banking system (comprising of conventional banks and Islamic banks that do not use the tag “Islamic”), thereby filling the existing gap in the Islamic banking literature.

The broad aim of this paper is to make an analogy between conventional banks and Islamic banking in micro-credit and the incentives they may provide for entrepreneurs and small and medium enterprises (SMEs) in a Mauritian perspective? Indeed, in Mauritius traditional or conventional banks are more and more reluctant to give loans to entrepreneurs who are considered as high risk investors (their fragile entrepreneurs may collapse unexpectedly) despite they create jobs and employment. In contrast, in most Islamic countries Islamic banks allow businessmen and investors among others to have loans without interest (or riba) according to sha’ria compliants and tailor made Islamic contracts (mudabara and musarakha) to support their innovations and proposals. Despite Islamic banking is at its burgeoning state it has expanded considerably in most Islamic and Arab countries. Would Islamic banks uproot conventional banks irrespective it is in Islamic countries or Western countries? This paper therefore adds to an already abundant literature on the subject-matter but it enlightens a central issue: would Islamic banking, sha’ria law and Islamic economies be the golden age for entrepreneurs and SMEs in Mauritius and worldwide?

This research has three main purposes. First, it discusses the differences between the conventional and the Islamic perspectives of accounting in terms of the accounting definition, objectives, principles, rules, measurements and disclosure requirements. Second, it discusses and formulates the accounting measurements and the disclosure requirements, which should be applied in Islamic banks for Murabahah and Mudarabah operations.Third, to provide insight into the current practice of these measures and requirements, the study reports the results of a survey which aims at identifying the gap between the suggested measures and requirements and the current practice of the Dubai Islamic Bank and the Jordan Islamic Bank. The analysis reveals that there are differences between the conventional and the Islamic perspectives of accounting. It also indicates the need for specific accounting measures for Murabahah and Mudarabah operations as well as the need to disclose more information about these operations and their accounting measurement methods in an Islamic bank's annual reports as well as in other disclosures.Finally, the direction for future research on Islamic banks operations and their accounting measurement problems are presented
Doctor of Philosophy (PhD)

This research has three main purposes. First, it discusses the differences between the conventional and the Islamic perspectives of accounting in terms of the accounting definition, objectives, principles, rules, measurements and disclosure requirements. Second, it discusses and formulates the accounting measurements and the disclosure requirements, which should be applied in Islamic banks for Murabahah and Mudarabah operations.Third, to provide insight into the current practice of these measures and requirements, the study reports the results of a survey which aims at identifying the gap between the suggested measures and requirements and the current practice of the Dubai Islamic Bank and the Jordan Islamic Bank. The analysis reveals that there are differences between the conventional and the Islamic perspectives of accounting. It also indicates the need for specific accounting measures for Murabahah and Mudarabah operations as well as the need to disclose more information about these operations and their accounting measurement methods in an Islamic bank's annual reports as well as in other disclosures.Finally, the direction for future research on Islamic banks operations and their accounting measurement problems are presented

Islamic banking emerged rapidly to fulfil the financial needs of Muslim consumers, by using different viable modes of Islamic financing. These tools of financing were designed to avoid risk-free return, unjustified increase of money on money (ribii.) and uncertainty (gharar). To offer Islamic finance products and services, the number of full-fledged Islamic bank branches has increased since 1985. The industry then further expanded with the entrance of local and international conventional banks, which advertised their Islamic banking products heavily. At the present time of heightened competition, it has become more difficult for Islamic banks to differentiate themselves in terms of providing products and services. By understanding customers' attitudes, it might be possible to differentiate their banking products and services. Therefore this research investigated the level of satisfaction and overall attitudes of respondents, both Islamic and conventional bank users, of different nationalities and aged between 30-40, living in Pakistan, UK, UAE, Saudi Arabia and Malaysia. Through an online survey regarding Islamic banking objectives, products, services, staff, Shari 'ah board and marketing, 385 responses were collected and analysed using the techniques of means and percentages. SPSS and Excel were used to produce bar charts and tables. Another distinctive aspect of this research was that it analysed product advertisements of Islamic banks (full-fledged and local/international banks) on websites based in Pakistan, UK, UAE, Saudi Arabia and Malaysia, in order to understand the differences and similarities with regard to website structures, content information, colour, marketed web products and targeted audiences. By investigating these factors, this research provided practical suggestions to design effective webpages or promotional messages to educate and inform customers of the distinction between the Islamic banking products and services that have emerged as a result of increasing competition in this market. Based on both quantitative and qualitative methods, the result of this research suggested Islamic banks should focus on the components of Customer Relationship Management (CRM) to achieve strategic competitive advantages. The research findings-suggested that Islamic banks should gather sufficient customer related information from all banking channels and utilise it accurately to reconnect with customers by offering innovative products, re- establish lost connections with existing customers, build relationships with new customers, reconstruct a trustworthy image and revise marketing approaches. Most importantly, these banks should refocus on incorporating the Islamic elements of gharar- (uncertainty) and r ib d- (usury) free operational processes. This research strongly asserted that verbal authenticity by Islamic banks and a reliance on highly-camouflaged conventional banking products alone cannot build customer trust. To regain trust, and to acquire a greater market share in the competitive financial sector, Islamic banks' staff and Shari 'ah scholars need to imply sincere motivation, truthful intention, and dynamic, personalised and practical CRM approaches to uplift the Islamic financial brand and to fulfil its promises.

