3.1 Introduction to research methodology: Types and forms of research philosophy. The different methods for designing the research that we can use for the purpose of evaluating any topic. Illustration of methods used for data collection in terms of their content and other features. The quality of the research is an important element, thus it will be mentioned, including a discussion regarding analysis instruments, finishing with an indication of the research's limitations.
3.2 Research philosophy: Research philosophy is considered to be an important element for many researchers; this philosophy relies on the methods that can be applied to create knowledge by the researcher. However, there are two types of the methods to perceive the philosophy used in research: ontology and epistemology. Each method has a different effect on the research function (Johnson and Duberley, 2000)
3.2.1 Epistemology: Epistemology is the part of the philosophy that agrees with questions, which can be useful to make the knowledge acceptable in a particular field. The main interest in epistemology is the possibility of following a specific set of procedures and rules of natural science when interested in dealing with the social world. There are three positions of epistemology and natural sciences that can be present to deal with the knowledge: positivism, interpretivism and realism (Johnson and Duberley, 2000).
22.214.171.124 Positivism: According to Creswell (2003), positivism is one of the most important parts to researchers and it includes the introduction of the most valuable theories in relation to the research subject. Furthermore, the researcher will determine the methods that will be used to collect the data, which will be useful to enforce the theories.
126.96.36.199 Interpretivism: According to Saunders, Lewis and Thornhill, 2007, interpretivism is considered a useful method to help the researcher understand the perceptions and behaviour of human beings.
188.8.131.52 Realism: Realism is considered an epistemological stance related to scientific investigation; it looks like positivism in its assumption that the scientific way is best for improving knowledge to use the social sciences of the similar type of data gathering and interpretation (Saunders, Lewis and Thornhill, 2007). The importance of realism is that the presence of objects in reality is independent from human thinking. The two main types of the realism are: Critical realism. Experimental realism.
3.2.2 Ontology: Ontology is a part of philosophy that deals with all topics regarding the domain of the nature of social structures. The important interest is to decide if social constructs are objective, or result from perspectives and works of people (constructivism) (Gill and John, 2010)
3.3 Research approaches Two research methods are available and both were used to understand this research, these are the deductive and inductive methods (Bryman and Bell, 2003). The deductive method is used to illustrate how the research is in relation to theory; this is done by the researcher who deduces assumptions on the basis of what he knows in a specific domain, and the theoretical interest in relation to that domain, then these assumptions go through empirical investigation. The assumptions consist of perceptions that need interpretation based on research structures. To build social structures, social scientists have to decide the way to gather data in relation to the perspectives that formulate the assumptions. The other way of understanding is inductive, which states that the theory is the output of the research. This means the presence of observations regarding specific phenomena; from observations the researcher is able to make his conclusions. The deduction method implements some of the induction components and the researcher should collect the necessary data to conduct the theoretical reaction; it is likely that he will need more data to generate the case in which the theory may or may not hold (Bryman and Bell, 2003). In order to introduce research that includes useful information, it must answer questions and meet objectives, and there must be an explanation about how these objectives were established or descriptive answers; the researcher may have more than one objective at the same time (Saunders, Lewis and Thornhill, 2007).
3.4 Research strategies: Qualitative and quantitative strategies are considered to be the main two categories of strategy, which could use in the business research. Researchers attempt to use these strategies to decide the relevant technique to use in the procedure of data collection and analysis. A quantitative strategy is one that uses numerical data, like those obtained from the questionnaire technique, or from graphs, while the qualitative strategy uses non-numerical data, like those from interviews, pictures and video clips. According to the objectives of this study, the researcher is going to use the qualitative strategy (Thomas, 2004).
3.5 Different research designs: Research design illustrates the structure for data collection and analysis (Bryman and Bell, 2003); there are five types of research design considered to be useful in many types of research, as follows:
3.5.1 Cross-sectional design: Cross-sectional design is often regarded as a social survey. It collects data on several cases, because the researcher may face variation in many variables, and he needs a greater number of participants in his sample (Burns and Robert B, 2008)
3.5.2 Comparative design: Comparative design is applied to two or more cases in order to accomplish better understanding, because of the comparative nature of the research. This type of strategy can use the collection of qualitative or quantitative data (Bryman and Bell, 2003).
3.5.3 Experimental design: This type of strategy is commonly used when the research aims to evaluate social subjects. This strategy depends on both dependent and independent variables (Burns and Robert B, 2008). However, to apply this strategy, there are facts that should be taken in consideration, such as: The relevant theory should be used. Explaining any sample related with the theory. Explaining any modifications or changes in evaluating the plan and the variables.
