Superiority of Conventional Bank and

Islamic Bank of Bangladesh

(Prime Bank Ltd. and Trust Bank Ltd.)
 Letter of Transmittal

February 28, 2011

Md. Safiullah
Lecturer
Department of Accounting & Finance
American International University- Bangladesh (AIUB)

Subject: Submission of term paper.

Dear Sir,
We are highly delighted that you have given us the consent to prepare the term paper. Please see
enclosed herewith the term paper with title “Superiority of Conventional Bank and Islamic Bank
of Bangladesh”. This is a great pleasure for us to submit this report that you have permitted me.
This paper was worthwhile experience for our. We have truly enjoyed our time attachment with
the preparation of this report.

We have tried to make the report comprehensive one with in the time. Any short comings
regarding the report will subject to your kind consideration.

Thank you.
Sincerely yours,
Raihan Islam
07-08884-2
Piash, Sadequr Rahman
07-09135-2
Bashar Imran
07-08743-2
Kabir MD. Rezwan
07-08069-1

2
American International University-(AIUB)

Declaration

We do hereby solemnly declare that the work presented in this term paper with title
“Superiority of Conventional Bank and Islamic Bank of Bangladesh” has been carried out by us
and has not been previously submitted to any other University/College/Organization for an
academic qualification/certificate/diploma or degree.

The work I have presented does not breach any existing copyright and no portion of this report is
copied from any work done earlier for a degree or otherwise.

I further undertake to indemnify the Department against any loss or damage arising from breach
of the foregoing obligations.

Raihan Islam
07-08884-2
Piash, Sadequr Rahman
07-09135-2
Bashar Imran
07-08743-2
Kabir MD. Rezwan
07-08069-1
American International University- Bangladesh (AIUB)

3
 Acknowledgement

I would like to acknowledge and pay my heartfelt gratitude to my report supervisor honorable
Lecturer MD. Safiullah, Department of Accounting & Finance, American International
University-(AIUB), for his sublime guidance, warm advice and affectionate encouragement to
carry out works as well as in preparing this report. We feel ourselves lucky to be in touch of this
great faculty member.

Executive Summary

Trust Bank has successfully introduced Visa Credit Cards to serve its existing and potential
valued customers. Credits cards can now be used at shops & restaurants all around Bangladesh
and even internationally. Trust Bank is a customer oriented financial institution. It remains
dedicated to meet up with the ever growing expectations of the customer because at Trust Bank,
customer is always at the center. . The bank, sponsored by the Army Welfare Trust (AWT), is
first of its kind in the country. With a wide range of modern corporate and consumer financial
products Trust Bank has been operating in Bangladesh since 1999 and has achieved public
confidence as a sound and stable bank. Prime Bank Limited has started its operation as a
Conventional Bank in April 1995. But pretty soon afterwards, within few months, the Bank has
taken up the Challenge to start Islami Banking Operations. The Challenge is not so much as in
operating Islamic Banking but in maintaining both the forms in Parallel. From its inception as an
Islami Bank the bank has proven itself to be worthy of its slogan of ‘Bank with a Difference’,
through successful operation of Islami Banking. Prime Bank has started its Islami Banking
operation through its first Branch being inaugurated at 19, Diluted C/A, Dhaka on 18 December
1995. Since then it has so far has established four more branches at different locations in the
Country. Because of its popularity and management’s commitment toward social well being
gradual expansion of Prime Bank’s Islami Banking operations is assured.

4
 Table of Content

No. of chapter Contents Page no.

