THE ASSOCIATION BETWEEN ACCOUNTING INCOME AND THE CAMEL FRAMEWORK: EVIDENCE FROM KUWAITI BANKS
Mostafa A. Elshmy1, Ali M Hewaidy2*, Metwally A Kayed3
1Professor of Accounting, Kuwait University, Kuwait, eshamy@cba.edu.kw
2Associate Professor of Accounting, Kuwait University, Kuwait, hewaidy@cba.edu.kw
3Associate Professor of Accounting, Kuwait University, kayed@cba.edu.kw
*Corresponding Author
Abstract
The CAMEL framework derives from the five main segments of a bank operations: Capital adequacy (C), asset quality (A), management quality (M), earnings ability (E) and liquidity (L). The CAMEL framework has been used worldwide in evaluating the overall banks performance by bank regulators, supervision authorities in several countries, including those in Kuwait.
The Kuwaiti banking sector is one of the most important and developed economic sector in Kuwait. Based on the value of traded shares, banking sector accounted for 34% of the total shares value traded in the Kuwait Stock Exchange (KSE) during 2016, and raised to more than 52% during 2018. In addition, six banks are among the top ten profitable companies listed in the KSE.
The objective of this study is to examine if accounting income numbers measured under International Financial Reporting Standards (IFRS) as a single indicator of financial performance is associated with the CAMEL framework. The study examines further if the association between accounting income and the CAMEL framework will differ between commercial and Islamic banks.
Using available data for all Kuwaiti banks listed in Kuwait Stock Exchange during the period from 2010 to 2017, the study documents two main findings: Accounting income (as measured by Return on Assets and Return on Equity) is highly associated with the CAMEL framework for all Kuwaiti banks during the study period, and the association is higher for the commercial banks than that of Islamic banks.
The findings of this study reveals that accounting income number as a single indicator for financial performance can be used as a proxy by bank regulators and others to measure banks performance, and support the claims by accounting standards setters and the finding of previous studies that documented the usefulness of accounting income numbers as a measure of financial performance to users of financial statements.
The findings are also expected to provide useful information for stakeholders to make better and rational decisions, and to help both conventional and Islamic banks to mark and re-valuate their performance. In addition, the outcome of this study is important to policymakers in assessing the bank performance that could determine the future direction of the banking system in Kuwait.
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