3.5.4 Case study design: This type of strategy is related to the place, location, country, organization, people or firm the research is concerned with. It is characterized by extensive investigations regarding the nature of the study's question. However, the result of case studies is often more about understanding the research environment (Bougie, 2010). This strategy is the most relevant strategy to this type of research, because this type of research will answer the designed questions, and it will meet the research's objectives. A case study will be applied to the banks; it will start by explaining the Islamic banks' philosophy and showing the main differentiation between the conventional and the Islamic banking systems. In addition, there will be a comparison between the Islamic and the commercial banks by determine the financial performance in conventional and the Islamic banking systems over the period of study using statistical and financial methods. Furthermore, this research will conduct a comparison between the two systems of banks during the recent global financial crisis and between the methods they used to encounter or to avoid the impact of the crisis. This comparison will be about reducing the risk that in relation with the financial crisis to determine and apply the most effective system during the period of the study.
3.5.5 Longitudinal design: Researchers apply this type of research design to monitor any possible change in the research's subject over time; it is used to lengthen the survey research period (Bougie, 2010).
3.6 Research's quality: The quality of the research comprises four basic features: Validity. Reliability. Generalization. Transparency.
3.6.1 Research's validity: According to Hair (2007), a research's validity depends on the following factors: Instrumentation. History. Testing. Ambiguity relating to the direction of the study. Maturation. Morality. According to this type of research, the first four factors are not related to this study, and maturation has little impact on the research; accordingly, this study uses secondary data that comes from different resources.
3.6.2 Research's reliability: The research reliability indicates an assurance of the results through testing the results that emerge from the analysis (Quinton and Smallbone, 2006). Therefore, there are four threats that might occur to the reliability, they are: Bias from the participants. Participants' bias. Observer bias. Observer error. Accordingly, these research only observer error and observer biases are relevant to the study because there are no interviews in this research.
3.6.3 Generalization: In quantitative research, the researcher understands that his results may only be usable for that particular research environment and scope. They could be used as a basis and could even be applied in different research. Accordingly, the researcher works to generate a sample that will represent a greater population in order to generalize the results (Quinton and Smallbone, 2006).
3.6.4 Transparent: The results of the data analysis and the conclusion of this research will illustrate to the reader how the work has been conducted, as well as the relation between data analysis and the conclusion.
3.9 Data collection methods: The researcher is going to use secondary data In order to answer the research questions and cover the main objectives of this research. The secondary data may include articles, books, annual reports, newspapers, published journal and raw data. However, the research aims to analyse and evaluate the financial performance and the financial stability of the top ten commercial and the top ten Islamic banks. Consequently, the researcher will use the financial information of these banks, and this financial information was issued in the form of financial statements in the annual reports of the banks; accordingly the researcher will use the secondary data from the websites of these banks to obtain the financial statements. The other reasons for selecting only secondary data are that the researcher does not have access to any bank, the sample banks are in different countries in the world and there is limited time to conduct the research.
3.9.1 Secondary data: It is possible to collect both qualitative and quantitative secondary data, which can be employed in an explanatory way in descriptive research. There are three subgroups of secondary data: documentary, survey-based and data obtained from many sources (Saunders, Lewis and Thornhill, 2007).
3.9.2The secondary data for this research: The focus on secondary data collection for the Islamic and commercial banks was the annual reports of the banks, recent articles and journals through the following. The annual reports were issued by the banks, and the financial reports from websites such as the Financial Times, BBS and Congressional. The literature review includes the journals that are related to 'the Islamic and commercial banks' from Science Direct, EBSCO, Journal of Banking and Finance, Journal of Islamic Economics and Finance, Journal of Finance, Journal of Islamic Economics, Banking and Finance, and Electronic Journal of Social Sciences. The literature review includes the most recent published journals and articles that are related to 'the financial crisis' from Science Direct, EBSCO, Journal of Risk Management in Financial Institutions, Journal of Financial & Quantitative Analysis, International Journal of Monetary Economics and Finance, and International Journal of Political Economy.
