Ratio: Definition, Factors, and Types

Knowing about Nisbah is important as it is an integral part of Islamic finance and Sharia law.

If you are involved in any transaction or business in a Muslim majority country, you need to understand Nisbah and its various types.

By understanding the Ratio, you can better understand these ratios and make the right investment decisions.

The following is a further explanation regarding the ratio.

Definition of Ratio

In Islamic banking, the term "nisbah" is used to describe the rate of return of a transaction or investment. It is calculated by dividing the total amount invested by the total amount received.

Since charging interest is against Sharia law, Nisbah is used in Islamic banking as a substitute for interest rates.

In contrast, the investment is set up as a partnership in which the investor and the bank share profits and losses. Profit sharing between the two parties is determined by the ratio.

In conclusion, the ratio is a measure of the rate of return on investment used in Islamic banking as a substitute for interest rates.

Ratio Factor

The ratio in Islamic banking is influenced by various factors that can affect the rate of return on an investment. The following are some of the factors:

Competition Level

The level of competition refers to the number of players in the market offering similar products or services.

In Islamic banking, competition between banks can affect the ratio level. When there is more competition, banks may offer lower ratio rates to attract customers, and vice versa.

Funding Composition

The source of funding that a bank uses to finance its operations is referred to as the funding composition. The type of financing used, such as whether it is equity or debt-based, can affect the ratio level in Islamic banking.

Higher ratios may be the result of equity-based financing, such as profit sharing, while lower ratios may be the result of debt-based financing, such as loans.

Financing Risk

The degree of risk associated with the underlying asset or project being funded is referred to as financing risk.

This can have an impact on the level of ratios in Islamic banking. Higher ratios can result from riskier investments.

Ratio Types

There are many types of ratios because they are financial ratios used to measure various aspects of a bank's performance. By using various types of ratios, analysts and investors can gain a more comprehensive understanding of a bank's performance and make informed decisions regarding their investments.

The following are some types of ratios:

Jariyah ratio

The Jariyah ratio is the profit sharing ratio between the bank and the customer in a Mudharabah contract. Profits are shared based on a pre-agreed percentage.

At-tamwil wa al-wada'l ratio

At-tamwil wa al-wada'l ratio refers to the profit sharing ratio in Musyarakah contracts. Profits are shared based on the investment percentage agreed by each partner.

Ratio of Total Capital (Return on Equity)

The ratio of total capital (Return on Equity) is the ratio of net income to shareholder equity. It shows how efficiently a company uses its capital to generate profits for shareholders.

Fixed Assets Ratio (Return on Assets)

Fixed Assets Ratio (Return on Assets) is a method for measuring the profitability of a business by dividing net income by total assets. The higher the ratio, the better.

Net Income Ratio

The net income ratio is the most common type of ratio and is used to describe a company that has no debt. This means not borrowing money from banks or other companies, but instead using its own cash flow to fund its operations.

Turnover Ratio

Turnover Ratio is a type of ratio that allows you to invest in more than one mutual fund. You can choose from a variety of funds and invest in them all at once, or you can choose the option of investing in each fund separately.

Nisbah Fi Ihtiyathi Naqdi

Nisbah Fi Ihtiyathi Naqdi is the ratio of a bank's liquid to total deposits. It measures a bank's ability to meet its short-term obligations.

Capital Ratio Ratio

The ratio of bank capital to risk-weighted assets is known as Nisbah Capital Ratio. It assesses a bank's ability to tolerate losses in the event of adverse economic conditions.

Liquidity Ratio

The liquidity ratio is a type of ratio in which an investor buys an asset and then leases it back to the seller. Investors can then use these lease payments as a way to generate income and profits.

Nisbah Si'ri Al-Sahminila Al-Ribni

The ratio of a bank's net income to its total assets is known as the Nisbah Si'ri Al-Sahminila Al-Ribni. It measures how successful a bank is in using its assets to generate money.

Ratio Capital To Risk Assets Ratio

The Capital to Risk Assets Ratio is a financial ratio that measures the amount of capital used to fund certain projects. This ratio can be calculated by dividing the amount of invested capital by total assets and then multiplying it by 100%. The higher the number, the better because it means more money invested into the project.

Thus a complete explanation of the ratio, may be useful.