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Journal of Money, Investment and Banking ISSN 1450-288X Issue 22 (2011) EuroJournals Publishing, Inc. 2011 http://www.eurojournals.com/JMIB.

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The Performance Analysis of Islamic and Conventional Banks: The Pakistans Perspective
Mian Muhammad Ashraf M. Phil Scholar, Superior University of Lahore E-mail: Ashraf.iub@gmail.com Tel: 0092-300-7808066 Zia-ur-Rehman Lecturer, Hailey College of Commerce University of the Punjab, Lahore E-mail: Ziaurrehman_hailey@hotmail.com Abstract The intent of this endeavor is to compare and analyze performance of Islamic banking and conventional banking system through use of financial measures. For this purpose two banks each from Islamic and conventional Pakistani banking system are selected. Primary objectives of this study are to depict domino effect for the performance of interest free banking system, to consider the concept of profit and loss sharing of Islamic banking, comparison of banking frame work and conceptual comparison. The performance of Islamic banks' of Pakistan is scrutinized by using bank level data from 2007-2010. For research purpose authors have used ratios of: (1) profitability (2) earnings (3) liquidity (4) credit risk and (5) assets activity to compare performance of Islamic banking and conventional banking system. The research ascertains that banking performance of Islamic banks is less effective because of augmented operating cost and inefficiency of management. Further this study can be helpful and beneficial for management of Islamic banks in Pakistan for performance enhancement and stability.

Keywords: Islamic Banks, Conventional banks, Banking framework, Performance Analysis, Islamic Shariah.

Introduction
Before 1970s the term Islamic financial system or Islamic banking was relatively a new idea for the Muslim world. All previous commercial activities and transaction were based on requirements of Islamic principles i.e. the system of Interest free or Islamic banks. Un doubtfully, according to Islamic Shariah principles, fixed return on capital or the fixed return on transaction made against the capital is prohibited. Only such transactions or investments can be made or allowed which is in contract of profit and loss sharing. Principles laid down in Islamic financial system are not only capable to provide a workable Islamic banking system, but also covers principles for all types of financial markets, instruments and other financial intermediaries. 15%-20% per annum rapid growth in Islamic banking since 1970s to date and development a complete banking system in comparison to their counterparts is a major success. Islamic banks are operating in approximately 75 countries of the world. Although numerous financial institutions are

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working in many other countries, serious efforts are under way to progress and implement the Islamic banking in every country at a comprehensive level. Islamic banking and financial institutions are working with the analogous position with the conventional banking system in the countries of Gulf, Bahrain and Malaysia. Several points make difference between Islamic and conventional banking system. These important points include prohibition of predetermined or fixed rate of return based transactions and the banks operations requirements that carried out according to certain procedures through use of some financial instruments. Even though in lot of countries, Islamic banks are working in same line and same regulatory frame work with the conventional banks. This regulatory frame work follows the standards and guidelines established by the Basel Committee on banking Supervision. Even these standards are not followed by the Islamic banking frame work in the same line as these standards followed by the conventional banking system. So thats why, there is a need of complete education and training for understanding of how to operate Islamic banking through an appropriate and better regulatory system (Errico and Farahbaksh, 1998). Islamic banking system depends upon profit and loss sharing, owning and transaction of physical goods, participation in trading process, and also Islamic modes of finance are used for leasing and construction contracts. As for purpose of income generation, Islamic banks deal with assets management. The Islamic banks carefully manage involved risk in assets management with devotion to best exercise of corporate governance. It is clear that when bank is able to receive stream of Halal Income, the depositors of the banks ultimately receive the stable and Halal Income. Gain on the capital is appreciated by the Islamic Shariah but the interest based transactions are prohibited. The interest is fixed amount that is charged over principal amount of loan or debt which is prohibited in Islamic Shariah. Islamic Shariah considers performance of capital when actual capital is rewarded. Islamic Shariah prohibit risk free return and trading, as in the Verse II: 275, of holy Quran that financial activities and transactions in the Islamic Shariah principle are real asset-backed, with an ability of value addition. To analyze performance of Islamic and conventional banks, four banks (Meezan bank, Bank Islami, Standard Chartered bank and Muslim Commercial bank) are selected and their financial statements are obtained from their websites for the period of 2007-2010. Financial ratios and trend analysis techniques are used to get the look on the banks. These techniques help to identify important indicators and where banks are moving forward. Trend analysis techniques clarify that how effectively banks are responding to the new horizon. Literature review is conducted in this regard to get an overview. To sum up the results, table and graphs are also used.

