Regression Analysis of Islami Bank Bangladesh Ltd.

Overview of Islami Bank Limited

Islami Bank Bangladesh Ltd. As a first shariah based interest free bank in South- East Asia in registered in 13^th March, 1983 as a public limited company according to company law of 1913.

The 1^st local branch of the Bank started its function on 30^th March in 1983 at Motijheel of Dhaka. The bank is formally inaugurated in 12^th August in 1983. The authorized capital of the bank is 5,000million taka and paid-up capital is 3,456 million taka. 57.37% of the authorized capital is foreign and 42.63% of the authorized capital given by the local shareholders.

The corporate Head office of the bank is situated at its own modern building Islami bank Tower of 17^th floor at 40, Dilkusha C/A, Dhaka.

Islami Bank Bangladesh Limited is a Joint Venture Public Limited Company engaged in commercial banking business based on Islamic Shari'ah with 63.09% foreign shareholding having largest branch network ( total 304 Branches) among the private sector Banks in Bangladesh. It was established on the 13th March 1983 as the first Islamic Bank in the South East Asia.

It is listed with Dhaka Stock Exchange Ltd. and Chittagong Stock Exchange Ltd. Authorized Capital of the Bank is Tk. 20,000.00 Million and Paid-up Capital is Tk. 16,099.90 Million having 33,686 shareholders as on 31st December 2015.

 Introduction

Banking system occupies an important place in a nation`s economy. A banking institution is indispensable in a modern society. It plays a pivotal role in the economic development of a country and forms the core of the money market in an advanced country.  In recent times the banking sector over the world has been undergoing a lot of changes due to deregulation, technological innovation, globalization etc. Bangladesh banking sector is lagging for behind in adopting these changes. To thrive well in this changing environment, not only development of appropriate infrastructure is necessary but also infusion of professionalism in to banking service is essential. The banking sector is one of the highly regulated sectors in our country.  It is governed by the rules and regulation of central bank of the country i.e. Bangladesh Bank and Security & Exchange commission. The bank companies are forced to company the best accounting practices. It strictly follows International Accounting Standard (IAS) norms. It publishes the financial statement every year getting it duly audited by recognized audit firms. Every bank of our country has a division named Financial Administration Division (FAD) which takes care of the accounting issues of the Bank. Most of the personnel who lead this division are of accounting background. Among the accounting based FAD personnel who know the banking operation better can contribute more in the banks.

Islami bank Bangladesh Limited is an unconditional and specialized financial institution which is first of its kind in South East Asia performs most of the standard banking service and investment activities on the basis of profit-loss sharing system conforming to the principles of Islamic Shariah. Islami Bank does not pay interest to depositor. Instead depositors participate in the profitability of the bank. The Bank participates in financing long-term project on the basis of profit-loss sharing instead of granting credit facilities with interest. IBBL also performs various social welfare activities through its subsidiary organ named Islami Bank Foundation (IBF).

 Historical Data: Islami Bank Bangladesh Ltd.

Year	Dependent Variable	Independent Variables
	Net Profit After Tax	Investment Income	Profit Paid on Deposits, borrowing etc.	Non-Investment Income	Administrative & other Exp.	Other Operating Expenses
2016	4,464.98	52,942.09	29,345.11	8,615.36	17,687.22	8,937.07
2015	3,029.08	48,152.28	28,737.87	8,399.62	13,466.17	8386.20
2014	3,999.06	49,109.96	30,650.27	8,937.07	12,074.13	7468.01
2013	4,948.58	48,145.46	30,975.19	7,972.88	11,039.15	6633.00
2012	5,338.91	43,672.23	25,870.43	6,345.56	8,724.65	5582.33
2011	4505.66	31354.25	28035.65	5524.22	8654.25	4752.92
2010	4463.47	25224.42	20331.25	6925.34	7360.54	6046.55
2009	3403.55	21485.69	24792.45	4612.56	7625.17	4126.33
2008	2674.80	19952.59	25112.66	3932.93	6364.20	4926.61
2007	1427.36	14856.19	21275.80	4865.44	7956.33	3532.52

3.1. Summary Output

Interpret Regression Statistics Table.

This is the following output. Of greatest interest is R Square. 

Regression Statistics
Multiple R	0.990715369
R Square	0.981516943
Adjusted R Square	0.944550829
Standard Error	0.712940436
Observations	10

R Square:

R-squared is a statistical measure of how close the data are to the fitted regression line. It is also known as the coefficient of determination, or the coefficient of multiple determination for multiple regression.

From the table it can be observed that R Square equals 0.982, which is a very good fit. 91% of the variation in Net Profit after Tax is explained by the independent variables; Investment income, profit paid on deposit, borrowing etc , other operating income, salary & allowances and other operating expense. The closer to 1, the better the regression line fits the data.

