CAMELS Rating Research Articles

Conventional versus Islamic bank efficiency: A dynamic network data-envelopment-analysis approach

This study compares the efficiency of conventional and Islamic banks in Malaysia by engaging in a dynamic three-step (production, intermediation, and profitability) network data envelopment analysis (DEA). The inputs and outputs for the DEA model are selected based on the CAMELS rating. The major contributions of this study are threefold. First, this study investigates the efficiency of Malaysian banks using a novel dynamic network DEA model. Second, the Malaysian banking industry is found to be efficient in creating earning assets rather than in creating loans or profit. The results reveal that only a few banks in Malaysia have been efficient in converting deposits and equities into profit. Third, Islamic banks, in general, have been performing efficiently in the production and profitability approaches. Conventional banks, in contrast, are found to have been efficient in the intermediation approach. Policy implications are derived from the main conclusions.

Mega Bank Merger Drive in India: Analysis of Financial Performance of Banks Before Merger

Banking sector plays an important role in the development of an economy in a country. Banking sector has the most crucial role in the smooth functioning of economy in India. India is one of the developing countries which has a strong banking base with a large number of banks in India. But in recent times a large number of Merger of Banks in India has been announced by the Finance Minister Nirmala Sitharaman on 30.08.2019. So an evaluation of the performance of merged banks is done in this study on the basis of CAMEL Rating Model for judging Capital Adequacy, Asset Quality, Management Effectiveness, Earnings Ability, and Liquidity. The present study analyses the financial performance of banks before merger in recent times.

A Critical Review of Empirical Studies on Assessing Bank Performance using CAMEL Framework

CAMEL as a tool for assessing the soundness of banks has become increasingly important following the recent financial crises in the banking sector. Poor asset quality and low capital base were seen as some of the factors responsible for the banking failures. Several studies have been conducted to assess the effect of CAMEL on financial performance in both developed and emerging economies. These studies are however, largely characterized by conflicting findings as a result of institutional differences and measurement choices. This paper uses exploratory and descriptive methods to review extant literature on the relationship between CAMEL ratios and bank performance with a view to exposing the controversy of measurement and methodologies in this area of research that has attracted little attention in emerging economies such as Nigeria. The paper posits that CAMEL rating system is a popular way of assessing the soundness of banks in various economic and institutional jurisdiction because of the strategic importance of banks in national economies. It however observes that CAMEL studies are just evolving in emerging economies such as Nigeria and therefore concludes that there is the need to explore the relationship between CAMEL ratios and performance of banks in Nigeria especially that the country is faced with new economic situations such as dwindling oil revenue and other factors that may have serious ramifications on the country’s banking sector. The paper is important in identifying literature gaps that will serve as an impetus for future empirical studies.

Camel Research of Selected Private and Public Sector Banks in India

Banks are the mainstay of any country’s economic development. The money is stored in the bank, wherein the people are risk free of keeping money at home, and whenever required can take their money. The banks also help for any business growth or any start up business. And to meet all this peoples’ requirement and even gain profits, banks sees their financial growth and analyze as what to be done to meet the requirements. Even the people should know, whether the bank in which they have gone on their money is stable and can give back their money back when needed or when the bank fails to shut down due to unavailability of assets or loss which cannot be reclaimed. This report examines the execution of certain private and public sector banks. Five banks from private sector viz. ICICI, HDFC, Axis, YES, Kotak Mahindra and five banks from public sector viz. SBI, PNB, BOB, UBI and Canara bank were chosen for this analysis. The data were collected for a period from 2012-2013 to 2016-2017 (5 years). CAMEL analysis (Capital adequacy, Asset quality, Management efficiency, Earning quality, and Liquidity) was applied towards assessing the performance. Based on CAMEL rating, HDFC & AXIS Bank are considered as performing above average; whereas PNB & Canara Bank is seen as below average. Thus, it could be concluded that in all the parameters of the CAMEL Model and its sub-parameters, the performance of the private sector is found to be better than the public sector. .

