Impact of brand value on financial performance of Islamic

banks

Introduction:
Brand name is recognized as the most valuable asset for any industry, but for service industry it’s
a challenging task to create a brand value particularly for Islamic banking industry where all
financial activities are shariah compliant. Researches indicates that strong brand name directly
increase the profitability, market share and valuation of shares etc. (simmon, 2003) Hence, the
purpose of this study is to examine the impact of brand value on financial performance of Islamic
banks in Pakistan.

If we particularly talk about Pakistan where majority of people practice Islam as a religion and
they want Riba free dealings in their business and their financial matters then perception of
people really matters which help Islamic banks to grow (Zafar M. A., 2016). The backbone of
success for Islamic banks is awareness of halal business dealings in financial matters addressed
by Islamic scholar and Pakistan is very resourceful state in this regard, Pakistan has scholars like
Sheikh Muhammad Taqi Usmani, Sheikh Abdul Sattar Abu Guddah, and Sheikh Yousaf Talal.
These scholars play a significant role in growth and development of Islamic banks and help to
create strong brand in customers mind. (sbp.gov.pk, n.d.)

Brand is core capability of any industry to achieve high growth and returns, because brand is
something that customers are willing to pay extra for. This is the only intangible asset of firm
that directly link to the market from where company’s revenue is generated that influence the
wealth of shareholders (Sinclair, 2009). So, to remain competitive with commercial bank,
Islamic banks require special attention to create brand value to sustain in market. The main
component of brand is trust, people become loyal who they trust, and industry like banking
where involvement of money, investments, risk involve the customers all need is trust, and for
making strong brand the trust is at high priority and that trust can achieve through fulfilling
promise of delivering what customers want. If company is unable to deliver what they promise
the customers and taking for granted and showing irresponsible behavior toward it then people
stop voting for them, people take their money from company’s wallet. In Islamic teachings, the
highest moral trait is trust in business. Islam is the religion of truthfulness and honesty, it is
obligatory on every Muslim to be ethical, honest and speak truth in business.The ideology of
trust in Islamic baking is of equality, distribution of wealth, avoid exploitation, equal sharing of
profit loss, making moral values among people in business matters (Sauer, 2002).

In late 20th century the idea of creation of shareholders wealth arises, before those tangible assets
like land, building, workforce and financial assets like bond, receivables etc. are regarded as the
most valuable and high profit generating assets of the firm as they were shown in financial
statements of company they were ignoring the importance of intangible assets. The brand value
concept arises in 1980’s when companies go for acquisition for high value of goodwill in the
market. The importance of intangible assets arises from the gap of book value of firm and stock
market valuation of firm and the unacceptable high premium were paid in merger and
acquisition. The US Federal Reserve Board study also shows that there was dramatic increase in
importance of intangible assets by large corporate companies. Brand is for few at that contribute
long-term competitive advantage for the firm.

Islamic banks are financial institutions whose practices are aligned with principles of Islamic
shariah and interest is prohibited as paying or receiving in any of their dealings. As Islam clearly
prohibited interest in Holy Quran as:

"Trading is only like Ribā (usury), whereas Allah has permitted trading and forbidden Ribā
(usury)". Quran Chapter Al-Baqra (2), Verse No. (275).

Islamic banking is based on Islamic laws, the main aim behind this idea is to increase the wealth
of people with surplus amount of money and helps those with deficient amount of money
without involving of interest, and the Islamic banks achieve this aim through equity-based
financing. In Islamic banking, the risk is bear equally by all investors; the burden of risk cannot
be bear by single individual, Islamic banking believe in win-win situation for all investors.
People have different perception about Islamic banking, the lack of education and awareness of
Islamic banking leads to misconception about Islamic banking which is the biggest challenge for
Islamic banks today. Majority of people are unable to identify the difference between Islamic
and commercial banks, 68.7% people think there is no major difference in both, (Sohail, 2014).
Problem Statement:

Different studies were done to analyze the impact of brand value on the financial performance
for banking industry particularly with reference to Islamic banks which is an evolving concept in
Pakistan so this topic needs to be studied in depth that how the word “Islamic” associated with
the banks influences the financial performance of banks, hence the prime focus of this paper
would be to study the impact of brand value on financial performance of Islamic banks in
Pakistan

Research Questions:

 What is the impact of brand value on financial performance of Islamic banks in

Pakistan?
 What is impact of brand value on ROE?
 What is impact of brand value on ROA?

Research Objective:

 To study the impact of brand value on financial performance of Islamic banks in Pakistan
 To study the impact of brand value on ROE
 To study the impact of brand value on ROA.

Significance of Study

The significance of this study is the theoretical contribution that fills the gap of literature which
is to study of Islamic banks perception as a brand in customers mind and their direct impact on
banks financial performance, for practical contribution it also gives an idea to Islamic banks
how to strong their brand value for competitive edge. This study also helps the Islamic banks of
Pakistan to better understand their customers.The scope of this purposed study is examining the
brand value association with financial performance of Islamic banks. Previous studies were done
on commercial banks ( (Sangeeta Arora N. C., 2016), but this study primarily focuses on shariah
compliant financial services provided by Islamic banks and the image of Islamic banks as a
brand in customers thought which directly influence the financial performance. Islamic banking
is recently started in Pakistan, Pakistan as an Islamic state promotes this Islamic financial
activity from 2001 and now there are five full fledge licensed Islamic banks in Pakistan and 17
conventional banks have licensed to operate as Islamic banking branch. (sbp.gov.pk, n.d.)

