Spiramus Press Valuing Banks in Uncertain Times: With Special Reference to Islamic Banks

Over the years, large numbers of academics and practitioners have looked into the valuation of companies and the different techniques that can be applied. Discounted cash flow, residual income and economic value added (EVA) are only a few of the techniques that have been researched extensively. Typically, these cover either a specific industry, or a large diverse set of listed companies, but without exception exclude financial institutions. The reason for this exclusion is simply that the characteristics are different from other industries and financial institutions, specifically banks, are notoriously difficult to value. This book starts off with a brief overview of the main different models available to value a company, followed by an analysis of why banks are so difficult to value. The most suitable model to explain the cross-sectional returns of banks, and how to estimate the parameters required for the model is then determined. As a result of the global growth of the Islamic banking industry it becomes increasingly important to be able to determine the value of Islamic banks and compare their ability to create value with other banks in the industry. For Islamic banks, the estimation of parameters differs, amongst others due to the different balance sheet structure, and the lack of availability of market data. The application of the same model to Islamic banks results in the identification of a number of issues. The main question the book addresses is whether it is possible to determine the value of banks in general and Islamic banks in particular using generally available valuation models.