Financial Intermediary and Insurance Companies: Assessing Financial Stability

In modern fast changing world financial institutions are exposed to a big variety of risks, which shall be properly addressed. In these circumstances it is vitally important to predict the risks and understand how each of them can affect the company’s financial stability. Among the approaches assessing financial stability of a financial intermediary, CAMELS rating system is considered by leading research agencies (such as CFI and Bloomberg) to be one of the most universal one. Although the approach is used mainly to analyse banks, components of CAMELS rating are applicable to insurance companies. The aim of this study was to analyse global and Russian insurance markets and confirm or refute the hypothesis that CAMELS rating system can be applied for evaluation of financial stability of specific Russian insurance companies. Application of CAMELS method showed that Russian insurance companies, especially those that are not part of globally integrated structures, are not in a strong financial position.

Gender Responsive Budget (GRB) Initiatives in Nepal: Achievements and Challenges

Gender responsive budgeting (GRB) aims at raising awareness of the gendered impacts of budget and to make governments accountable for ensuring gender equality and women's rights. Government of Nepal has introduced gender budgeting system in 2007/08 for direct, indirect and neutral benefit to women. This paper examines the effectiveness of GRB implementation at local level. The descriptive technique is used to explain the gender sensitivity of policies, planning and programming and budgeting process of the selected five municipalities in Kathmandu Valley. The analytical technique is used to assess implementation and impacts of gender-focused policy, strategy and plan. The effectiveness of GRB is measured using two models: Integrated Organizational Model (IOM) and CAMELS rating. The results clearly show that mere preparing GRB and strategies does not solve the problem of inequality. Therefore, translating gender mainstreaming into actual action requires re-examination of the policies, programs and planning/budgeting process from a gender perspective. Analysis also shows that due to lack of gender need analysis before planning and allocating gender budget, implementation of GRB program are fully dependent on service provider's strength, interest and capacity to implement women development programs. This has encouraged a kind of ad-hoc system which did not guarantee the immediate benefit to the participants in terms of income generation and employment creation.

Forecasting High-Risk Composite CAMELS Ratings

We investigate whether statistical learning models can contribute to supervisors’ off-site monitoring of banks’ overall condition. We use five statistical learning and two forecast combination models to forecast high-risk composite CAMELS ratings over time (1984-2015), where a high-risk composite CAMELS rating is defined as a CAMELS rating of 3, 4, or 5. Our results indicate that the standard logit model, which is already widely used to forecast CAMELS ratings, comes close enough to be an adequate model for predicting high-risk ratings. We also find that the overall accuracy of the individual forecasts could be modestly improved upon by using forecast combination methods.

An Evaluation of Financial Health of Nigerian Deposit Money Banks using CAMELS Rating Model

This study evaluates the financial health of Deposit Money Banks (DMBs) in Nigeria using CAMELS Rating Model based on three characteristics. Using ex-post facto research design, secondary data which covers years 2010 to 2017 were collected from the annual reports of the selected listed DMBs. Guided by three research objectives, the study formulates and tests three hypotheses. Mean and independent sample t-test are employed to present and analyse the data. The paper, inter alia, provides evidence of a statistically significant difference between the financial health of Domestic-Systemically Important and Domestic-Non-Systemically Important DMBs in Nigeria (tcal (10) =2.832 > ttab=2.228; p-value= 0.018). Based on these findings, the paper concludes that the financial health of DMBs do not differ based on the type of operating licence they hold and the structure they operate. The study recommends that Central Bank of Nigeria should tighten its prudential guidelines on DMBs in Nigeria.