Literature Review
International Association of Islamic Banks (IAIB) defined the Islamic banking as the Islamic Bank basically implements a new banking concept in that it adheres strictly to the rules of Islamic Shariah in the fields of finance and other dealings. Moreover bank functioning in this way must reflect Islamic principles in real life. As banks work towards the establishment of an Islamic society therefore one of its primary goals is the deepening of religious spirit among the people. Therefore, point is obviously clear that Islamic banking differentiate from conventional banking in terms and conditions of its mission and objectives and duties toward society. Islamic bank take all these duties and responsibilities greater than conventional banks, (Hassan & Adnan, 1998, 1999). The doctrine of Islamic banking system is much more than the combination of production factors and economic activity (Nienhaus, 1994). While, conventional system primarily focuses on monitory aspects of transactions and economic activities. The Islamic systems equally emphasize on the religious, moral, ethical and social aspects, to increase the equality and fairness for betterment of as a whole society (Akkas, 1996).

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The similarities exist in both Islamic and conventional banking system. The Islamic banking system, although depends and regulated by rules of Islamic Shariah. Principally, Islamic banks perform same functions as those of a conventional banking system; that is, they play role of financial intermediary and also economys payments system administrator (Ebrahim & Joo, 2001). According to the work of (Haron, 2004) the Islamic and conventional banks differentiate with each other with some points but both have something in common. Islamic banks are totally against the investment of fixed return in other words money based transaction is not accepted (rent on money) and therefore do not charge interest, the banks innovate or developed some investment techniques such as bai murabahah, musharakah, and mudarabah for the purpose of investment to generate profit. Islamic banks used two monitory policy instruments that instruments are on the base of Islamic Shariah principles, first is exchange of monitory value with monitory value is prohibited in the Islamic Shariah, a real based transaction process must be involved with the capital link. For change and development of community, productive and carefully investment of assets is necessary. Second, supplier of capital must be involved in risk sharing with user of capital and transactions must be based on the profit and loss sharing (Cornelisse, P. A. and Steffelaar, W. 1995). The above two principles develop the Islamic framework of financial intermediation. As a result, in nature financial associations in Islamic point of view have been participatory and the interest based institutions converted according to the principle of profit and loss sharing, Chapra, (1985). The result is that the predetermined fixed rate of return is replaced by the rate that can vary on the return of real based economic activities, Mangla & Uppal, (1990). Conventional banking is fundamentally based on the debtor-creditor relationship between the depositors and the bank on the one hand and between the borrowers and the bank on the other, with interest as the price of credit, that reflect the opportunity cost of money. The creditor should not take advantage of the borrower (Al-Omar & Abdel-Haq, 1996). When money is lent on the base of Riba (interest), it often leads to the unfairness. The Islamic principle primarily allows such kind of transactions: Deal not unjustly, and you shall not be dealt with unjustly [2:279]. The distinctive features that give clear picture of Islamic banking transformation from the traditional interest-based commercial banking system, these are: (a) the profit and loss share base transaction is the principle of Islamic banking, which is not in conventional banking system and (b) the investment in Islamic banking system must provide the benefit to the investor and economy as well. True Islamic economic system is only possible by implementing the Islamic banking system in its true spirit as a first step. Islamic banking is one the financial system which is based and follows the rules and regulations of Islamic Shariah because Islamic economic system depends on the Islamic Shariah. In Egypt and Malaysia, in 1950 to 1960 a study was conducted regarding interest free banking system and the study could not add any value for Islamic banking system. In 1976, international Islamic bank was established and in Dubai the first Islamic bank start its operations in 1994 and now international Islamic bank has 53 member countries. In present scenario Islamic banking is in practice and acceptable almost in all countries around the globe. Even at a very small level some institutions are working under Islamic financing in America also (Kahf, M. 2002). The privatization of the banks has no concern with the Islamization. Due to the Islamic banking no change exists in the stability of the banks because the Islamic banking performance is not up to the mark. Theoretically comparison of Islamic banking and conventional banking is given. Islamic banking gets to much effect of Islamization but proved less effective (Cornelisse and Steffelaar. 1995).