Multiple R:

Multiple R is the Square root of R². Multiple R square 0.99 implies that there is a strong positive relationship among the variables.

Adjusted R Square:

The adjusted R-squared is a modified version of R-squared that has been adjusted for the number of predictors in the model. Based on the number of independent variable R-squared is influenced. Here the adjusted R square decreases to 0.94   because of predictors improve the model by less than expected by chance. Adjusted R square is always lower than the R-squared.

Standard Error

This is also referred to as the root mean squared error. It also refers to the estimated standard deviation of the error term. It is sometimes called the standard error of the regression. It equals sort (SSE/ (n-k)). 

Observation: Total number of observation equals to 10 considered for conducting the study

Interpretation of ANOVA Table

An ANOVA table is given below

ANOVA
		df	SS	MS	F	Significance F
Regression		6	80.97514781	13.49585797	26.55180224	0.010751
Residual		3	1.524852194	0.508284065
Total		9	82.5

The Analysis of Variance table is also known as the ANOVA table (for Analysis Of Variance). It tells the story of how the regression equation accounts for variability in the response variable.

The column labeled Source has three rows: Regression, Residual, and Total. The column labeled Sum of Squares describes the variability in the response variable, Y.

d_{f = n-1=10-1=09}

The column labeled significance F has the associated P-value.

At Significance level 0.05, the model is significant since 0.010751 < 0.05

Interpret Regression Coefficients Table

The regression output of most interest is the following table of coefficients and associated output: 

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept(Net Profit)	2001.125949	3.622713043	552.3832346	1.30841E-08	1989.597	2012.655	1989.597	2012.655
Investment Income	0.000244948	0.000328457	0.745755283	0.509931277	-0.0008	0.00129	-0.0008	0.00129
Profit Paid on Deposits, borrowing etc	8.23023E-05	7.94236E-05	1.036245515	0.376284747	-0.00017	0.000335	-0.00017	0.000335
Other Operating Income	4.61598E-05	0.00013749	0.335732426	0.759181355	-0.00039	0.000484	-0.00039	0.000484
Salary &Allowances	4.75239E-05	0.000374223	0.126993649	0.906979265	-0.00114	0.001238	-0.00114	0.001238
Other Operating Expenses	0.000201273	0.000167258	1.20336844	0.315133712	-0.00033	0.000734	-0.00033	0.000734

A simple summary of the above output is that the fitted line is

  Y = a+ b₁*x₁- b₂*x₂ + b₃*x₃ + b₄*x₄ + b₅*x₅

  Y = 2001.125949+ 0.000244948*X₁- 8.23023*X₂+ 4.6159*X₃+ 4.75239*X₄- .000201273*X₅

From the equation we can say that

When X₁₌X₂=X₃₌X₄₌X₅₌O then Y=2001.125949

Explanation for each independent variable’s coefficient & their effect

Investment Income(X₁):

The coefficient for Investment Income is 0.000244948.  So for every unit increase in investment income, a 0.000244948unit increase in Net Profit after Tax, holding all other variables constant.

Profit Paid on Deposits, borrowing etc. (X₂):

For every unit increase in Profit Paid on Deposits, borrowing etc, we expect an 8.23023 unit decrease in Net Profit after Tax, holding all other variables constant. 

Other Operating Income(X₃):

Keeping all other variable remain same, for every unit increase in other operating income, The Net profit after tax increases by 4.61598

Salary & Allowances(X₄):

The coefficient for Salary & allowances is 4.75239.  So for every unit increase in Salary & allowances, we expect an approximately 4.75239 point increase in the Net Profit after tax, holding all other variables constant.

Other Operating Expenses(X₅):

For every unit increase in other operating expenses, we expect a 0.000201273unit decrease in Net Profit after Tax, holding all other variables constant. 

The p-value for each term tests the null hypothesis that the coefficient is equal to zero (no effect). A low p-value (< 0.05) indicates that you can reject the null hypothesis. In other words, a predictor that has a low p-value is likely to be a meaningful addition to your model because changes in the predictor's value are related to changes in the response variable.

From the output stated above the p-value variables Net Profit after tax & other operating income Investment income, profit paid on deposit, borrowing etc.  Salary & allowances and other operating expense is greater than the significance level of 0.05, which indicates that it is not statistically significant

 At 0.05 Significance level:

Variable	P-value	P-value
Intercept(Net Profit)	1.30841E-08	Insignificant
Investment Income	0.509931277	Insignificant
Profit Paid on Deposits, borrowing etc	0.376284747	Insignificant
Other Operating Income	0.759181355	Insignificant
Salary & Allowances	0.906979265	Insignificant
Other Operating Expenses	0.315133712	Insignificant