Comparison between Islamic and conventional banking

This study investigates the comparison between the Conventional Bank (MCB) and Islamic Bank
(Dubai Islamic bank) of Pakistan and analysis of different activities. The history of conventional bank of
Pakistan is very affluent in comparison to the Islamic bank. Islamic banking industry in Pakistan is in its
early stages, very few bank are operating in this sector which performs pure Islamic banking. We need
to understand the terms “Conventional Banking” ,”Islamic Banking” their differences and “Banking
efficiency”.
Islamic Banking refers to banking system based on principles of Islamic law (Sharia) and its practical
implementation through development of Islamic economics. It promotes risk sharing between Provider
of capital (investor) and user of funds (Entrepreneur).Similar to conventional banking, rates of profits
are aimed at maximization subject to Sharia principles. One of the important aspects of
Islamic Banking system is inclusion of Zakat not only on customers but also on the individuals
governing such a system. Islamic Banking system ensures an equal contribution to all parties involved,
whether in profitability or in case of any loss incurred. Customers are always given status of partners or
contributors in any financial transaction or Business deal. Pakistan has emerged as one of potential
growing Islamic Banking market and till to date five Islamic banks are operational in accordance to
Sharia principles and looking forward to seeing more of these in the future.
Islamic Banking is growing with fast speed all over the world particularly in Pakistan while the
conventional banking is surprisingly declining in the countries which are the champion of capitalism and
founder of interest-based financial system. Now these developed countries are trying to contain financial
crisis by manipulating interest rates and have brought down it near to zero level but have failed to
achieve desired results. Dozens of centuries old and strong financial institutions have been wiped out
form the financial scene.
In this depressed world financial scenario, Islamic banking has emerged as a strong alternate financial
system. It has recorded a phenomenon growth within a short span of time. Now Islamic financial
industry has reached $1 trillion US dollar and is growing about 20 percent annually. Its growth is not
restricted to the Muslim societies but Islamic financial products are also gaining popularity among non-
Muslim countries. Many global banks have also opened separate windows to serve their Muslim clients.
Similarly, about all global agencies like IMF, World Bank, IFC, ADBP, etc, have set up special cell to
investigate into this new phenomenon.
Conventional Banking is based on pure financial model, in which banks mainly borrow from savers
and lend to enterprises or individuals. They make profit among the difference of rate of interests among
borrowing and lending of money. Apart from these conventional bank also earn from the services they
provide such as letter of credits , (In which they earn the profit based on services of intermediately party
among importers and exporters of any said goods or services) etc. One drawback of conventional
banking is that it prohibits from trading in the share holding of the borrowing concern.
Because of fractional reverse system ,they produce derivative deposits which helps them multiply their
low-cost resources .Conventional Banking sector of Pakistan is approximately based on 35 banks ,which
will grown faster in coming years .

In this study we have done comparison between conventional bank and Islamic
bank. The conventional bank includes MCB LIMITED BANK and Islamic bank
includes the DUBAI ISLAMIC BANK.

CONVENTIONAL BANK: MCB

HISTORY OF THE MCB BANK LIMITED

Before separation of Indo Pak, the need for more Muslim banks was felt. And Muslims having strong
financial capacity were thinking to invest in this sector as well. This was the idea which paved the way
for setting up MCB Bank Ltd known as MCB. This was the third Muslim bank in the subcontinent.
HISTORY
This bank was incorporated under companies’ act 1913 on 9th July, 1947 (just before partition) at
Calcutta. But due to changing scenario of the region, the certificate of incorporation was issued on 17th
August, 1948 with a delay of almost 1 year; the certificate was issued at Chitagong. The first Head
office of the company was established at Dacca and Mr. G.M. Adamjee was appointed its first chairman.
It was incorporated with an authorized capital of Rs. 15 million.
After some time the registered office of the company was shifted to Karachi on August 23rd, 1956
through a special resolution, now recently the Head office of MCB has been transferred to Islamabad in
July, 1999 and now Head office is termed as Principle Office.
This institute was nationalized with other on January 1st, 1974. At that time it had 506 branches and
deposits amounting to Rs. 1,640 million. Although. MCB has a reputation of a conservative bank but
nationalization also left its effects on this institute as well and by end of year 1991 in which it was
privatized the total number of branches were 1.287 and deposits amounting to as high as Rs. 35,029
million
PRIVATIZATION
When privatization policy was announced in 1990, MCB was the first to be privatized upon
recommendations of World Bank and IMF. The reason for this choice was the better profitability
condition of the organization and less risky credit portfolio which made'' it a good choice for investors.
On April 8th, 1991, the management control was handed over to National Group (the highest bidders).
Initially only 26% of shares were sold to private sector at Rs. 56 per share.
AFTER PRIVATIZATION
Ten years after privatization, MCB is now in a consolidation stage designed to lock in the gains made in
recent years and prepare the groundwork for future growth. The bank has restructured its asset portfolio
and rationalized the cost structure in order to remain a low cost producer.
After privatization, the growth in every department of the bank has been observed. Following are some
key developments:
Launching of different deposit schemes to increase saving level.
Increased participation on foreign trade.
Betterment of branches and staff service level.
Introduction of Rupee Traveler Cheques & Photo Credit Card for the first time in Pakistan.