Current Practice and Regulations of Islamic Banking in Pakistan


First step toward the Islamic banking and financial system of Pakistan was made in 1977-78. First of all, three countries try to implement the Islamic banking and financial system and Pakistan was one of them. The task was gigantic, the implementations ware made in phases. The plan was on the base of Islamic Shariah principles which lead to elimination of Riba (Interest) from all financial institutions

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that includes House Building Finance Corporation (HBFC), Investment Corporation of Pakistan (ICP) and National Investment Trust (NIT) in 1st July 1979. The legal frame work of Pakistans financial and corporate system was amended on June 26, 1980 and then a new interest free instrument of corporate financing certificate issued named as Participation Term Certificate (PTC). An ordinance was passed to permit the managing authorities of Mudaraba companies regarding the floatation of Mudaraba certificate to enhance the risk based capital. In the Banking Companies ordinance, 1962, the amendments were made and also in related laws which include the provision of bank finance through profit and loss sharing, mark-up in prices, leasing and hire purchase. The Islamic banking and financial system adopted by banks since from July 1, 1985, and was declared un-Islamic by the Federal Shariat Court (FSC) in November 1991. However, even then the appeals were made in the Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan. The Shariat Appellate Bench (SAB) issued its decision on December 23, 1999, in which Bench reject the appeals and give the indication that laws of interest based system would cease to have effect finally by June 30, 2011. In this decision, the Court decided that the existing financial system had to be subjected to radical changes in the pattern of Islamic Shariah. The Court also directed the Government to make a commission within the specified time period, a commission for transformation of the financial system and two task forces to plan and implement the process of the transformation. According to the commission, the existing activities for introduction of Shariah compliant financial system briefly including creating legal infrastructure encouraging for working of Islamic financial system, training and education program launched for bankers and their clients and a campaign started through media for the general public to create the awareness about the Islamic financial system. The Finance Minister of Pakistan in his budget speech for the Financial Year 2002, declared the following: Government is committed to eliminate Riba and promote Islamic banking in the country. For this purpose a number of steps are under way which are: 1) Islamic banking practice encouraged by banks and financial institutions through a designed legal framework as a subsidiary operation of their main operation. 2) Problems regarding the regulations and operations of Islamic banking, consultations and exchanges are considered to be undertaken from the brother Islamic countries and AlAzhar University of Egypt, to learn through their experience and practices. 3) The HBFC Act amendments are being made according to the decision and directions of the Supreme Court. These amendments of HBFC Act are fully depending on the Islamic Shariah and the HBFC would be Shariah compliant institution, that will play critical role in the promotion of Islamic financing Method but also very important is housing sector development. 4) Financing aspects of Islamic Shariah like Musharaka and Mudaraba will be encouraged so that the awareness and introduction regarding the use of such product and adoption at a large size made possible.