This dissertation assesses how Islamic finance fares as an example of 'civil compromise' in Islamic law. By focusing on the Islamic project finance sector, my research examines how the industry's main stakeholders (representing faith, capital, and power) cooperate and compete to bring about this compromise through the 'Game of Islamic Bank Bargains'. The Islamic finance industry is a work in progress, and while it has made some significant strides, it is still a niche in the global conventional financial order rather than an alternative to it. It has fallen short of fulfilling its originally-stated social justice aspirations, but has provided a previously unavailable form of banking and finance for Muslims to transact, at least formalistically, in accordance with widely-believed tenets of their faith. Thus, those who hold up Islamic finance as a universal panacea or dismiss it outright as a fraud have both got it wrong. It is neither. It is, rather, a complex myriad of incentives and aspirations of a multitude of stakeholders muddled together across numerous geographies and evolving incrementally and constantly. The state of the industry is the result of how the stakeholders (the shariah scholars, lawyers, bankers, government officials, and customers) have pursued their self-interest in the Game of Islamic Bank Bargains. My research examines who are the 'winners' and 'losers' of this game, and what religious, commercial, and political factors have influenced this outcome. I assess what may incentivise the incumbent 'winners' to guide the Islamic finance industry away from a formal and legalistic approach towards one that also incorporates principles from Islamic economics. I explore how the 'losers' - whose interests are not accounted for due to their lack of sufficient financial and political clout - can sway the outcome of the game in their favour.

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Coordenação de Aperfeiçoamento de Pessoal de Nível Superior - CAPES
The main purpose of this thesis was to analyze the dissemination of Corporate Social Responsibility (CSR) and to examine its determinants and consequences for the Islamic banks of the Gulf Cooperation Council (GCC). In the fulfillment of the research objectives, 40 Islamic banks from the countries that make up the GCC were analyzed during the period from 2013 to 2017, which involved 200 observations to each group. With regard to CSR, an index was constructed to measure the level of disclosure in Islamic banks and conventional banks, based on 11 dimensions recommended by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOFI) No. 7 published in 2010 (1985), Ismail (1986), and Dusuki (2008), were used in the literature on the dissemination of CSR. Statistical analysis included econometric regressions using the Ordinary Least Squares (OLS) method to examine the determinants and consequences of CSR disclosure in the sample selection of banks. The results indicated a level of disclosure of Islamic RSC of 41.05%, higher than the level of its conventional peers in the region that reached a mark of 30.65%. Using Corporate Governance (CG) mechanisms to measure the determinants of CSR disclosure, the survey found a positive and significant association between the disclosure of CSR and the size of the Board of Directors of the Islamic banks studied. Thus, evidence is provided that stronger corporate governance is associated with a higher level of CSR disclosure. Another result found was the significantly negative relationship of the CEO's Duality (CEOD) and the Audit Committee Size (ACS) with the disclosure of CSR. However, the results did not show a significant association between disclosure of CSR and other variables of corporate governance. To examine the economic consequences of CSR disclosure in Islamic and conventional