MCB BANK TODAY

MCB has been awarded as a Euro money Award 2008 for the “Best Bank in Asia".
MCB today, represents a bank that has grown with time, experience and Pakistan. A major financial
institution, in scope and size, it symbolizes a fully growing tree evergreen, strong, and firmly rooted.
FOREIGN TRADE
The bank conducted import business during the year amounting to RS. 54.0 billion As compare to RS.
56.4 Billion In 2005. The export business slightly improves to RS. 36.9 Billion From RS. 35.1 Billion.
In 2006 home remittances decline to RS. 16.7 Billion From 30.7 Billion the decline in home remittances
business was due to freezing of Foreign Currency Accounts, which has affected the confidence of
Pakistanis working overseas.
YEAR 2006 COMPLIANCE
MCB’s strength lies in providing a technological base at the gross root level of the society with a
challenge to educate and assimilate such systems across vast cultural and economic backgrounds. With
over 768 automated branches, 263 online branches, over 151 MCB ATMs in 27 cities nationwide and a
network of over 16 banks on the MNET ATM switch, MCB continuously innovates new products and
services that harness technology for the customer’s benefits.
THE BUSINESS
MCB is in it’s over 50 years of operation. It has a network of over 1,000 branches all over the country
with business establishments in Sri Lanka and Bahrain. The branch break-up province wise is Punjab
(57%), Sindh (21%), NWFP (19%) and Blochistan (3%) respectively.
MCB has an edge over other local banks, as it was the first privatized bank. The State Bank of Pakistan
has restricted the number of branches that can be opened by foreign banks, an advantage that MCB
capitalizes because of its extensive branch network.
Fourteen years after privatization, MCB is now in a consolidation stage designed to lock in the gains
made in recent years and prepare the groundwork for future growth. The bank has restructured its asset
portfolio and rationalized the cost structure in order to remain a low cost producer.
MCB now focuses on three core businesses namely Corporate, Commercial and Consumer Banking.
Corporate clientele includes public sector companies as well as large local and multinational concerns.
MCB is also catering to the growing middle class by
Providing new asset and liability products. The Bank provides 24 hour banking convenience with the
largest ATM network in Pakistan covering 27 cities with over 151 ATM locations. The Bank’s Rupee
Traveler Cheques have been market leaders for the past six years and have recently launched their Gift
Cheque Scheme.MCB looks with confidence at year 2009 and beyond, making strides towards
fulfillment of its mission, "to become the preferred provider of quality financial services in the country
with profitability and responsibility and to be the best place to work".
 HISTORY AND INTRODUCTION OF DUBAI ISLAMIC BANK
Dubai Islamic Bank Pakistan brings with it a legacy of outstanding success, constant innovation and a
solid commitment to practice Islamic financing to the letter and spirit. Dubai Islamic Bank Pakistan is a
wholly owned subsidiary of Dubai Islamic Bank headquartered in UAE. As the world’s first Islamic
bank, Dubai Islamic Bank has maintained its status quo as an undisputed market leader in Islamic
financing since its inception in 1975. DIB is the leading arranger of Sukuk issuances globally aand has
led the single largest Sukuk in the world. DIB’s Shari’a expertise is respected globally.
Dubai Islamic Bank Pakistan Limited (DIBPL), commenced operations in 2006. Since then, DIBPL has
undertaken major initiatives to expand its branch network across the country. Under its consumer
banking division, the bank is offering state-of-the-art Sharia compliant products that effectively compete
with those being offered in the market by conventional banks. It also has expertise in providing Retail,
Private, Small and Medium Enterprises, Corporate, Investment Banking and Advisory services.
DIBPL has also introduced Priority Banking and Internet Banking, both of which are being recognized
as benchmark products in their respective categories. Besides regular banking services, the Bank is
committed to bringing foreign investment to the country. DIBPL's corporate wing has actively pursued
foreign investors and convinced world renowned giants from the GCC to be part of Pakistan's economy.
DIBPL is 100% owned by Dubai Islamic Bank PJSC (Public Joint Stock Company) and its nominated
shareholders. The parent company is a listed company in Dubai the State Bank of Pakistan (the SBP)
granted a “Scheduled Islamic Commercial Bank” license to the Bank on November 26, 2005 and
subsequently the Bank received the Certificate of Commencement of Business from the Securities and
Exchange Commission of Pakistan (the SECP) on January 26, 2006 and commenced operations as a
scheduled Islamic Commercial Bank with effect from March 28, 2006 on receiving certificate for
commencement of business from the SBP. The Bank is operating through 35 branches and 1 sub-branch
as at December 31, 2009 (2008: 23 branches and 2 sub-branches). The registered office of the Bank is
situated at Hasan Chambers, DC-7, Block-7 Kehkashan, Clifton, and Karachi. The Bank is a wholly
owned subsidiary of Dubai Islamic Bank PJSC, UAE (the holding Company).
World Renowned Shariah Board
Essential to the Bank’s success has clearly been its close compliance with the Islamic Shariah. Dubai
Islamic Bank has a Fatwa and Shariah Supervisory Board, comprising of a number of well-respected and
knowledgeable scholars with extensive experience in law, economics, and banking systems and
specializing in law and finance as prescribed by Islamic Shariah who are an integral element in the
future development of the Bank.
The Board is appointed by the bank’s General Assembly and ranks above the Board of Directors. Its task
is to supervise the development and production of innovative Shariah-compliant investment and
financing products. The Board is fully competent to issue fatwas in any matter proposed to it by
different business units of the bank, and the Shariah auditors ensure that these are carried out in all
banking transactions. The presence of such expert Shariah supervision at DIBP is clear evidence of how
Islamic banking is practiced in letter and spirit, providing shareholders and customers with complete
assurance that all dealings are free from riba (interest).
All Dubai Islamic Bank products and services are approved by the Bank’s Shariah Board and are at par
with those provided by conventional bank. Dubai Islamic Bank Pakistan aims to provide customers with
Islamic solutions for all their financial needs. They are designed and developed as stand-alone products
that are highly competitive with all other available products in the market – Islamic or conventional.
Enhancing its reputation built on the guiding principles of ethical and responsible modes of banking and
finance, Dubai Islamic Bank Pakistan remains exceptionally well-placed to meet the banking challenges
as it strives for excellence in the provision of Islamic Banking for today’s world. With path-breaking
vision and bold strategies,
FUNCTIONS OF DUBAI ISLAMIC BANK PAKISTAN LTD
1. To collect deposits from the people on profit-and-loss sharing basis.
2. To provide all necessary banking services to its customers.
3. To finance those projects which generates employment?
4. To allocate financial resources (financing) in a way that it ensures equitable distribution of income.
5. To act as a development institution.
6. To promote entrepreneurship by providing finance on profit and loss basis.
7. To transform saving into investment in such a way that it benefits to the majority.
8. To provide expertise and technical advice to the finance-taker in order to improve the process of
production and profitability.
 FINANCING & INVESTMENT ACTIVITEIES