Comparison of Islamic and Conventional Banking Framework


There are several points that explain the scenario of Islamic banking. That are: (1) Islamic banks focus on profit and loss sharing investment, so the banks neither provide the guarantee of capital value nor the return on investment deposits, and basically these banks are poor depositors funds to provide depositors with the supervision of professional investment management. This scenario of investment emphasizes on some interesting points between these activities of Islamic banking and the investment companies in the west. There is, however, a primary difference exists between the Islamic banks and investment companies that need to recognize. Fact is that the investment companies create a link with public and sell out their capital to them, but the Islamic banks find out the depositors from public to accept

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deposits. This criteria entails that the investment company shareholders own a part of the company equity capital in proportion and have the number of rights, which include that the continuously receiving of information on companys business development and at important matters they have right to exercise their voting rights, as such company want to make some changes in the companys investment policy. So they have the authority to check the companys performance, take part in investment decisions and also they have the power to affect the companys strategic decisions. In comparison, Islamic banks have Islamic principles according to Islamic Shariah which depends on profit and loss sharing. In Islamic principles the profit and loss ratio is predefined in their contracts. The deposit investment can not be withdrawn at any time by the depositor except on maturity and, on the best evidence rules can be withdrawn at par value. Instead of this depositors of Islamic banks do not have own any portion of the banks equity capital so thats why they do not have any voting rights. Islamic bank depositors cannot affect the banks policy of investment. Islamic banks depositors relationship with the bank is explained according to the unrestricted Mudaraba contract. (2) Islamic banking structure of balance sheet, procedure of profit and loss sharing, Islamic banking operating system is much better then the conventional banks to absorb the external shocks. Except this as mentioned previously, Islamic banks have the right to reduce the capital value of depositors investment in case loss. (3) For the purpose of granting pre-requisite profit and loss share facilities, Islamic banks are not reduce credit risk without requiring collateral or any other guarantee. (4) A major difference between the operations of these two must be clearly defined and need to be recognized. For financing and investment activities in Scheme A, Islamic banks can use their deposits according to their deposits demand and investments, but the investment deposits can be used only in scheme B for such purpose. This is only, when the assets and liabilities of bank, of scheme A, are at risk than scheme B, where assets and liabilities of bank are categorized in two windows. In fact, in scheme A, (1) demand deposits are reformable through demand of depositors and the guarantee of demand deposits is capital value; (2) Finance risk bearing investment projects use the demand deposits; and (3) reserve requirements are not prescribed for the demand and investment deposits, due to this an asset-liability inequality can be held, leading possibility of loss of worth, or bank collapse, (Errico and Farahbaksh, 1998).
Conceptual difference between Islamic and conventional banks
Conventional Banks 1. Conventional banks functions and operating modes are based on self developed principles. 2. Conventional banks provide fixed return. 3. Conventional banks focus only to generate profit without any restriction. 4. Conventional banks only deals with tax but not deals for the collection and distribution of Zakat. 5. Conventional banks focus only on lending to get interest in shape of profit. 6. The defaulter of the bank pays extra charges as a penalty. 7. The bank has no concern with clients equity growth. 8. Conventional banks can easily borrow money from money market. 9. Conventional banks did not provide attention to develop expertise in project appraisal and evaluations. 10. Bank build relation with clients of creditor and debtors. Islamic Banks 1. Islamic banks functions and operating modes are based on the Islamic Shariah principles. 2. The Islamic banking based on profit and loss sharing. 3. It also focuses to generate profit according to the Islamic Shariah principles. 4. Islamic banks are used to provide services of collection and distribution of Zakat. 5. 6. Islamic banking promotes partnership business.

Islamic banks are multipurpose institution because of this their scope is wider. 7. Islamic banks highly appreciate equity growth for public interest. 8. Islamic Shariah principle of profit and loss sharing provides equal opportunity to the both. 9. Attention to developing projects appraisal and evaluation process is better due to profit and loss sharing principle. 10. Islamic bank create a relation with client as a partner, investor and trader.

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Conceptual difference between Islamic and conventional banks - continued
11. Conventional banks provide guarantee to clients for their deposits. 12. Conventional bank greatly emphasis on the client creditworthiness. Source: Errico and Farahbaksh, (1998).

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11. Islamic bank did not take responsibility of return of real equity. 12. Islamic banks clients can lose their actual deposit rather then the profit.