1 Introduction 06
1.1 Origin of the report 06
1.2 Objective & scope of the report 06
1.3 Methodology of the report 06
1.4 Data Collection 07
1.5 Limitation of the report 07
2 Tools of analyzing financial performance 07
2.1 Profitability Ratios 07
2.2 Liquidity and Solvency Ratios 07
2.3 Business Development ratios 08
2.4 Efficiency and Productivity ratio 08
2.5 Commitment to Economy and Community 08
2.6 Analysis & Discussion 08
2.7 Statistical hypothesis 08
3 Conclusion 09
4 References 09
5 Trust Bank An overview 10
6 Prime Bank an Overview 11
6.1 Al-Wadiah 13
6.2 Mudaraba 13
7 Appendix 13

5
1. Introduction:
In the backdrop of economic liberalization and financial sector reforms, a group of highly
successful local entrepreneurs conceived an idea of floating a commercial bank with different
outlook. For them, it was competence, excellence and consistent delivery of reliable service with
superior value products. Accordingly, Prime Bank Ltd. was created and commencement of
business started on 17th April 1995. The sponsors are reputed personalities in the field of trade
and commerce and their stake ranges from shipping to textile and finance to energy etc. Trust
Bank Limited is one of the leading private commercial banks having a spread network of 45
branches and 5 SME center across Bangladesh and plans to open few more branches to cover the
important commercial areas in Dhaka, Chittagong, Sylhet and other areas in 2010. The bank,
sponsored by the Army Welfare Trust (AWT), is first of its kind in the country. With a wide
range of modern corporate and consumer financial products Trust Bank has been operating in
Bangladesh since 1999 and has achieved public confidence as a sound and stable bank.

1.1 Origin of the Report:

Bank Fund Management course of American International University- Bangladesh (AIUB) is a

graduation requirement for the BBA students. This report is a partial requirement of the BBA
program. Assigned by the institutional instructor Mr Safiullah, Department of Accounting &
Finance on January 27, 2011.we prepared this report as a part of our study.

1.2 Objective of the Study:

The broad and over all objective of this report is to provide with an over view of the learning at
difference between Conventional Bank and Islamic Bank. So that the theoretical learning can
be related with the real life business situation. The specific purpose of this study is Financial
performance of interest based conventional Banks & Islamic Banks.

1.3 Methodology of the report:

Interest based conventional Banks & Islamic Banks both are contribute our economic of
Bangladesh. For this Study one conventional Bank, Trust Bank, And one Islamic Bank, Prime
Bank (Islamic Branch) have been selected. The period of study is five years from 2004 to 2008.
Here all data are collected from secondary a source which is based on Internet. The study is also
cover International journals and some international books. Data is processed through SPSS
Package, Microsoft Excel and Microsoft Word.

6
1.4 Data collection:

Data for this report has been extracted from secondary sources, as the descriptive nature of the
study to prepare this report calls in for existing facts and information compilation.

1.5 Limitations of the study:

The major limitation factor for this report was primarily the reluctance and strict adherence to
confidentiality maintenance attitude shown by the officials of banking sectors. Most of the
relevant literature and study materials on the Banking sector were not updated, and no
comprehensive in-depth study on the banking industry could be found. The analysis and
future projections were computed with the simplified trend analysis by MS Excel. Use of other
professional or statistical software would generate reports with higher level of precision and
lower standard deviation.

2. Tools of analyzing financial performance:

2.1 Profitability Ratios:
Profitability is the ultimate test of managements operating effectiveness and success of a
company. Profitability can be judged by the following criteria. Return on asset (ROA), Return on
equity (ROE), Profit expense ratio (PER), Profit growth and EPS.ROA, ROE, Profit growth rate
and EPS are the indicators of measuring managerial efficiency. ROA is net earning per unit of a
given asset. It shows how a bank can convert its asset into net earnings. The higher ratio
indicates higher ability and therefore is an indicator of better performance.
Similarly, ROE is net earnings per unit equity capital. The higher ratio is an indicator of higher
managerial performance. A high PER indicates that a bank is cost efficient and makes higher
profit with a given expense.
However, profitability is only part of bank performance story.