Evaluation of the Competitiveness of China’s Commercial Banks Based on the G-CAMELS Evaluation System

On the basis of the original camel rating system, this study added the green indicator and formed the G-CAMELS evaluation system (An improved rating system based on the CAMELS rating system to evaluate the business operation of financial institutions more comprehensively.) to comprehensively evaluate the competitiveness of commercial banks. It followed China’s current requirements for the sustainable development of commercial banks. In this paper, factor analysis, entropy methods, and dynamic evaluation models are used to obtain the ranking of competitiveness. In addition, according to the same steps as above, the comprehensive ranking based on the CAMELS evaluation system (A comprehensive rating system which is standardized, institutionalized and indexed for business operations of commercial banks and other financial institutions.) was obtained. The two ranking systems were compared. It is found that with the entropy weight method, in the G-CAMELS system, the weight of the green index is quite large, so it magnifies the impact of the financial industry on the environment. Compared with the original CAMELS system, the newly formed system will increase the ranking of state-owned banks and there is no significant change in the ranking of joint-stock banks. In order to improve the competitiveness of banks, state-owned banks should innovate their banking business and continue to implement the green credit policy; joint-stock banks should continue to seize the opportunity of green credit and expand profitability while paying attention to safety. In addition, the government could consider relaxing green credit standards for city commercial banks to ease pressure on banks.

A Comparative study of financial performance of banking sector in Sri Lanka – An application of CAMEL rating system

Purpose of this study is to compare the financial performance of state and private sector banks. The banking sector of developing countries is different from the developed countries. The banking sector of Sri Lanka plays a vital role in the Sri Lankan Economy specially commercial banks a re playing a major role in the banking sector of Sri Lanka. There are two types of commercials banks in Sri Lanka such as state and private commercial banks here the private commercial banks can be divided into domestic and foreign private commercial banks. The focus of this study is to compare the financial performance of state and private commercial banks using the Capital Adequacy, Assets Quality, Management Soundness, Earnings, Liquidity (CAMEL) rating system in Sri Lanka 2013-2017. Many studies are conducted in different countries to compare the financial performance of banking sector with the use of various statistical methods. In this study CAMEL rating system used to compare the financial performance of banks, it is one of the quantitative techniques and it is widely used in the current world. State banks should focus to increase their financial performance to compete and survive successfully in the current world and also private commercial banks try to achieve their target financial performance for their long survival.

Investigation of the effects of financial regulation and supervision on bank stability: The application of CAMELS-DEA to quantile regressions

We rigorously investigate the multifaceted effects of financial regulation and supervision on bank stability using panel data for 2210 banks across 47 European countries over the period 2000–2016. The CAMELS rating system is applied to quantile regressions. We find that greater capital regulation is positively associated with bank stability, whilst tighter restrictions, deposit insurance and excess of supervision appear to exert an adverse effect on bank stability. These effects are more pronounced among banks at a higher level of stability. It also appears that commercial banks, smaller banks and banks in emerging countries are relatively sensitive to regulatory shocks.

Can the CAMELS rating system Survive the Future?

Can the CAMELS rating system Survive the Future?

STUDY OF CAMEL RATING SYSTEM IN BANKING SUPERVISION- A CASE STUDY OF NEPAL BANGLADESH BANK LTD

The banking sector plays in important role in the country’s economy, acting as an intermediary to all industries. As the banking sector has a major impact on the economy as a whole. Performance evaluation of the banking sector is an effective measure and indicator to check the soundness of economic activities of an economy. Many methods are employed to analyse banking performance. One of the popular methods is the CAMELS framework, developed in the early 1970’s by federal regulators in the USA. The CAMELS rating system is based upon an evaluation of six critical elements of a financial institution’s operations: Capital adequacy, Asset quality, Management soundness, Earnings and profitability, Liquidity, and Sensitivity to market risk. Under this bank is required to enhance capital adequacy, strengthen asset quality, improve management, increase earnings, maintain liquidity, and reduce sensitivity to various financial risks. In the present study an attempt was made to evaluate the performance & financial soundness of NEPAL BANGLADESH BANK LTD using CAMEL approach. Quantitative parameters are computed and updated on a quarterly basis while in respect of the qualitative parameters the ratings / marks given at the time of previous on-site examination

Performance Analysis Of Banks In Turkey Using Camels Approach Case Study: Six Turkish Banks During 2005 To 2016