Financing are financial products launched by the Bank and principally comprise Murabaha, Musharaka,
Musharaka cum Ijara, Wakala, Wakala Istithmar, Istisna cum Wakala, Ijara Muntahiya Bil Tamleek and
Shirkatulmilk. These are stated at amortised cost (except for Murabaha which is accounted for at gross
receivable) net of general and specific provisions.Provision against non-performing financing is made in
accordance with the requirements of the Prudential Regulations issued by the SBP and charged to profit
and loss account. Specific provisions are made for identified doubtful financing in addition to general
provisioning requirements. Murabaha to the purchase orderer is a sale transaction wherein the first party
(the Bank) sells to the client/customer a Sharia compliant asset/good for cost plus a pre-agreed profit
after getting title and possession of the same. In principle on the basis of an undertaking (Promise-to-
Purchase) from the client (the purchase orderer), the bank purchases the goods/assets subject of the
Murabaha from a third party and takes the possession thereof, however the bank can appoint the client as
its agent to purchase the goods/assets on its behalf. Thereafter, it sells it to the client at cost plus the
profit agreed upon in the Promise.

Import Murabaha is a product, used to finance a commercial transaction which consists of purchase by
the bank (generally through an undisclosed agent) the goods from the foreign supplier and selling them
to the customer after getting the title to and possession of the goods. Murabaha financing is extended to
all types of trade transactions i.e. under Documentary Credits (LCs) and Documentary Collections.
Musharaka is a form of partnership in business with distribution of profit in agreed ratio and distribution
of loss in the ratio of capital invested.