banks, the study used two different proxies (Market to Book Value and Tobin's Q) to measure the value of the firm. The study found no significant relationship between the proxies analyzed. It is suggested that there is a strong need to improve the current CSR disclosure practice, especially in the Islamic banks of the GCC, imposing additional restrictions on the characteristics of the Board of Directors. The results corroborate the global debate on the need for corporate governance reform, providing insights into the role-played by corporate governance mechanisms in encouraging and enhancing CSR disclosure practices and opens up fertile ground for studies involving the influence of religious roots on practices
O objetivo desta tese foi analisar a divulgação da Responsabilidade Social Corporativa (RSC) e examinar seus determinantes e consequências entre os bancos islâmicos do Conselho de Cooperação do Golfo (CCG). No cumprimento dos objetivos da pesquisa, foram analisados 40 bancos islâmicos e 40 bancos convencionais dos países que compõem o CCG, durante o período de 2013 a 2017, o que envolveu 200 observações em cada grupo. No tocante à RSC, foi construído um índice para mensurar o nível de sua divulgação em bancos islâmicos e em bancos convencionais, com base em 11 dimensões recomendadas pela norma nº 7 do Accounting and Auditing Organization for Islamic Financial Institutions (AAOFI), publicada em 2010. Com relação aos determinantes da divulgação, foram construídas hipóteses, com base nas lacunas identificadas na literatura precedente, nas Teorias de divulgação existentes e nos Modelos Islâmicos de divulgação da RSC: Modelos de Chapra (1985), Ismail (1986) e Dusuki (2008). A análise estatística compreendeu regressões econométricas utilizando o método dos Mínimos Quadrados Ordinários (MQO), para examinar os determinantes e as consequências da divulgação de RSC na seleção amostral dos bancos. Os resultados indicaram um nível de divulgação da RSC Islâmica de 41,05%, maior do que o nível de seus pares convencionais da região que alcançaram um índice de 30,65%. Usando mecanismos de Governança Corporativa (GC), para mensurar os determinantes da divulgação de RSC, a pesquisa encontrou uma associação positiva e significativa entre a divulgação da RSC e o tamanho do Conselho de Administração (CA) dos bancos islâmicos estudados. Com isso, são fornecidas evidências de que uma Governança Corporativa mais forte está associada a um nível mais alto de divulgação de RSC. Outro resultado encontrado foi o relacionamento significativamente negativo da Dualidade do CEO (DCEO) e do Tamanho do Comitê de Auditoria (TCTA) com a divulgação da RSC. No entanto, os resultados não mostraram associação significativa entre divulgação da RSC e outras variáveis de governança corporativa. Para examinar as consequências econômicas da divulgação da RSC nos bancos islâmicos e convencionais, o estudo usou duas proxies diferentes (Market to Book Value e o Q de Tobin) para mensurar o valor da empresa. O estudo não encontrou nenhuma relação significativa entre as proxies analisadas. Sugere-se que há forte necessidade de melhorar a atual prática de divulgação da RSC, especialmente nos bancos islâmicos do CCG, impondo restrições adicionais às características do Conselho de Administração. Os resultados corroboram com o debate global sobre a necessidade de reforma da governança corporativa, fornecendo insights sobre o papel desempenhado pelos mecanismos de governança corporativa no incentivo e aprimoramento das práticas de divulgação da RSC e abre campo fértil para estudos envolvendo a influência das raízes religiosas nas práticas de RSC

Thesis (Master of Laws (Hons.)) -- University of Western Sydney, 2002.
"A thesis submitted in fulfillment of the requirement for the degree of Master of Laws (Honours)" Bibliography : leaves 215-221.