This study analyzes the performance and financial credibility of six Turkish banks for the period of 2005-2016. The sample comprises two state-owned deposit banks, three private-owned deposit banks, and one foreign bank. As one of the most popular methods for measuring banking performance, CAMELS method is used to analyze the performance of the banks. CAMELS stands for Capital Adequacy, Asset Quality, Management Efficiency, Earning Quality, Liquidity, Sensitivity respectively. When the average rates of 2014, 2015 and 2016 ratios –for each one of these mentioned categories- separately examined, none of the banks is found to be superior to the others. As for the composite rate for CAMELS though, Ziraat Bank has the highest rate (29.32%) and Halkbank stands at the last row (21.94%). Overall, the values of the CAMELS ratios for 2016 seem to be quite close to each other. However, when the yearly analysis is conducted, some significant differences in the categories of CAMELS ratio are observed. In addition, ANOVA test results state that the means of CAMELS ratios are significantly different over the years. Finally, comparison of CAMELS ratings with institutional ratings shows that the latter does lag the financial indicators of the companies and even can be not reflective of the current financial condition of the company. On the other hand, the trends of the institutional ratings and of financial indicators are consistent over a long period of time.

Are charter value and supervision aligned? A segmentation analysis

Previous work suggests that the charter value hypothesis is theoretically grounded and empirically supported, but not universally. Accordingly, this paper aims to perform an analysis of the relations between charter value, risk taking, and supervision, taking into account the relations’ complexity. Specifically, using the CAMELS rating system as a general framework for supervision, we study how charter value relates to risk and supervision by means of classification and regression tree analysis. The sample covers the period 2005–2016 and consists of listed banks in countries that were members of the Eurozone when it came into existence, along with Greece. To evaluate the crisis consequences, we also separately analyze four subperiods and countries that required financial aid from third parties and those that did not so, along with large and small banks. Our results reflect the complexity of the relations between charter value, supervision, and risk. Indeed, supervision and charter value seem aligned regarding only some types of risk.

Comparative Performance Evaluation of Selected Commercial Banks in India using CAMELS Rating Model

Sound financial health of a bank is the guarantee not only to its depositors but is equally significant for the shareholders, employees and whole economy as well. As sequel to this maxim, efforts have been made from time to time to measure the financial position of each bank and manage it efficiently and effectively.Indian banking sector widely includes commercial, nationalized, co-operative, private and international banks in its fold. In the present study an attempt is made to evaluate the financial performance of three major commercial banks (IOB, Canara Bank and Syndicate Bank) using CAMELS Rating Model. CAMELS rating model is basically an approach widely used to measure the performance of banking unit inside and outside India. This model measures the performance of banks from all important parameters like Capital adequacy, Asset quality, Management efficiency, Earning quality, Liquidity and sensitivity to market. The study is based on secondary data drawn from the annual reports. For the purpose of evaluation the data’s of five years (2011-2016) before demonetization are analyzed by calculating the 17 ratios related to CAMELS rating model. It is found out that according to Basel Norm the overall state of capital adequacy of all the three banks are satisfactory. As far as loan portfolio is concern, the overall state of asset quality and management efficiency are satisfactory, whereas the earning capacity of the banks is not and the liquidity is also not satisfactory. The high level of NPAs and sluggishness in the domestic growth, slow recovery in the global economy and the continuing uncertainty in the global market leading to lower exports and imports are one of the main reasons for the low earning capacity of banks along with these reasons RBI’s new rules to make higher provisioning for substandard assets also affected the earning capacity of all the three banks. Based on the evaluations all the three commercial banks should improve its earning capacity and the liquidity position to perform efficiently and effectively.

Lógica difusa y el riesgo financiero. Una propuesta de clasificación de riesgo financiero al sector cooperativo

Apply fuzzy logic in financial indicators is a proposal not widespread in the accounting field. This methodology allows us to observe the results of financial ratios with a broader perspective, showing not completely true nor completely false results, because they can take an indeterminate truth value within a set of values, applying the theory of fuzzy logic. The aim of this paper is to present the reader with the application of fuzzy logic in indicators of financial risk, using ratios of the cooperatives segment each Ecuador, and thus validate the level of relevance that has this indicator to compared with the standard meta model and CAMEL ratings. To apply these theory linguistic variables were used, which were valued at scales ranges from 0 to 1. It is determined that the diffuse methodologist applied to financial risks presented a higher level of membership to good credit rating by ensuring a level of low risk and very good solvency. However, in periods of low economic activity it would stagnate at this level for the increased risk.