In Shirkat ul-Milk / Musharaka cum Ijara, the bank and the customer become co-owners in certain
identified assets by acquiring the same from a third party or by purchase of any asset from the customer
by the bank of an undivided share of an identified asset. Thereafter, the customer/co-owner leases the
share of the bank from the bank. Wakala Istithmar has been developed to facilitate exporters through
investment agency where the customer acts as the investment agent of the bank. This medium is used to
cater to the export based customer’s financial needs i.e. help the customer to bridge the gap between the
commencement of the manufacturing process and the dispatch of goods to the ultimate buyer/buyers.
Istisna cum Wakala product has two legs: first the bank acquires the described goods by way of Istisna
to be manufactured by the Customer from raw material of its own and once the goods are delivered to
the bank, the customer through an independent agency contract, will sell the same to various end-users
as the agent of the Bank. Ijara Muntahiya Bil Tamleek is a lease contract in which the lease asset’s title
is transferred at the end of the lease term to the lessee through an independent sale agreement.

PRODUCTS OF ISLAMIC BANK

The industry over the years has managed to offer a wide array of products encompassing almost the
entire range of Islamic modes of financing that are able to cater to the needs of majority of the sectors of
the economy.
ASSETS SIDE PRODUCTS
With its team of seasoned professionals, DIBPL has become the Investment Bank of choice for local and
regional clients in a short span of time. We leverage our regional expertise and local knowledge to create
an efficient blend of solutions for our customers. Driven by Sharia principles, we provide a mix of
following services:
 Project Finance.
 Mergers & Acquisitions Advisory.
 Privatization Advisory.
 Real Estate Advisory.
 Balance Sheet Restructuring.
 Private Placements.
 Syndications.
 Sukkuk Issuance
DIBPL’s Investment Banking provide its clients with a unique combination of expertise, broad range of
investment banking/financial services and access to top regional decision makers. We derive strength
from our team that has unrivalled experience in dealing with the largest M&A, Advisory and
Fundraising transactions in the country. In the short span of less than one year, the Investment Banking
has been instrumental in attracting investment/interests from major groups from the UAE including:
• Nakheel.
• Al- Habtoor Group.
• Dubai Properties.
Dubai Islamic Bank covered by the industry through various Shariah compliant modes financial products
launched by the Bank and principally comprise
 1. 1.Murabaha,
2. Mudaraba,
3. Musharaka,
4. Ijarah,
5. 5 Diminishing Musharaka,
6. 6 Salam,
7. 7.Istisna,
8. Wakala .
9. Islamic Export Refinance etc.
10. (Please See Table. 10.13) include
a. Corporate / Commercial,
b. Agriculture,
c. Consumer,
d. Commodity Financing,
e. SME sector,
f. Treasury & Financial Institutions
Provision against non-performing financing is made in accordance with the requirements of the
Prudential Regulations issued by the SBP and charged to profit and loss account. Specific provisions are
made for identified doubtful financing in addition to general provisioning requirements.
Import Murabaha
Import Murabaha is a product, used to finance a commercial transaction which consists of purchase by
the Bank (generally through an undisclosed agent) the goods from the foreign supplier and selling them
to the customer after getting the title to and possession of the goods. Murabaha financing is extended to
all types of trade transactions i.e., under Documentary Credits (LCs), Documentary Collections and
Open Account.
Wakala Istithmar Facility (Exports)
A unique structure tailor-made for the exporters of the country, the Wakala Istithmar facility which has
been developed under the direct guidance of Sharia to meet the working capital requirements of
exporters and local manufacturers speaks volumes about our Shari’a expertise and edge in bringing new
Shari’a compliant products to the market for promotion of Islamic banking and ridding those who desire
Halal income from interest-based financing. Through this facility DIBPL is able to finance the exporter
before shipment, be it in pre-manufacturing or post manufacturing scenarios.
 FINANCING
Financing in Pakistan

Murabaha 2,430,861 2,559,791

Musharaka cum Ijara – Housing 5,514,369 5,148,476

Musharaka cum Ijara – Autos 5,095,718 4,653,991

Ijara Muntahiya Bil Tamleek– Autos 216,259 221,479

Musharaka cum Ijara – Other 1,315,603 1,835,915

Wakala Istithmar 104,359 232,023

Shirkatulmilk 1,241,136 376,389

Service Ijarah 700,000 –

Musharaka 1,431,250 1,183,750

Istisna cum Wakala 2,908,627 1,996,850

Financing against bills - Wakala Istithmar 3,410 121,680

Financing – gross 20,961,592 18,330,344

Less: Provision against non-performing financing (371,979) (256,843)

Financing – net of provisions 20,589,613 18,073,501

Murabaha sale price 6,964,817 8,664,720

Purchase price (6,603,760) (8,286,289)