Cette thèse analyse les conséquences de l’intégration d’un milieu bancaire conventionnel pour une banque islamique. Elle est composée de trois chapitres. Un premier traité de la conformité Sharia des banques islamiques. Cette conformité est assurée par un comité de supervision éthique. Nous détaillons le rôle et les tâches de ce comité de supervision éthique et montrons comment les contraintes réglementaires internationales ainsi que la pénurie éventuelle de personnels compétents pour alimenter ces sharia boards incitent la banque islamique à externaliser ce contrôle de conformité Sharia. En se proposant sur modèle théorique inspiré de Kornai, Maskin and Roland (2003), ce premier chapitre examine ainsi l'impact de l'externalisation de ce comité sur le business model de la banque islamique. Le deuxième chapitre est essentiellement empirique : nous comparons l'efficacité des deux modèles de banque, l’un internalisant (l’autre externalisant) le processus d’examen/ validation de la conformité Sharia. Pour procéder à cette étude empirique, nous examinons un échantillon d'une centaine de banques qui se divise en deux groupes de banques un premier qui externalise le contrôle de conformité Sharia et le deuxième l'internalise. Nous montrons que les banques sont plus efficaces lorsqu'elles externalisent ce processus de conformité. Finalement, un troisième chapitre traite la question de la création de liquidité au sein des deux banques, conventionnelle et islamique. Dans ce chapitre nous développons un modèle théorique inspiré de Diamond (2007) et nous comparons la création de liquidité de ces deux banques. Nous mettons en évidences les contraintes qui pèsent sur la banque islamique, elles se manifestent dans la structure du bilan des banques islamiques, un bilan qui présente un volume important d'actifs tangibles. On montre que la structure de ce bilan limite la possibilité pour les banques islamiques de concurrencer les banques conventionnelles et ainsi remet en cause leur capacité à intégrer un milieu bancaire conventionnel
This dissertation analyses the consequences of the integration of an Islamic bank into a conventional banking environment. The dissertation is composed of three chapters. The first examines the Islamic banks' compliance, which is ensured by a supervisory ethical committee. We examine the role and the tasks of this committee in detail, showing how international regulatory constraints, as well as a general lack of individuals with the required skills to sit on the Sharia boards, provide incentives for the Islamic bank to outsource the monitoring of Sharia compliance. Basing our study on a theoretical model, inspired by Kornai, Maskin and Roland (2003), this first chapter analyses how the outsourcing of this committee has an impact on the business model of the Islamic bank. The second chapter is largely empirical; we compare the effectiveness of two bank models, one in which the Sharia compliance validation process is internal, and one in which it is external. To test this empirical study, we analyze a sample of around 100 banks which are divided into two groups, one which outsources the Sharia compliance and monitoring and one which internalizes this process. We show that banks are more effective when they outsource the compliance monitoring process. Finally, the third chapter approaches the question of liquidity creation within two types of bank: Islamic and conventional. In this chapter, we develop a theoretical model inspired by Diamond (2007) and we compare the liquidity creation process in these two banks. We demonstrate the constraints that burden the Islamic bank, shown by the high volume of tangible assets in their balance sheets. We demonstrate that the structure of this balance sheet limits the possibilities for Islamic banks to compete with conventional banks, and thus brings into question their capacity to integrate a conventional banking environment

Despite differences in the principles by which they operate between the participation (Islamic) and conventional banks, there is no huge difference between the products and the services provided by these banks. The distinctive features of the participation banks, compliance with the Islamic precepts, are not the only way for these banks to appeal to the customers. For this reason, customer satisfaction is an important element in the banking sector. The major goal of this study is to analyze the level of awareness and satisfaction among the customers of the participation banks. This study which uses the data compiled through the surveys held in Eskişehir with the participation of 500 Islamic bank customers reveals findings that suggest that most of the customers are satisfied with the products and services by the participation banks and that they have high level of awareness on the Islamic banking products.

Islamic banking is a banking system that is based on the principles of sharia or Islamic law. The principles of Islamic finance forbid interest - this is commonly known as riba - charity (zakat), forbid high risk (gharar), forbid some transactions like gambling, and are based on PLS (Profit-Loss Share). The most important concept is that both charging and receiving interest are strictly forbidden; money may not generate profits. Islamic banks have largely survived the global economic crisis intact and they offer a safer operation than conventional banks. CAMEL analysis is a supervisory rating system to classify a bank's overall condition according to Capital (C), Assets (A), Management (M), Earnings (E) and Liquidity (L). In the analysis a variety of indicators were calculated based on data from the annual reports. The results of the four banks were averaged separately, then classified (1 = good, 2 = adequate, 3 = satisfactory, 4 = acceptable, 5 = unacceptable) according to the desired criteria, the changes over the years and the relative values of the four banks.