2.2 Liquidity and Solvency Ratios:

Liquidity ratios measure the short-term ability of the company to pay its maturing obligations
and to meet unexpected needs for cash. There is a trade-offs that generally exist between
returns(profitability) and risks(liquidity) are demonstrated by observing that a shift from short-
term securities to long-term securities or loans raises a banks returns but also increases its
liquidity risk. The inverse would be true if short-term securities were increased. Thus, a higher
liquidity ratio for the sample bank would indicate a less risky and less profitable bank. In another
situation bank and other depository institutions share liquidity risk because transaction deposits
and saving accounts can be withdrawn at any time. Thus when withdrawals exceed new deposit
significantly over a short period, banks get into liquidity trouble. Cash deposit ratio, Advance
deposit ratio, Current asset rational Equity multiplier are the indicators of liquidity and solvency
position of banks. Higher CDR indicates that a bank is relatively more liquid than a bank which
has lower CDR as cash in a bank vault is the most liquid asset of a bank. Depositors' confidence
to bank is enhanced when a bank maintains a higher cash deposit ratio. Again higher advance
deposit ratio indicates that a bank takes more financial stress by making too much loan.

7
Comparatively higher CAR indicates that a bank has more liquid asset. A lower ratio is a sign for
illiquidity as more of the assets are long term in nature and EM is the amount of assets per unit of
equity capital. A higher EM indicates that the bank has borrowed more funds to convert into
asset with the share capital and greater risk for a bank.

2.3 Business Development ratios:

Business development ratios are the indicators of financial progress and development over time
measured by different indicators as total assets growth, deposits growth, advances growth and
investment growth. They are also the indicators of contribution of banks in the economic
development of Bangladesh through financing, investment and capital forming scheme directly
and indirectly. Higher ratios are the record of success story and significant contribution in the
economy.

2.4 Efficiency and Productivity ratio:

Total operating expenses to deposit ratio is the measurement of efficiency and productivity of
banks. It indicates economies of scale in banking operation.

2.5 Commitment to Economy and Community:

Commitment to economy and community can be measured by long term loan ratio (LTL), and
government bond Investment (GBD) ratio. A high LTL indicates a bank commitment for
supporting long term development project and higher GBD indicates commitment to the
community through investment in govt. securities also measures high liquidity and less risk.

2.6 Analysis & Discussion:

The financial performance ratios have been calculated from the annual financial statements of
these banks. Ratios of the period 2004-2008 have been calculated for evaluation. The statistical
method of t-test has been used at 0.05 level of significance to identify significant difference of
performance indicators between interest-based conventional banks as Trust Bank ltd. and
interest-free Islamic banks as Prime Bank ltd.

2.7 Statistical hypothesis:

In order to assess and draw comparison of the financial performance of interest-based
conventional banks like Trust bank ltd. and interest-free Islamic banks like prime bank ltd. the
assumed null hypothesis is: “The performance of interest-based conventional banks is superior to
that of interest-free Islamic banks”. The hypothesis has been rejected or accepted for each
performance ratio separately between conventional and Islamic bank.

8
3. Conclusion:
Since bank’s business volume increased over the years and the demands of the customers
enlarged in manifold, our technology has been upgraded to manage the growth of the bank and
meet the demands of our customers. Trust Bank has successfully introduced Visa Credit Cards to
serve its existing and potential valued customers. Credits cards can now be used at shops &
restaurants all around Bangladesh and even internationally. Trust Bank is a customer oriented
financial institution. It remains dedicated to meet up with the ever growing expectations of the
customer because at Trust Bank, customer is always at the center. Prime Bank Ltd., since its
beginning has attached more importance in technology integration. In order to retain competitive
edge, investment in technology is always a top agenda and under constant focus. Keeping the
network within a reasonable limit, our strategy is to serve the customers through capacity
building across multi delivery channels. Our past performance gives an indication of our
strength. We are better placed and poised to take our customers through fast changing times and
enable them compete more effectively in the market they operate.

4. References:
Superiority of Conventional Banks & Islamic Banks of Bangladesh:
A Comparative Study
Md. Safiullah
Lecturer
Department of Business Administration
Faculty of Business and Economics, Daffodil International University
102, Shukrabad, Dhanmodi, Dhaka-1207, Bangladesh

1. www.ccsenet.org/ijef
2. www.google.com
3. www.wikipedia.org
4. www.primebank.com.bd
5. www.trustbank.com.bd

9
 5. Trust Bank An overview

Trust Bank Limited is one of the leading private commercial banks having a spread network of
45 branches and 5 SME center across Bangladesh and plans to open few more branches to cover
the important commercial areas in Dhaka, Chittagong, Sylhet and other areas in 2010. The
bank, sponsored by the Army Welfare Trust (AWT), is first of its kind in the country. With a
wide range of modern corporate and consumer financial products Trust Bank has been operating
in Bangladesh since 1999 and has achieved public confidence as a sound and stable bank.