Methodology
To analyze the performance of Pakistans banks, the method of ratio measures have been used. The ratio measure method is not new to measure the performance. In the 1970, Libby and in 1973 OCornor adopted this method to check the performance. Afterwards Shimerda & Chen 1981, Rose 1981, Sabi 1996, Samad 1999, Ahmed, Hassan (2007) used this method in their research work. The method of ratio measures removes the disparities and shows positive aspects. In this study two Islamic bank namely (Meezan Bank, and Bank Islami) and two commercial banks (Standard chartered Bank and Muslim Commercial Bank) are considered for this research. The Financial Statements of all four banks are obtained from the website of each banking firm. The Financial Statements of all four banks (Meezan Bank, Bank Islami, Standard Chartered Bank and Muslim Commercial bank) are used for the period of 2007-10.

Measures of Performance
Performance evaluation process is complicated because assessment interaction involved between the environment, internal operations and external activities. Normally, to measure the financial performance of financial intermediaries, financial ratios are usually used. To assess the financial performance the primary method is used to analyzing accounting data. The Financial ratios generally provide a better and broader understanding of the banks financial situation even from the bank started its operations and constructed from accounting data contained on the banks balance sheet and financial statement. For the purpose of comparison of financial performance of Islamic and conventional banks financial measures are used which contains 14 ratios. These are the measures which are categorized as listed below. 1. Profitability Ratios For the purpose of assessment of banks profitability related to the volume of sale, size of assets, speculation of stake holders can be achieved by using the profitability ratios. The lot of measures is available to check the profitability but here we use only four major ratios below. Gross Profit Margin (GPM) Gross profit margin estimate the income per rupee percentage outstanding after the cost payment, According to bank perspective, if the ratio is at its maximum, the ratio considered by the bank efficient and gainful. Gross profit margin ratio can be can be calculated by the formula given below. Gross profit margin ratio formula = Gross profit*100/Income Cost to Income (CTI) Cost to income ratio assesses the banks efficiency in producing income. According to bank perspective, if the ratio is at its minimum, the ratio would consider efficient by the bank. The cost to income ratio can be calculated by the given formula below. Cost to income ratio formula = cost of income * 100/ Income

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Net Profit Margin (NPM) Net profit margin assesses the financial position and efficiency of the bank. According to the banks perspective, if the ratio is at its maximum, the bank would consider profitable and efficient. The net profit margin ratio can be calculated by using the formula given below. Net profit margin ratio formula = NPATZ * 100/ Income Operating Profit Margin (OPM) Operating profit margin ratio determines the profit created through the operations of bank. Operating profit margin ratio can be calculated through the formula given below. Operating profit margin ratio formula = NPBTAZ*100 / Income 2. Earning Ratios Earning ratios measure the overall earning performance of the bank and its efficiency in utilizing assets, liabilities and equity. For this study purpose, two earning ratios are used which are listed below. Return on Equity (ROE) Return on equity ratio evaluates the return received on the bank shareholders. According to the banks perspective, if the ratio is at its maximum in comparison of market value, the bank would consider efficient and profitable. For the calculation of Return on Equity ratio the following formula can be used. Return on Equity Ratio formula = NPBTAZ / share holder book value Return on Net Assets (RNA) Return on assets ratio measure the effectiveness of bank management and how the existing resource has been utilized to produce the earnings. If the ratio is at its highest level the bank would be effective. The ratio can be calculated by using the formula given below. Return on Net Assets ratio formula = NPBTAZ / Total Assets