1.1 Macroeconomic summary Economic recovery has consistently outperformed the technical staff’s expectations following a steep decline in activity in the second quarter of 2020. At the same time, total and core inflation rates have fallen and remain at low levels, suggesting that a significant element of the reactivation of Colombia’s economy has been related to recovery in potential GDP. This would support the technical staff’s diagnosis of weak aggregate demand and ample excess capacity. The most recently available data on 2020 growth suggests a contraction in economic activity of 6.8%, lower than estimates from January’s Monetary Policy Report (-7.2%). High-frequency indicators suggest that economic performance was significantly more dynamic than expected in January, despite mobility restrictions and quarantine measures. This has also come amid declines in total and core inflation, the latter of which was below January projections if controlling for certain relative price changes. This suggests that the unexpected strength of recent growth contains elements of demand, and that excess capacity, while significant, could be lower than previously estimated. Nevertheless, uncertainty over the measurement of excess capacity continues to be unusually high and marked both by variations in the way different economic sectors and spending components have been affected by the pandemic, and by uneven price behavior. The size of excess capacity, and in particular the evolution of the pandemic in forthcoming quarters, constitute substantial risks to the macroeconomic forecast presented in this report. Despite the unexpected strength of the recovery, the technical staff continues to project ample excess capacity that is expected to remain on the forecast horizon, alongside core inflation that will likely remain below the target. Domestic demand remains below 2019 levels amid unusually significant uncertainty over the size of excess capacity in the economy. High national unemployment (14.6% for February 2021) reflects a loose labor market, while observed total and core inflation continue to be below 2%. Inflationary pressures from the exchange rate are expected to continue to be low, with relatively little pass-through on inflation. This would be compatible with a negative output gap. Excess productive capacity and the expectation of core inflation below the 3% target on the forecast horizon provide a basis for an expansive monetary policy posture. The technical staff’s assessment of certain shocks and their expected effects on the economy, as well as the presence of several sources of uncertainty and related assumptions about their potential macroeconomic impacts, remain a feature of this report. The coronavirus pandemic, in particular, continues to affect the public health environment, and the reopening of Colombia’s economy remains incomplete. The technical staff’s assessment is that the COVID-19 shock has affected both aggregate demand and supply, but that the impact on demand has been deeper and more persistent. Given this persistence, the central forecast accounts for a gradual tightening of the output gap in the absence of new waves of contagion, and as vaccination campaigns progress. The central forecast continues to include an expected increase of total and core inflation rates in the second quarter of 2021, alongside the lapse of the temporary price relief measures put in place in 2020. Additional COVID-19 outbreaks (of uncertain duration and intensity) represent a significant risk factor that could affect these projections. Additionally, the forecast continues to include an upward trend in sovereign risk premiums, reflected by higher levels of public debt that in the wake of the pandemic are likely to persist on the forecast horizon, even in the context of a fiscal adjustment. At the same time, the projection accounts for the shortterm effects on private domestic demand from a fiscal adjustment along the lines of the one currently being proposed by the national government. This would be compatible with a gradual recovery of private domestic demand in 2022. The size and characteristics of the fiscal adjustment that is ultimately implemented, as well as the corresponding market response, represent another source of forecast uncertainty. Newly available information offers evidence of the potential for significant changes to the macroeconomic scenario, though without altering the general diagnosis described above. The most recent data on inflation, growth, fiscal policy, and international financial conditions suggests a more dynamic economy than previously expected. However, a third wave of the pandemic has delayed the re-opening of Colombia’s economy and brought with it a deceleration in economic activity. Detailed descriptions of these considerations and subsequent changes to the macroeconomic forecast are presented below. The expected annual decline in GDP (-0.3%) in the first quarter of 2021 appears to have been less pronounced than projected in January (-4.8%). Partial closures in January to address a second wave of COVID-19 appear to have had a less significant negative impact on the economy than previously estimated. This is reflected in figures related to mobility, energy demand, industry and retail sales, foreign trade, commercial transactions from selected banks, and the national statistics agency’s (DANE) economic tracking indicator (ISE). Output is now expected to have declined annually in the first quarter by 0.3%. Private consumption likely continued to recover, registering levels somewhat above those from the previous year, while public consumption likely increased significantly. While a recovery in investment in both housing and in other buildings and structures is expected, overall investment levels in this case likely continued to be low, and gross fixed capital formation is expected to continue to show significant annual declines. Imports likely recovered to again outpace exports, though both are expected to register significant