Literature review:

In such competitive market, it is very important for Islamic bank to develop a brand through
creating awareness about their product and services they are offering, communicate the
difference between shariah compliant and non-shariah compliant product. To remain competitive
in a market service quality should be assured like guidance by staff to customer, timely
transactions, use of innovative technology, risk management techniques etc. people were unable
to understand the products of Islamic banks like Murabah, musharkah, Ijarah, Istisna, Salam and
Takaful and their difference from rest of the conventional products, this is the challenging task
for Islamic banks, if they will able to communicate their products and services to the customers
then there will be boost in their growth and profitability .vast network of conventional banks
threatens the growth of Islamic banks, Islamic banks should increase their network in urban areas
as well as rural areas of Pakistan (Zafar L. s., 2016)

Lack of Knowledge becomes hurdle in success or growth of Islamic banks. Young customers
don’t have awareness about Islamic banks product. Young customers select the brands that they
know the most, factor of convenience (like ATM, bank lactation, parking facility etc.) play
crucial role in selection of brand by young customers specially students. Due to this Islamic bank
face competition from conventional banks as well as other Islamic banks. (Khaliq Ahmad, 2011)
For any brand, strategic position and segmentation is core of marketing. For any brand, loyalty
with brand is important. Islamic financial institutions enhance their brand through religiosity
aura they build emotional connection with their customers through religion which ultimately
strengthen the loyalty with brand. Islamic banks should pay attention to create strong brand in
order to differentiate conventional banking from Islamic banking. There is direct relationship of
brand aura with loyalty of customers (sri Wahyuni, 2015)

Corporate Social Responsibility, God-Conciseness association, Shariah compliant association,

these are three attributes of halal branding for Islamic financial institutions. The senior policy
makers should have aligned their branding strategy with halal branding attributes for Islamic
banks. Islamic banking should offer product and services that are ethical, transparent, socially
responsible. (Ahmad, 2016)

The literature of branding shows that brand experience has positive relation with customer based
brand equity, which indicates that while creating brand value we can ignore these factors to
create positive image of Islamic financial institutions in customers perception the brand
experience should be improved to make loyal customers. (Mohsin Altaf, 2017)

Past researches show that Impact of brand value on financial performance of commercial banks
is positive in nature. Financial performance is measured by ROE, ROA, EPS and stock prices.
All these variables positively relate with brand perception, brand image and brand value of
commercial banks. Banks’ age is also positive relate with financial performance of commercial
banks, it shows credibility of banks and assume that with the passage of time banks trying to
improve their performance and reputation in market. Investment in creating brand value is fruit-
full for commercial banks of India. The limitation of this research is that they don’t focus on
brand value of Islamic financial institution and impact on their financial performance.
 Conceptual frame work:

HYPOTHESIS:
H1= There is a positive relation between the brand value and return on assets (ROA)

H2= There is a positive relation between the brand value and return on equity (ROE)
Methodology:
The variables examined in this study are derived from State bank of Pakistan official website.

The Time period for the study is 8 years from 2008 to 2016. Five Islamic banks are selected for

the study. These banks are Meezan Bank, Albaraka Bank, Bank Islami Pakistan limited, MCB

Islamic Banking and Askari Bank limited. All the accounting information is consolidated on 31

March of each year. Majority of researchers have analyzed the financial performance by using

Return On Assets, Return On Equity , ( (Simon & Sullivan, 1993); (Barth et al, 1998);

(Jacobson, 2001), ; (Wright, 2004),; (Chu & Keh, 2006); (Vijin, 2006),; (Eng & Keh, 2007);

(Angulo, 2008); (Mirik & Jacobson, 2008); (Ohnemus, 2008); (Mizik, 2009), ; (al K. e., 2009);

(Ohnemus, 2010); (Ohnemus, 2011),, 2011; Kirk et al., 2012; Hsu et al, 2013; Tsai & Chang,

2012 (Nordeen, 2013); (Gherghina et al, 2013). Therefore, these measures have incorporated as a

proxy of Financial Performance in the study. The data for ROA and ROE is retrieved from

financial reports of the selected banks. For calculating the brand value all the financial data are

from year 2006 to 2016. Most of the information is collected from annual reports of these 5

banks. Brand index is an important variable for estimating brand value. The spearman’s rank

correlation value between brand index and brand value is 0.69, which means there is a strong

positive correlation between these two variables. Banks which have higher total revenue have

higher brand index.

Formulas:
ROA is measured by using formula:

ROA = Net Income

Total Asset
ROE is measured by using Formula
ROE= Net Income
Shareholder’s Equity

Economic Value-Added Method:

We use economic added value to calculate the brand value of bank, the formula to derive its
value is given below:

Brand Value = (Profit per the Income Statement - Capital Charge) x “Branding Index” x Implied
Multiplier.

Model Formulation

1st MODEL ROA = α+β1 BV +β2 AGE + β3 BANK SIZE + β4 OWNERSHIP + E

2nd MODEL ROE= α+β1BV +β2 AGE + β3BANK SIZE + β4 OWNERSHIP + E

Where

α= α is Constant or Intercept

β= β is the coefficient of each variable.

ROA= Return on Assets

ROE= Return on Equity

BV = Brand value

AGE = Age of the Bank

BANK SIZE = Size of the bank

OWNERSHIP = ownership (public or private) of the bank

E = representing the Error term