Return on Capital Employed


The Return on Capital Employed, ratio is one of the most important operating ratios that can be used to assess corporate profitability. It is expressed as a percentage and can be very revealing about the industry/ bank operates in, the skills of the management and occasionally the general business climate. Return on Capital Employed = NPAT/ (Total Assets-Current Liabilities) 3. Liquidity Ratios For the survival of long run it is very crucial to maintain the correct level of liquidity for any kind of business. But the lower level of liquidity May shows the business financial and operational risks, a higher liquidity is not good for business because this may cause of lower returns. For this research purpose we will use two major liquidity ratios listed below. Current Ratio (CR) Current ratio gives the indicator that whether or not bank has capacity of resources to pay its debt over the business cycle. The optimal ratio achieved when total liabilities are less or equal to half of the total assets. This ratio can be calculated using the formula given below. Current Ratio formula = Current assets / current liabilities

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Networking Capital to Income (NCTS) Networking capital to income ratio estimates the banks outstanding balance after deducting the short term commitments. Networking capital to income ratio can be calculated by using the formula given below. Networking capital to income ratio formula = (Current assets-current liabilities)/ Income 4. Credit risk Ratios Solvency can also be described as the capacity of a corporation to meet up its long-term fixed expense and to complete long-term expansion and growth. The better a company solvency, the better it is financially. We have use three major Credit risk performance ratio below. Equity to Assets (EQTA) Equity to assets ratio measures the balance between the owners total equity and the size of the total assets. The ratio can be calculated by using the formula given below. Equity to assets ratio formula = Total Equity / Total Assets Equity to Net Loan (EQL) This ratio measures the balance between owners total equity and its total loans. Equity to net loan ratio can be calculated by the formula given below Equity to net loan ratio formula = Total Equity / Net Loans Debt To Equity (DER) Debt to Equity ratio compares owners capital to borrowed funds. By using the formula given below debt to equity ratio can be calculated. Debt to Equity ratio formula = Debt / Equity Capital 5. Assets Activity Performance Ratio Assets activity performance ratios provide details of how a business is effective in using of its different types of assets (fixed and current). It also shows the link between total income and existing level of assets. If the ratio is at its high level the bank would be effective. We have using two major asset activity ratios for this research which are listed below. Fixed Assets Turnover (FATR) Fixed assets turnover ratio measures the efficiency of the bank, and how the bank makes use of its total fixed assets to produce income. This ratio can be calculated by the use of formula given below. Fixed assets turnover ratio formula = Income / net fixed assets Net Assets Turnover (NATR) Net assets turnover ratio measures the efficiency of the bank, and how the bank makes use of its total net assets to produce income. This ratio can be calculated by the use of formula given below. Net assets turnover ratio formula = Income / Net assets

Findings
Bank Islami of Pakistan managed to generate high gross profit by keeping its operating profits to minimum level as compare to its competitors and it is proved by analyzing the figures of financial year 2009-2010. Beside this bank cant show higher increment in generating the high net profit and operating profit due to reduction in bank revenue and increase in expense. Meezan bank exemplified rising tendency in gross profit of FY 2008-09 and conversely showed reduction in gross profit margin