annual declines. Economic activity that outpaced projections, an increase in oil prices and other export products, and an expected increase in public spending this year account for the upward revision to the 2021 growth forecast (from 4.6% with a range between 2% and 6% in January, to 6.0% with a range between 3% and 7% in April). As a result, the output gap is expected to be smaller and to tighten more rapidly than projected in the previous report, though it is still expected to remain in negative territory on the forecast horizon. Wide forecast intervals reflect the fact that the future evolution of the COVID-19 pandemic remains a significant source of uncertainty on these projections. The delay in the recovery of economic activity as a result of the resurgence of COVID-19 in the first quarter appears to have been less significant than projected in the January report. The central forecast scenario expects this improved performance to continue in 2021 alongside increased consumer and business confidence. Low real interest rates and an active credit supply would also support this dynamic, and the overall conditions would be expected to spur a recovery in consumption and investment. Increased growth in public spending and public works based on the national government’s spending plan (Plan Financiero del Gobierno) are other factors to consider. Additionally, an expected recovery in global demand and higher projected prices for oil and coffee would further contribute to improved external revenues and would favor investment, in particular in the oil sector. Given the above, the technical staff’s 2021 growth forecast has been revised upward from 4.6% in January (range from 2% to 6%) to 6.0% in April (range from 3% to 7%). These projections account for the potential for the third wave of COVID-19 to have a larger and more persistent effect on the economy than the previous wave, while also supposing that there will not be any additional significant waves of the pandemic and that mobility restrictions will be relaxed as a result. Economic growth in 2022 is expected to be 3%, with a range between 1% and 5%. This figure would be lower than projected in the January report (3.6% with a range between 2% and 6%), due to a higher base of comparison given the upward revision to expected GDP in 2021. This forecast also takes into account the likely effects on private demand of a fiscal adjustment of the size currently being proposed by the national government, and which would come into effect in 2022. Excess in productive capacity is now expected to be lower than estimated in January but continues to be significant and affected by high levels of uncertainty, as reflected in the wide forecast intervals. The possibility of new waves of the virus (of uncertain intensity and duration) represents a significant downward risk to projected GDP growth, and is signaled by the lower limits of the ranges provided in this report. Inflation (1.51%) and inflation excluding food and regulated items (0.94%) declined in March compared to December, continuing below the 3% target. The decline in inflation in this period was below projections, explained in large part by unanticipated increases in the costs of certain foods (3.92%) and regulated items (1.52%). An increase in international food and shipping prices, increased foreign demand for beef, and specific upward pressures on perishable food supplies appear to explain a lower-than-expected deceleration in the consumer price index (CPI) for foods. An unexpected increase in regulated items prices came amid unanticipated increases in international fuel prices, on some utilities rates, and for regulated education prices. The decline in annual inflation excluding food and regulated items between December and March was in line with projections from January, though this included downward pressure from a significant reduction in telecommunications rates due to the imminent entry of a new operator. When controlling for the effects of this relative price change, inflation excluding food and regulated items exceeds levels forecast in the previous report. Within this indicator of core inflation, the CPI for goods (1.05%) accelerated due to a reversion of the effects of the VAT-free day in November, which was largely accounted for in February, and possibly by the transmission of a recent depreciation of the peso on domestic prices for certain items (electric and household appliances). For their part, services prices decelerated and showed the lowest rate of annual growth (0.89%) among the large consumer baskets in the CPI. Within the services basket, the annual change in rental prices continued to decline, while those services that continue to experience the most significant restrictions on returning to normal operations (tourism, cinemas, nightlife, etc.) continued to register significant price declines. As previously mentioned, telephone rates also fell significantly due to increased competition in the market. Total inflation is expected to continue to be affected by ample excesses in productive capacity for the remainder of 2021 and 2022, though less so than projected in January. As a result, convergence to the inflation target is now expected to be somewhat faster than estimated in the previous report, assuming the absence of significant additional outbreaks of COVID-19. The technical staff’s year-end inflation projections for 2021 and 2022 have increased, suggesting figures around 3% due largely to variation in food and regulated items prices. The projection for inflation excluding food and regulated items also increased, but remains below 3%. Price relief measures on indirect taxes implemented in 2020 are expected to lapse in the second quarter of 2021, generating a one-off effect on prices and temporarily affecting inflation excluding food and regulated items. However, indexation to low levels of past inflation, weak demand, and ample excess productive capacity are expected to keep core inflation below the target, near 2.3% at the