In 2001, the bank introduced automated branch banking system to increase efficiency and
improve customer service. In the year 2005, the bank moved one step further and introduced
ATM services for its customers.
Since bank’s business volume increased over the years and the demands of the customers
enlarged in manifold, our technology has been upgraded to manage the growth of the bank and
meet the demands of our customers.

In January 2007, Trust Bank successfully launched Online Banking Services which facilitate
Any Branch Banking, ATM Banking, Phone Banking, SMS Banking, & Internet Banking to all
customers. Customers can now deposit or withdraw money from any Branch of Trust Bank
nationwide without needing to open multiple accounts in multiple Branches.
Via Online Services and Visa Electron (Debit Card), ATMs now allow customers to retrieve
24x7 hours Account information such as account balance checkup through mini-statements and
cash withdrawals.
Trust Bank has successfully introduced Visa Credit Cards to serve its existing and potential
valued customers. Credits cards can now be used at shops & restaurants all around Bangladesh
and even internationally.
Trust Bank is a customer oriented financial institution. It remains dedicated to meet up with the
ever growing expectations of the customer because at Trust Bank, customer is always at the
center.

10
 6. Prime Bank an Overview

In the backdrop of economic liberalization and financial sector reforms, a group of highly
successful local entrepreneurs conceived an idea of floating a commercial bank with different
outlook. For them, it was competence, excellence and consistent delivery of reliable service with
superior value products. Accordingly, Prime Bank Ltd. was created and commencement of
business started on 17th April 1995. The sponsors are reputed personalities in the field of trade
and commerce and their stake ranges from shipping to textile and finance to energy etc.

As a fully licensed commercial bank, Prime Bank Ltd. is being managed by a highly professional
and dedicated team with long experience in banking. They constantly focus on understanding
and anticipating customer needs. As the banking scenario undergoes changes so is the bank and
it repositions itself in the changed market condition.

Prime Bank Ltd. has already made significant progress within a very short period of its
existence. The bank has been graded as a top class bank in the country through internationally
accepted CAMEL rating. The bank has already occupied an enviable position among its
competitors after achieving success in all areas of business operation.

Prime Bank Ltd. offers all kinds of Commercial Corporate and Personal Banking services
covering all segments of society within the framework of Banking Company Act and rules and
regulations laid down by our central bank. Diversification of products and services include
Corporate Banking, Retail Banking and Consumer Banking right from industry to agriculture,
and real state to software.

The bank has consistently turned over good returns on Assets and Capital. During the year 2005,
the bank has posted an operating profit of Tk.1520.34 million and its capital funds stood at
Tk.3177.32 million. Out of this, Tk.1400 million consists of paid up capital by shareholders and
Tk.1777.32 million represents reserves and retained earnings. The bank’s current capital
adequacy ratio of 9.96% is in the market. In spite of complex business environment and default
culture, quantum of classified loan in the bank is very insignificant and stood at less than 0.96%.

Prime Bank Ltd., since its beginning has attached more importance in technology integration. In
order to retain competitive edge, investment in technology is always a top agenda and under
constant focus. Keeping the network within a reasonable limit, our strategy is to serve the
customers through capacity building across multi delivery channels. Our past performance gives
an indication of our strength. We are better placed and poised to take our customers through fast
changing times and enable them compete more effectively in the market they operate.

11
Prime Bank Limited has started its operation as a Conventional Bank in April 1995. But pretty
soon afterwards, within few months, the Bank has taken up the Challenge to start Islami Banking
Operations. The Challenge is not so much as in operating Islamic Banking but in maintaining
both the forms in Parallel. From its inception as an Islami Bank the bank has proven itself to be
worthy of its slogan of ‘Bank with a Difference’, through successful operation of Islami
Banking.