361,057 378,431

Deferred Murabaha income

Opening balance 64,507 48,410

Deferred during the year 361,057 378,431
Recognized during the year (376,834) (362,334)
48,730 64,507
 Investment OF MCB
The Bank classifies its investments as follows:
a) Held for trading
These are securities, which are either acquired for generating profit from short-term fluctuations in
market prices, interest rate movements, dealers margin or are securities included in a portfolio in which
a pattern of short-term profit taking exists.
b) Held to maturity
These are securities with fixed or determinable payments and fixed maturity in respect of which the
Bank has the positive intent and ability to hold to maturity.
c) Available for sale
These are investments, other than those in subsidiaries and associates that do not fall under the ‘held for
trading ‘or’ held to maturity categories. Investments are initially recognized at cost which in case of
investments other than 'held for trading’ include transaction costs associated with the investment. All
purchases and sales of investments that require delivery within the time frame established by regulation
or market convention are recognized at the trade date. Trade date is the date on which the Bank commits
to purchase or sell the investment.
In accordance with the requirements of the State Bank of Pakistan, quoted securities, other than those
classified as 'held to maturity', investments in subsidiaries and investments in associates are
subsequently re-measured to market value. Surplus / (deficit) arising on revaluation of quoted securities
which are classified as 'available for sale', is taken to a separate account which is shown in the balance
sheet below equity. Surplus / (deficit) arising on revaluation of quoted securities which are
classified as 'held for trading', is taken to the profit and loss account currently
 CASH AND BALANCES WITH TREASURY BANKS
2009
2008

(Ru
pees in '000)

In hand - local currency 9,104,489

11,239,357

In hand - foreign currencies 1,059,928

142,188

With State Bank of Pakistan (SBP) in:

Local currency current account 17,221,148

19,038,530

Foreign currency current account 7,464

261,891

Foreign currency deposit account 3,363,399

2,600,990

With other central banks in foreign currency

Current account 23
24,287 214,910

With National Bank of Pakistan in local currency

current account
7,694,156 6,133,306

=== =
=== == = = = = =

38,774,
871 39,631,172
BORROWINGS

In Pakistan 43,658,408 17,742,776

Outside Pakistan 1,003,680 4,921,064
== = = = = = = = = = === = = = = = =
44,662,088 22,663,840
Particulars of borrowings with respect to currencies
In local currency 43,658,408 17,742,776
In foreign currencies 1,003,680 4,921,064
== = = = = = = = = = === = = = = = =
44,662,088 22,663,840
Details of borrowings (secured / unsecured)
Secured
Borrowings from State Bank of Pakistan
Export refinance scheme 8,829,527 9,217,004
Long term financing facility 80,220 2,044,460
Long term financing - export oriented projects scheme 2,018,330 56,291
== = = = = = = = = = === = = = = = =
10,928,077 11,317,755
Borrowings from other financial institution 452,398 -
Repurchase agreement borrowings 31,606,331 6,325,021
== = = = = = = = = == = = = = = = = =
42,986,806 17,642,776
Unsecured
Call borrowings 1,146,092 4,418,990
Overdrawn nostro accounts 529,190 602,074
== = = = = = = = = = === = = = = = = =

1,675,282 5,021,064
=== = = = = = = = =
=== = = = = = = =
44,662,088 22,663,840

=== = = = = = = = =
=== = = = = = = =

Financial assets and financial liabilities

Financial instruments carried on the balance sheet include cash and balances with treasury banks, Balances with
other banks, lendings to financial institutions, investments (excluding investment in associates and subsidiaries),
advances, other assets, bills payable, borrowings, deposits and other liabilities. The particular recognition methods
adopted for significant financial assets and financial liabilities are disclosed in the individual policy statements
associated with these assets and liabilities.

The Bank's primary format of reporting is based on business segments.

Corporate Finance

Trading and Sales

Retail and Consumer Banking & Commercial Banking
Analysis and Comparison of conventional bank and Islamic bank