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in FY 2009-10 and revealed increase in net profit margin and operating profit margin due to bank effectiveness in cost reduction. Standard Chartered bank is displayed increasing drift of gross profit margin and also bank exhibited increasing inclination of net profit and operating margin. Bank is proficient to maintain its expenses and generating its profit. Muslim Commercial bank gross profit margin is in declining trend due to gradually increase in bank revenue and bank net profit and gross profit margin is also in reduction due to escalating trend of expenses. Bank is less effective in reduction of expenses and in generating high profit. Bank Islami return on equity and return on assets are evolving in zigzag. The bank Islami return on capital employed ratio indicates growth of 1.94%, 1.10% and 11.61% respectively due to increase in liabilities and increase in net profit after tax. In comparison, Meezan bank of Pakistan is reflecting superior performance than Bank Islami. Meezan bank return on capital employed shows increasing growth from -0.62%, 0.07% and 0.25% due to increasing tendency of liabilities. Standard Chartered bank return on equity, return on assets and return on capital employed reduced due to increase in equity and assets. Muslim Commercial bank return on equity, return on assets and return on capital employed are in reducing trend due to increase in equity and assets. Bank Islami demonstrates increasing trend in current liabilities, due to increase in liabilities. Bank is least effective to generate current assets and also shows reduction in revenue. Bank Islami shows increase 112% in current liabilities. Meezan bank is effective to increase its current assets growth and shows efficiency in reduce its current liabilities. Standard Chartered bank is showing steady increase in assets and banks liabilities are going in the same of assets. Bank shows increasing trend in networking capital to income ratio due to reduction in bank revenue. Muslim Commercial bank current ratio is showing increase in assets and also increase in liabilities. Networking capital to income ratio reduced due to increase in revenue. Bank Islami equity trend is in reduction and shows increasing trend of loans and debts. Meezan bank is also in same situation for equity growth and the bank equity to loans ratio trend can be seen in reduction and also bank shows reduction in bank debt. Standard Chartered bank assets and loans are increasing and bank equity is also increasing but these elements effect the bank ratio. Muslim Commercial bank equity to assets ratio shows increasing trend due to increase in equity and bank debts are also in increasing trend. Meezan bank shows increase in fixed assets and revenue. Bank shows reduction in net assets. Bank Islami fixed assets and net assets are in reduction trend. Standard Chartered bank fixed assets turnover ratio is in reducing trend and shows increase in the year 2010 and net assets turnover ratio also shows reducing trend but increased in the year of 2010. Muslim Commercial bank shows increasing trend of fixed assets turnover ratio due to significant increase in income and bank net assets turnover ratio trend at same pace because the bank income and assets are showing increasing trend.

Trend Analysis
1. The trend analysis of Assets, liabilities, share capital, and reserves of Meezan bank of Pakistan shows the gradually increasing trend from 2007-2010. The trend analysis of balance sheet and income statement clarifies that balance sheet trend is increasing every year but the income statement shows that the profit before tax and profit after tax are reduced only in the year 2008 but over all shows increasing trend. (Insert Figure-5 &6). 2. Bank Islami trend analysis show increasing trend of balance sheet because the assets and liabilities are increasing every year. Net assets increase increased in 2008 and then reduced and show consistency. The bank Islami income statement shows the increasing trend in the total income and in total expense. Expense increasing ratio reduced in 2010. The income statement shows net profit before tax & zakat and profit before tax & zakat negative in 2007 and then show positive in 2008 and in 2009 show negative and in the year of 2010 the bank show positive net profit tax & Zakat and profit after tax and Zakat. (Insert Figure-7 &8).

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3. Standard Chartered Bank trend analysis of balance sheet (Assets, Liabilities. Net assets, Share capital, Reserves) shows the increasing trend of assets and liabilities. The banks net assets are showing increase at very low and share capital remain the same in the four years period. The banks reserves trend is increasing every year. The Income statement of the bank trend analysis showed that the income reduced in the selected 1st year and in 2010 approximately shows 28% increase in the total income. Trend analysis of total expense is almost increasing except reduction in the 2009. The profit before tax & Zakat and profit after tax & Zakat shows reduction trend from 2007-08 and increased from 2008-09 and in 2009-10 shows the increase of 73.67% and 76.68% respectively. (Insert Figure-9 &10). 4. Muslim Commercial bank trend analysis shows the increasing trend of balance sheet all items. The Muslim Commercial bank income statement shows the increasing trend of income, expense. The banks profit before tax & Zakat is increasing gradually with 2.56%, 5.56% and 11.80% respectively. Due to increase in expenses the banks net profit after tax & Zakat increasing ratio is less. (Insert Figure-11 &12).