Prime Bank has started its Islami Banking operation through its first Branch being inaugurated at
19, Diluted C/A, Dhaka on 18 December 1995. Since then it has so far has established four more
branches at different locations in the Country. Because of its popularity and management’s
commitment toward social well being gradual expansion of Prime Bank’s Islami Banking
operations is assured. Following are the salient features of Islamic Banking, as is practiced in
Prime Bank Limited:

01. All activities are conducted according to Islamic Shariah.

02. Interest free monetary operations.
03. Building partnership relation between the Bank and its customers.
04. Following Islamic principles in its investment portfolio.
05. While investing special consideration to social needs is given.
Through small and long term deposit schemes providing hope to the poor income group of
06.
the society.
07. Client service centric banking, through which making the clients feel special.
08. Conduct welfare activates etc.

Service Portfolio
Prime Bank Limited provides following services under Islami Banking:
1. Deposit
2. Investment
3. Foreign Trade
4. Remittance and Fund Transfer

12
Prime Bank under its Islami Banking operations collects deposit mainly in two modes. These
are:

6.1 Al-Wadiah: In this mode of deposit depositors are not given any profit. Bank can use the
deposit in its business but committed to pay back to the customers on demand.

6.2 Mudaraba: It is partnership between two parties, the capital provider, the depositor in this
case and the provider of skill and labor, here the bank. In Islamic terms the depositors are the
“Shahib-Al-Maal” and the Bank is “Mudarib”. In this kind of partnership the profit of investment
is divided as per agreed upon ratio and the loss is borne by the provider of capital, the depositor
in this case. According to Banking laws depositors money should always be protected and be
deliverable on demand. Thus, Mudaraba mode of deposit, for profit and loss, capital is not
considered rather it is subject to the projected profit rate.

7. Appendix:

Statistical output summary (Prime Bank Ltd. vs. Trust Bank Ltd.)
Table-1. Statistical result of Profitability:

Prime Trust Statistical Test Hypothesis

2005-2009 2005-2009 T-Value

Mean SD Mean SD

ROA .0789 .0683 .0254 .03278 2.546 Accepted

ROE .4238 .2789 .5724 .02487 -2.449 Rejected
Profit .3562 .2136 .3119 .08178 -.610 Rejected
Expense Ratio
Profit Growth .2548 .4963 .1482 .38589 -2.614 Rejected
EPS 38.65 29.89 317.1880 247.151 -1.009 Rejected

13
Table-2. Statistical result of Liquidity and Solvency

Prime Trust Statistical Test Hypothesis

2005-2009 2005-2009 T-Value

Mean SD Mean SD

Cash deposit .0741 .00781 .1565 .03118 -4.885 Rejected

Ratio
Advance .7460 .04807 .8856 .03909 -5.460 Rejected
deposit Ratio
Current asset .9723 .00993 .0229 .00278 2.802 Accepted
ratio
Equity 46.1532 5.8226 46.2322 3.03245 -0.022 Rejected
Multiplier
Govt. bond .3084 .18671 .0512 .03996 6.396 Accepted
investment

Table-3. Statistical result of Business development

Prime Trust Statistical Test Hypothesis

2005-2009 2005-2009 T-Value

Mean SD Mean SD

Total Assets .2204 .15141 .2265 .03253 -0.069 Rejected

Growth
Deposits .2012 .16211 .2295 .02106 -0.335 Rejected
Growth
Advances .2112 .23009 .2568 .05058 -0.361 Rejected
Growth
Investment .3245 .28837 1.0250 2.48399 -0.543 Rejected
Growth

Table-4. Statistical result of Efficiency and Productivity

Prime Trust
2005-2009 2005-2009
Mean SD Mean SD

Total operating expenses to .0429 .00537 .0356 .00258

deposits

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Table-5. Statistical result of Efficiency and Productivity

Prime Trust Statistical Test Hypothesis

2005-2009 2005-2009 T-Value

Mean SD Mean SD

Long term loan ratio .5446 .18965 .2672 .03496 3.483 Accepted

15