Islamic Banking is growing with fast speed all over the world particularly in Pakistan while the
conventional banking is surprisingly declining in the countries which are the champion of capitalism and
founder of interest-based financial system. Now these developed countries are trying to contain financial
crisis by manipulating interest rates and have brought down it near to zero level but have failed to
achieve desired results. Dozens of centuries old and strong financial institutions have been wiped out
form the financial scene.
In this depressed world financial scenario, Islamic banking has emerged as a strong alternate financial
system. It has recorded a phenomenon growth within a short span of time. Now Islamic financial
industry has reached $1 trillion US dollar and is growing about 20 percent annually. Its growth is not
restricted to the Muslim societies but Islamic financial products are also gaining popularity among non-
Muslim countries. Many global banks have also opened separate windows to serve their Muslim clients.
Similarly, about all global agencies like IMF, World Bank, IFC, ADBP, etc, have set up special cell to
investigate into this new phenomenon. In this paper, the author has probed how an idea floated by some
Muslim economists a few years back has now become a potent reality.
An amazing comparison of four main financial crisis occurred during last two decades in different parts
of the world has been given in the Figure 1. The first major crisis was U.S. Savings and Loan crisis,
1986-95, which involved a fiscal cost of $225 billion to the United States while five percent of GDP
losses. .The second major banking crisis was occurred in Japan in 1990-99, spreading over a period of a
decade and is termed as “ mother of all crises”, costing Japanese economy about $800 billion, about 18
percent of GDP losses. Third major crisis was ensued in East Asian and Latin American countries in
1998-99 that involved fiscal cost about $400 billion, 10 percent of GDP losses. The fourth biggest
financial crisis (generally termed as Sub-prime mortgage loans crisis) was occurred in the United States
in 2007 and is still continued in 2009. IMF estimated its fiscal cost around $1.4 trillion and 10 percent
GDP losses in 2007, which was revised to $2.2 trillion and 16 percent of GDP losses in 2009. This crisis
has hit hard to the United States, European countries and slightly Asian countries. It is to be taken as the
worst financing crisis since Second World War that has jolted the invulnerability and institutional
financial strength of advanced economies.
 THEORETECAL AND PRACTICAL DIFFERENCES BETWEEN
ISLAMIC AND CONVENTIONAL BANKING
Islamic and conventional banking has some basic difference in theory and practice which draws a line of
demarcation between the two entities. Although the basic function of the two institutions is to collect
savings and transform them into junk amount and then lend to business firms, government, public sector
organizations and individuals, yet the mode of the collection of surplus funds from the savers and
lending it to the borrowers is different. In the same way, the two institutions used to lend money to the
borrowers but the objective of lending money is also different. For instance, the objective of the MCB
(conventional bank) is to maximize the wealth of the shareholders and in this way accumulate wealth
through the institution of interest. The conventional bank helps concentration and accumulation of
wealth in the sense that the net profit is distributed among shareholders which are few in number and in
this way the wealth of shareholders rises exponentially year after year. Conventional bank accumulates
wealth by charging interest from its borrowers who are thousands in number but distributes it among
few shareholders while the objective of Dubai Islamic bank is to stimulate business activities through
profit-and-loss sharing and in this way it accelerates circulation of wealth and facilitates distribution of
income. The mood and target of credit allocation of DUBAI Islamic Bank is different, the profit is
distributed among the depositors which are thousands in number and in this way Islamic bank helps
widen distribution of wealth in the society. under profit-and-loss sharing (PLS) system Dubai Islamic
bank as well as their depositors link their own fate to the success of the projects they finance. The
system allows a capital-poor, but promising, entrepreneur to obtain financing.”
These differences make the two institutions totally different from each other. The two institutions
MCB(conventional Bank) and Dubai Islamic Bank operate in the same environment but with
different modes of operation and opposite objectives Let us see how Islamic and conventional
banks are different in their objectives and operations.

1: ANALYSIS OF FINANCING ACTIVITIES

Conventional bank MCB: provides loans to government, business firms, public sector organizations
and individuals. These loans are provided for project-financing, consumer financing and working capital
on fixed interest basis. The conventional bank charge high rates of interest on all these types of loans.
High rate of interest results in failure of businesses and default of loans. Non-performing loans are the
main problem of MCB (conventional bank).
According to MCB annual Report, 2009-2010, the non-performing loans of conventional banks in
Pakistan was 23,238,723 thousand rupees which increased 15692501 thousand in just one year, 2009
According to annual report of MCB 2009, the non-performing loans of bank in 2009 was 23,238,723
thousand rupees (In Retail &Consumer Banking 7,546,222 & in Commercial Banking 15,692,501) .
Return on net assets (ROA) in Retail & Consumer Banking was -2.67% (%)
DUBAI Islamic bank: also provides funds for project financing, consumer financing and for working
capital. But its practice of financing is different from conventional bank. It provides loans on profit-and-
loss (PLS) basis. Moreover, Islamic banks provide loans only for productive purpose and can be used for
specific objective. The funds provided by Islamic banks cannot be used for gambling, speculation,
pornography, alcohol, prostitutions and other such immoral purpose because Islam has prohibited such
activities. Non performing financing during same period was little amount 371979 thousand and
performing financing was 20961592 thousand (Net 20,589,613,000 financing)
2: ANALYSIS OF INVESTMENT ACTIVITIES