3.10 The method applied in the analysis: The researcher will evaluate the financial performance and stability of the top ten commercial banks and the top ten Islamic banks by using the financial ratio analysis, horizontal analysis and Statistical Package for Social Sciences (SPSS). There are several financial ratios that could be used to determine the financial performance and stability of the banks in order to obtain obvious views about the financial position of these banks. However, since this study is dealing with the analysis of twenty banks in eleven different countries, and as a result of the difference in the countries, also different laws and financial legislation, there appears significant differences in the nature of the financial statements issued; this led the researcher to restrict the selection of the financial ratios to those that are compatible with the financial statements of these twenty banks. Therefore, the researcher will select the financial ratios that they share with each other by using the main items in the balance sheets and income statements; in the other words, the commercial and Islamic banks share the following in their financial statements: Total assets. Total liabilities. Total equity. Total revenue. Net profits. Earnings per share. Accordingly, the researcher adopted these fundamental items in the financial statements in order to determine the best financial ratios to achieve the objectives of this study; therefore the researcher will use the following six financial ratios: Net profit margin (NPM). Return on equity (ROE). Return on assets (ROA). Assets turnover ratio. Gearing ratio. Earnings per share.
3.10.1 Financial ratios analysis The ratio is a simple expression of a number relative to another number; in order for the ratios to be considered as meaningful indexes, there should be a clear and specific relation between the two numbers used in calculating each ratio. More often there is a need calls to search and test the nature of the information, or the basic numbers used in calculating the ratio, in order to explain and understand the full meaning of this relation; the ratio by itself may not mean much unless it is compared with other ratios in a different year or with the industry standard ratios (Walsh, 2003). Generally, it is possible to divide the financial ratios into four basic categories as follows.
Profitability ratios: A set of financial ratios that connect profits with sales to express the extent of sales' ability to generate profits and the ability of banks to use their equity and assets to generate profits
Net profit margin (NPM): This ratio is used to determine the extent to which the firm has the ability to encounter the difficult situations that may emerge either from declines in the product's market price or because of a rise in the product's manufacturing expenditures. In addition, this ratio can be used to measure whether there is a decline in the sales volume and to measure the net profit volume attained after the interests and taxes per dollar from the revenues. Finally, a higher ratio indicates that the firm is more profitable and has a better control over its costs (variable, operating and financial costs) compared with the other competing firms (Melville, 2008).
Return on equity: (ROE): Also called return on net worth, this is used to measure the volume of the achieved profit as a percentage of the common shareholder's equity. Thus it is the average of the net profit that the investors achieve from investing their money, as a return on their risk. This ratio indicates the management's competence in operating the shareholders' funds (Melville, 2008).
Return on assets (ROA): This ratio is considered an index to measure the extent of the firm's profitability relative to its total assets. In addition, it measures the management efficiency in using the assets to generate the profits (called return on investment) and it greatly depends on the type of industry and the volume of assets used in production. Accordingly, this ratio is used to compare between firms within the same sector to know the volume of profits resulting from investing in assets (Melville, 2008).
2) Efficiency or activity ratios: These ratios are used to evaluate the extent to which the firm's management is successful in managing the assets in order to generate revenue, which is considered the basic source of profit.
Assets turnover ratio This ratio is considered one of the most important ratios to measure efficiency. This ratio measures the extent of the ability of the banks to use their assets to generate revenue, and it shows the range of generating revenue from each dollar of assets (Mckenzie, 2010).
3) Capital structure ratios: These ratios are called solvency ratios and are considered instruments to evaluate the extent of the firm's ability to pay its long-term obligations; they also measure the extent of the success of the financing policy used in the firm and, in balancing between external and internal financing resources, the reflections of its policy on financial leverage risk. The most important ratios that can be used in this field are the following:
Gearing ratio The assets of the bank can be funded in two ways: Liabilities (borrowing) Equity (retained earnings + capital share) When the banks require the financing of new assets, they make financing decisions based on the costs and risks; borrowing is considered less costly than equity but equity is considered less risky than financing through borrowing. Accordingly, the importance of studying the gearing ratio appears to determine the financial risks that the banks encounter (Mckenzie, 2010). This ratio was measured based on the ratio of the total liabilities to the total assets.
4) Market ratios: These ratios help the shares analysts in performing their tasks when evaluating the firms' performance; they also help the present and prospective investors dealing with and working in the financial markets to know the attitudes of the stock market prices. The most important ratios used in this field are the following:
Earnings per share (EPS) According to the international accounting principle 33, the net profit or net loss for the period for the common stock holders is the net profit or loss after deducting the sum of the profits for the holders of the preferred shares, and all the recognized items of the revenues and expenditures during the period, including the taxes and expenditures, the unusual items and minority equity, mentioned in determining the net profit or loss for the period. Accordingly, this ratio illustrates the banks' ability to generate net profits to the shareholders per share; furthermore, many of the investors depend on it in their investment decisions because it is an important index regarding the banks' financial performance (Mckenzie, 2010).