Assessing the Effectiveness of Credit Risk Management Processes and its Impact on Financial Performance of Credit Unions in Ghana

Credit Unions in Ghana have made greater contributions to enhancing people access to loans. It has been argued that exposure of Credit Unions to credit risk has caused huge loan losses and in turn led to collapse of many of the institutions. This study sought to assess the risk management skills and approached of the St. Paul’s Cooperative Credit Union and the De-Pores Credit Union. The study also sought to examine the CAMEL rating performance of the Credit Unions and the effects of NPL and loan portfolio on profitability of the institutions. Data was collected from the Loan Officers, Branch Managers and Accountants of the Credit Unions on measures in place to reduce credit risks. Data was also obtained from the financial statements of the Credit Unions from 2007 to 2016. The study revealed that management of the Credit Unions conduct pre-assessment, mid-term assessment and post assessment before loans are granted to customers which have helped to reduce credit risks. The study found that the Credit Unions do not have the capacity to relate or use its accumulated capital against credit risks. Also, the study indicated that the Credit Unions had inadequate capital to back its operations. The study found that the assets of the Credit Unions are not effectively used to generate more income to improve performance. The Credit Unions experienced lower loan growth rate. The Credit Unions do not have enough liquidity to cover any unexpected fund obligations. The regression analysis showed significant effects of NPL and Loan Portfolio on profitability of the Credit Unions. The study recommends that management of the Credit Union should put measures in place to grant more quality loans, reduce NPL and revitalize it CAR position in order to make credit unions vibrant and solvent.

The Impact of Mergers and Acquisitions on Financial Performance of Banks in the Kingdom of Bahrain during 2004-15

Following the 2007 global financial crisis, more than 15 M&A transactions took place among financial institutions in the kingdom of Bahrain. This paper evaluates the impact of M&As on the financial performance of four such deals between banks in Bahrain. Data was collected from financial statements of the banks and the Bankscope database during 2004–2015. 15 accounting ratios were applied to CAMEL Rating Model approach. Financial modelling with Excel has been applied to test for the significance of changes in the financial performance of the banks three years before and three years after mergers. No significant difference in the financial performance of the local banks between pre and post M&As in the kingdom of Bahrain was observed. No significant difference in the financial performance of the acquirer bank or the target bank was observed except Bahraini Saudi Bank (target bank) which showed significant improvement in the financial performance after the merger with acquirer bank namely Al Salaam Bank. No significant change in the overall CAMEL ratios was observed for all banks involved in the M&As in Bahrain during 2004-15. The study provides an empirical analysis of the M&As before and after the mergers which can serve as a basis for further evaluation of future strategy of the banking sector in the kingdom of Bahrain.

Unveiling black-box of bank efficiency

PurposeThis paper aims to examine the efficiency of Islamic vs conventional banks in Malaysia by unveiling the traditional efficiency concept – black box – with a three-stage network structure of bank operations.Design/methodology/approachThis paper applies data envelopment analysis (DEA) for examining bank efficiency. An adaptive three-step network DEA (NDEA) model is demonstrated for redefining the traditional black box of banking operations. Slack-based variable returns to scale approach is used. Data from all 43 commercial banks in Malaysia are examined over a six-year study period (2010-2015). Inputs and outputs of the model are selected based on CAMELS rating. Undesired output is also considered in time of examining bank efficiency in Malaysia.FindingsThe empirical results of this study signify that only a few banks in Malaysia have been performing well in converting deposits and equities into profit as well as minimizing loan loss provisions. Islamic banks in Malaysia have performed better both in production (converting deposits and equities into earning assets) and profitability (converting loans into net income). Conventional banks, however, have over scored in intermediation (converting earning assets into loans).Originality/valueAn adaptive NDEA approach proposed in this paper defines the core banking process instead of traditional approaches in examining bank efficiency based on individual functions (nodes in the network model). This approach has proven to provide better benchmark capacity.