Conventional bank MCB: make more than 50 percent investment in government Treasury bills
(Market Treasury Bills 139,569 thousand rupees in 2009 and 774 70,513,126 in 2008rupees ),
bonds(Pakistan Investment Bonds 7,699,324 thousand in 2009), Government Compensation Bonds
286,557000thousand and term finance certificates for security and smooth return(Federal Government
Securities 171,583000 in 2009) . They also earn huge profit from stock market in case of bull-run and
suffer badly in case of its crash. In 2008 the investment to deposit ratio of conventional banks in
Pakistan were 22.78 % (367604711/16134465)
Dubai Islamic bank: the investment to deposit ratio of Dubai Islamic bank was 9.91.3% of Islamic
Banks. Islamic banks also make investment out of their deposits in different sectors. But this investment
is different from conventional banking in a sense that Islamic bank cannot invest in government treasury
bills, bonds and Term Finance Certificates which carries fixed rate of interest. Because under Islamic
laws Islamic banks can only invest in non-interest bearing financial instruments like equity market and
they are prohibited to invest in government bonds and treasury bills. On account of this, Islamic bank
has to face twin problems of excess liquidity and market risk. These two factors in past were responsible
for low profitability of Islamic bank.
But now the situation has been changed and Islamic bank faces no more such problem due to existence
of well-established Islamic money market, Islamic Sukuk and Islamic mutual funds in almost all Muslim
countries. Since 2000 about all central banks of Muslim countries have started issuing Islamic Sukuks
(bonds) and it has provided an opportunity to Islamic banks to invest their surplus funds in these Sukuks.
3: ANALYSIS OF BORROWING ACTIVITIES

MCB (Conventional bank) offer different deposit schemes and borrow funds from the depositors. The
rates of interest on these schemes are fixed and the banks are liable to pay these fixed rates of interest to
depositors at the completion of term whether they earn profit or suffer loss. The depositors have nothing
to do with the loss of bank. However, conventional banks used to pay low return to their depositors and
charge high interest from their borrowers in order to maximize their profit. According to the Bank’
report, 2008, the average weighted deposits rate between 2006 and 2007 in Pakistan was between 2.09
percent to 3.4 percent per annum on interest- bearing deposits while average lending rate was between
11.2% and 11.56% in the same period. The difference between weighted lending rates and deposits rate
is 7.82 percent which is highest as compared to 3 percent of international standard. It indicates how
much high rates of interest is being charged by conventional banks from the borrowers and are paying
very low profit to the depositors.
Dubai Islamic banks: in contrast, paid high return to their depositors and weighted average profit rate
on PLS deposits were between 3.56 percent and 3.79 percent. Profit and Loss sharing deposits earns
more than one percent high return than interest-bearing deposits.

4: ANALYSIS OF DIFFERENT CONCEPT OF RISK-SHARING

Dubai Islamic bank is perfectly a risk-sharing (PLS) system because both investor (lender) and
entrepreneur (borrower) equally share risk. There is no mismatch between the asset and liabilities of
Islamic bank or business firm because their depositors or investors are ready to share loss in case of
economic shock. Thus, there is very minimal chance of bankruptcy of Islamic bank or business firm
because they have inherent strength to cope with the onslaught of financial turmoil or market
disturbance.
Whereas the conventional bank MCB is non-risk-sharing system as the investors or lenders have
nothing to do with the loss of borrower. They receive fixed rate of interest on their investment and they
are not bother where the borrowed money is being spent. In conventional banking, the borrowers are
fully responsible to take every kind of risk and bear loss. In case of business failure, he has to loose
collateral. Opposite to this practice, Islamic bank or investor is vigilant about the proper use of loan and
watch the activities of the borrower because his risk is involved and he can lose total investment in case
of business failure or misuse of loan.
 RECOMMENDATION TO DUBAI ISLAMIC BANK
AWARNESS TO CUSTOMER

Dubai Islamic bank can attract more customers by launching effective marketing campaigns to enhance
awareness towards quality of their services. It helps to enhance the understanding of bank customers
about service quality regarding Islamic and conventional banks in Pakistan. Bank managers should take
quality initiatives to improve their products by considering demographic characteristics of the
customers.

Customer services

Proper attention should be paid to upgrade customer services. Banks are providing a large number of
products and services and facing a tough competition to attract potential customers.

Islamic Bank can attract large customer by providing better services as conventional Bank provide to
their customer. Perception, quality of services, availability of services, confidence in bank and social and
religious factors are playing a motivational role towards Islamic banks.

Enhancement of branches

The branches of Dubai Islamic bank was small in number (35), most of branches were allocated in big
cities. Customer of small cities can not avail the services of these Islamic bank and they prefer to
conventional bank due to large no of braches. They should also open new branches in big cities because
customers have to difficulty to travel a long distance to avail the services of the bank.