Concluding Remarks and Suggestions


Islamic banking system in Pakistan was launched with some objectives of playing a valuable role as Islamic banking entails a direct and detailed responsibility in the social and economic development of the country. Apparently at the advent of Islamic banking system, focus was on short-term commercial activities to prove their existence in the market. All efforts were made to achieve profits and to maintain level of success as a crucial objective of the Islamic banking system. Shariah principles of Islamic banking and finance are suppose to be enough to support and facilitate all modern banking products and services. The Islamic Shariah principles should also comprise the laws, practices, procedures, and instruments that support to maintain and special purpose considerations of distributive justice and impartiality. The banks deal in areas of customer relationship, legal support for the banks products and services and customer types varying with legal considerations. The banks are rendering their duties and responsibilities, legal actions against customers, finance aspects under umbrella of Islamic Shariah. According to the Islamic Shariah principle two monitory policy instruments used by the Islamic banks (i) A real transaction process must involve capital link and monitory value exchange for the monitory value is not acceptable. To bring change and betterment in the community, use of financial resources must be better and productive. (ii) Transaction must be on the base of profit and loss sharing i.e. supplier of capital must share the profit and loss with the user of capital. It is suggested that Islamic banks of Pakistan must try to implement mechanism of profit and loss sharing principles in their present investment decisions on urgent basis for implementation on project development and special clients programs. Islamic banking depends on Islamic Shariah and deals with their depositors according to the religious commitments to maintain the level of market share instead of competition and market extensive services.Islamic banking of Pakistan must focus to build their relationship on religious and on the base of economic considerations. It is just to achieve the market share and true comparison with conventional counterparts. The bank must focus to develop transparency in their system like, financial reporting, auditing, and accounting. To achieve their goals, Islamic banks of Pakistan must adhere to monitor and regulate the investment projects in the better way to increase productivity and attract new investors into Islamic banking system. Islamic banking system must try hard to educate all those investors who refuse to invest their funds in interest based conventional banks and still need more information. There is also need to pay the attention on low level investors who are ignored by the conventional banks. Finally, Islamic banking of Pakistan must concentrate to increase their market share, reduce their expenses as it can only happen by taking strategic decisions with blend of synergy and

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synchronization in efficient decision making process while monitoring projects of investment and enhancing efficiency of management.

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Annexture 1: Comparison of All Banks Assets, Liabilities, Income and Expenses


Figure 1: Total Assets

Figure 2: Total Liabilities

Figure 3: Total Income

Figure 4: Total Expense

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Table 1:

Journal of Money, Investment and Banking Issue 22 (2011)


Financial Performance of Islamic and Conventional banks (Average 2007-2010 period)
SCB MCB 64.66 35.34 60.32 87.98 24.38 3.30 0.24 1.11 1.78 0.14 0.16 6.38 1.47 0.06 Meezan Bank 33.48 66.52 23.23 33.48 13.33 1.01 0.13 1.05 1.28 0.07 0.08 1.36 2.31 0.46 Bank Islami -24.89 124.89 -10.34 -10.65 -2.39 -0.33 -0.02 1.16 3.53 0.18 0.20 0.31 0.56 0.03

Profitability Ratios Gross Profit Margin (GPM) Cost of Sales (COS) Net Profit Margin (NPM) Operating Profit Margin Earning Ratios Return on Equity Return on Assets (ROA) Return on Capital Employed Liquidity Ratios Current Ratio Networking to sale ratio Credit Risk Ratios Equity to Assets (EQTA) Equity to Net loans (EQL) Debt to Equity (DE) Assets Activity ratios Fixed Assets Turnover Net Assets Turnover

18.26 81.74 11.95 18.47 4.24 0.69 0.04 1.19 3.00 0.16 0.19 6.35 3.21 0.05

Appendix 2: Figures for Trend Analysis


Figure 5: Meezan Bank Balance Sheet

Figure 6: Meezan Bank Income Statement

Journal of Money, Investment and Banking Issue 22 (2011)


Figure 7: Bank Islami Balance Sheet

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Figure 8: Bank Islami Income Statement

Figure 9: Standard Chartered Bank Balance Sheet

Figure 10: Standard Chartered Bank Income Statement

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Journal of Money, Investment and Banking Issue 22 (2011)


Figure 11: Muslim Commercial Bank Balance Sheet

Figure 12: Muslim Commercial Bank Income Statement