end of 2021 (previously 2.1%). The reversion in 2021 of the effects of some price relief measures on utility rates from 2020 should lead to an increase in the CPI for regulated items in the second half of this year. Annual price changes are now expected to be higher than estimated in the January report due to an increased expected path for fuel prices and unanticipated increases in regulated education prices. The projection for the CPI for foods has increased compared to the previous report, taking into account certain factors that were not anticipated in January (a less favorable agricultural cycle, increased pressure from international prices, and transport costs). Given the above, year-end annual inflation for 2021 and 2022 is now expected to be 3% and 2.8%, respectively, which would be above projections from January (2.3% and 2,7%). For its part, expected inflation based on analyst surveys suggests year-end inflation in 2021 and 2022 of 2.8% and 3.1%, respectively. There remains significant uncertainty surrounding the inflation forecasts included in this report due to several factors: 1) the evolution of the pandemic; 2) the difficulty in evaluating the size and persistence of excess productive capacity; 3) the timing and manner in which price relief measures will lapse; and 4) the future behavior of food prices. Projected 2021 growth in foreign demand (4.4% to 5.2%) and the supposed average oil price (USD 53 to USD 61 per Brent benchmark barrel) were both revised upward. An increase in long-term international interest rates has been reflected in a depreciation of the peso and could result in relatively tighter external financial conditions for emerging market economies, including Colombia. Average growth among Colombia’s trade partners was greater than expected in the fourth quarter of 2020. This, together with a sizable fiscal stimulus approved in the United States and the onset of a massive global vaccination campaign, largely explains the projected increase in foreign demand growth in 2021. The resilience of the goods market in the face of global crisis and an expected normalization in international trade are additional factors. These considerations and the expected continuation of a gradual reduction of mobility restrictions abroad suggest that Colombia’s trade partners could grow on average by 5.2% in 2021 and around 3.4% in 2022. The improved prospects for global economic growth have led to an increase in current and expected oil prices. Production interruptions due to a heavy winter, reduced inventories, and increased supply restrictions instituted by producing countries have also contributed to the increase. Meanwhile, market forecasts and recent Federal Reserve pronouncements suggest that the benchmark interest rate in the U.S. will remain stable for the next two years. Nevertheless, a significant increase in public spending in the country has fostered expectations for greater growth and inflation, as well as increased uncertainty over the moment in which a normalization of monetary policy might begin. This has been reflected in an increase in long-term interest rates. In this context, emerging market economies in the region, including Colombia, have registered increases in sovereign risk premiums and long-term domestic interest rates, and a depreciation of local currencies against the dollar. Recent outbreaks of COVID-19 in several of these economies; limits on vaccine supply and the slow pace of immunization campaigns in some countries; a significant increase in public debt; and tensions between the United States and China, among other factors, all add to a high level of uncertainty surrounding interest rate spreads, external financing conditions, and the future performance of risk premiums. The impact that this environment could have on the exchange rate and on domestic financing conditions represent risks to the macroeconomic and monetary policy forecasts. Domestic financial conditions continue to favor recovery in economic activity. The transmission of reductions to the policy interest rate on credit rates has been significant. The banking portfolio continues to recover amid circumstances that have affected both the supply and demand for loans, and in which some credit risks have materialized. Preferential and ordinary commercial interest rates have fallen to a similar degree as the benchmark interest rate. As is generally the case, this transmission has come at a slower pace for consumer credit rates, and has been further delayed in the case of mortgage rates. Commercial credit levels stabilized above pre-pandemic levels in March, following an increase resulting from significant liquidity requirements for businesses in the second quarter of 2020. The consumer credit portfolio continued to recover and has now surpassed February 2020 levels, though overall growth in the portfolio remains low. At the same time, portfolio projections and default indicators have increased, and credit establishment earnings have come down. Despite this, credit disbursements continue to recover and solvency indicators remain well above regulatory minimums. 1.2 Monetary policy decision In its meetings in March and April the BDBR left the benchmark interest rate unchanged at 1.75%.

Unprecedented challenges from the coronavirus disease (COVID-19) pandemic have emphasized the need for Asia and the Pacific countries to work together to build back resiliently and sustainably. This report reflects on lessons learned from efforts to tackle the pandemic through regional cooperation and integration. It provides insights on how region-wide solidarity can be enhanced with the support of multilateral development banks in areas such as trade and investment, connectivity infrastructure, people’s mobility, regional public goods, and policy cooperation. The report was jointly prepared by the Asian Development Bank, the Asian Infrastructure Investment Bank, the European Bank for Reconstruction and Development, the Islamic Development Bank, and the World Bank Group.