Attractive product

Dubai Islamic Bank Pakistan should provide Sharia compliant financial services and products through
the best of innovation, talent and technology. Bank should provide a large number of products as an
alternative for interest base products.

Continuous Training

Human resources development is the main challenge being faced by the Islamic banking industry. As the
industry is expanding all over the Muslim world including Pakistan it needs Islamic scholars having vast
knowledge of Islamic finance to help the bank in development of new financial products and ensure the
operation of the bank in accordance with the Shariah compliance. It also needs trained staff having
experience and knowledge of Islamic banking for introducing Islamic financial products. Presently, this
shortage of skilled Islamic bankers is being met through short courses and training of new staff or hiring
staff from conventional banks at higher financial package. This is not a permanent solution.

RECOMMENDATION TO MCB
Shift their operation to Islamic Banking

Islamic banking has been growing continuously all over the world. Presently, Islamic banking industry
has reached US$1.0 trillion. High rate of interest results in failure of businesses and default of loans.
Non-performing loans are the main problem of conventional banking sector in Pakistan and also in
advanced economies. According to the State Bank of Pakistan’s State of Pakistan’s Economy-second
Quarterly Report,2008-2009,the non-performing loans of conventional banks in Pakistan has increased
by Rs.100 billion in just one year,2008 and they have aggregated to Rs.312 billion. The bank should
convert its operation toward Islamic banking because Islamic baking is more stable, more profitable and
continually growing. Although MCB is opened Islamic Windoow, but they should separate the funds
from conventional banks, establish the shahria board, management commitment and safeguard the
Muslim investor fund.

Job Rotation

Most of the bank employees, are sticking to one seat only with the result that they become master of one
particular job and loose their grip on other banking operation. In my opinion all the employees should
have regular job experience all out-look towards banking. The promotion policy should be adjusted.

Attractive Salary Packages

There is a criticism on the banking management that the salaries of the employees are decreasing in
every succeeding year. And I think this will shake the confidence and working habit of the employees.

Efficiency of Assets

We find that conventional banks are not employing their assets efficiently because aggregate amount of
their non-performing loans (NPLs) stands at 23,238,723 thousand rupees. This high amount of NPLs
indicates irresponsible lending behavior and inefficient recovery of loans by conventional banks. It also
indicates that assets allocation is not diversified and growing NPLS is major cause of their losses
 CONCLUSIONS
Islamic banking has emerged as a strong alternate financial system. It has recorded a phenomenon
growth within a short span of time. DIBP customer base has grown by 228% to approximately 21,000
customers in 2007, up from 6,400 in the year 2006. For the same period, DIBP deposit base has grown
by 273% to Rs 16.1 billion in 2007. The share capital of DIBP stands at Rs 5 billion.
The comparison of Dubai Islamic bank with the selected conventional banks during 2006-2009 shows
that Islamic banks have recorded consistent growth right from the beginning. The branch network of
Dubai Islamic Bank has recorded 53 percent growth during 2008-2009.It is not less than a miracle in the
financial history of Pakistan. Market share of Islamic Bank were also increased from 0.5 percent in 2006
to nearly 1 percent of total banking industry in 2008. The 100 percent increase in the market share is
itself a solid proof that Islamic banking is gaining momentum and has emerged as a strong alternate
financial system to meet the financial requirements of customers and business community under the
norms of Shariah Compliance. Islamic banks have recorded consistent growth during our study period-
2006-2008. The assets of Islamic banks were increased around 234 percent..
Growth rate of investment of Islamic bank recorded growth of 339 percent during 2006-2009. The
profitability of Islamic banks operating in Pakistan is less volatile as compared to the profitability of
conventional banking industry in Pakistan, which is highly volatile and abnormal.
All earning indicators of Islamic banks are positive and prove the fact that equity-based Islamic Banking
is profitable institutions. Placing deposits with Islamic banks without pre-determining rate of profit do
not mean that the depositors will not be paid any profit and the bank is free to use this money.
MCB have Strong and attractive products, Better focus on customer services and customization.
It is flexibility with the changing environment. Induction of the highly qualified professional to change
overall set up .it focus towards innovative and creative banking and Mobile banking.

. Also the MCB has introduced various new products and services and developed existing ones for better
market penetration. MCB has the advantage of vast network of 1026 branches and now also expanding
its online branches with ATM in the country. MCB has all the ingredients of strong ownership of
Mansha group, vast branch network, products and services for various kinds of customers, experienced
top management and good mixture of old and new employees in its branches. The MCB banks perform
better than the Islamic banks in term of technical efficiency but in term of cost and allocate efficiencies
Islamic banks give tough time to conventional banks.