3.10.2 Horizontal analysis: Horizontal analysis is an essential method used to determine the fluctuations in the total assets, equity, liabilities, net profit and revenue of the banks over a period of time, and to illustrate the strengths and weaknesses of the banks (Elliott, 2009).
3.10.3 SPSS - Statistical Software Program : SPSS is a computer program for statistical analysis introduced in 1968 by Norman H. Nie; it is used to evaluate variables in relation to government, bank, marketing organizations and Survey Company's researches, to determine whether the variables are input or output. SPSS can be used for the purpose of analysing data management and documentation and for other types of analysis, such as descriptive analysis, prediction numerical outcomes, predictions for identifying groups and vicariate statistics. In this paper, the researcher will estimate the mean and standard deviation for financial ratios during the period of study (2005-2009) to outline the results of the financial ratios. In addition, the researcher will calculate the mean and the average of the standard deviations in order to give a clear understanding regarding the financial position of the Islamic and commercial financial systems (Burns and Robert B, 2008).
3.11 Limitations of the research 1. The differences in the currencies between the banks and the countries. 2. The differences in the financial standards adopted in the issuance of financial statements. 3. The differences in the financial transactions of both systems, which leads to differences in their financial policies. 4. There are huge differences in the total assets, liabilities and equity for both systems, which impact on the comparative analysis of both systems.
THE CONCLUSION This study aims to evaluate the financial performance and stability of the top ten Islamic and the top ten commercial banks during the period 2005-2009. In addition, it attempts to determine the impact of the global financial crisis on the both systems in order to explore which is the most efficient system. The study began with an explanation of the importance of the banking system, the services offered by Islamic and commercial banks and the difference between Islamic and commercial banks in order to meet the first objective. In the literature review, the researcher discussed Islamic banking transactions, the principles of the Islamic banking system and some previous studies which have examined the financial performance, efficiency and stability of both systems in different regions. In the analysis chapter, the researcher employed six financial ratios and the horizontal analysis to determine the financial performance and stability of both systems in order to meet the second and third objectives, and to determine the impact of the current financial crisis on the two systems and determine which system was more efficient in facing the financial crisis in order to meet the fourth objective. Then the researcher used the statistical program known as SPSS to summarize the financial results of the financial ratios. The results of the financial ratios and statistical program (SPSS) indicate that the financial performance of the top ten Islamic banks was better than the financial performance of the top ten commercial banks during the period of study. The financial crisis affected both systems. However, the financial performance of the commercial banks declined strongly compared to the financial performance of the Islamic banks. However, in 2009, the effect of the financial crisis continued on the Islamic banks, while the commercial banking system improved its financial performance. However, the performance of Islamic banks remained better than the commercial banks. Accordingly, we reject both null hypotheses and accept both alternative hypotheses.
5.2 Recommendations 1. To create a market for short-term borrowing between Islamic banks, which would assist in managing their liquidity, just like a market where commercial banks borrow from each other (such as the London Interbank market, which deals with LIBOR interest from one day to five years). 2. To apply hedging policies in investment portfolios of Islamic banks based on the geographical distribution of the financial risk, and interest from the distribution of risks appears when a collapse of financial markets has not been affected by other financial markets in different countries. 3. To develop asset, liability and liquidity management in both Islamic and commercial banks, which would contribute to reducing the impact of the financial crisis on both systems. 4. To increase Islamic bank branches in non-Muslim countries, such as America and European countries, due to the existence of a large number of Muslim communities, in addition to the interest that appears from the distribution of income in different geographic areas. In contrast, there will appear a fluctuation in the exchange rates of foreign currency risks. 5. To improve the financial services for their customers in both systems in order to increase customer loyalty to these banks, which would contribute to reducing the phenomenon of a sudden rush of withdrawals by the depositors. 6. To improve the quality of the financial investments in both systems, particularly in the commercial banks, for instance, investments in the financial derivatives, such as CDS (credit default swap), which was one of the most important reasons for the current financial crisis. 7. To apply a mergers and acquisitions policy (M&A) between the banks in order to increase the strength of banks in the face of potential risks. 8. Commercial banks should carefully study the Islamic banking system in order to take positive things from it, and Islamic banks should carefully study the commercial banking system to take positive things. 9. To establish an international Islamic bank and international financial market and support existing regional Islamic markets.