Comparison of Islamic and Conventional Banks

Hassan Mohammed/ Master of Finance/ 2011
Comparative Study of Islamic and Conventional Banking performance: a case study from Pakistan
By:
Hassan Mohammed
A Dissertation Submitted In Fulfilment of Partial Requirement of Master of Finance
Glasgow Caledonian University
August 2011
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Acknowledgement
I want to thank many people without their help and support this research would not be possible to complete on time. First and foremost I want to thank Almighty ALLAH without his blessings and help this study which requires constant hard work cannot be achievable to complete during the due time. I am really thankful to my family for their guidance, support and love. They always understood me and supported me in every part of my life, in particular my parents and brothers. In addition I would like to thank my colleague and friend from Pakistan Mr. Inam-ul-haq, for his consistent support and guidance helped me in completing my study. Data collection was also not possible without his help. Last but not the least; it is a great pleasure for me to thank my supervisor Mr. Dr. Kazem Falahati for his consistent support, enthusiasm, supervision, advices and corrections in completing my dissertation at the time frame. He was always there for me to help and provided the main fundamentals to complete my dissertation.
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Abstract
Islamic Banking and its finance division started its operations in Pakistan in the year 1977-1978; this was after the abolition of interest which is according to the Islamic rules under the Shariah. The amendments in the financial instruments which were then made free from the interest portion was incorporated in the corporate financing and also the promulgation of the ordinance for starting the Mudraba company and issuance of Mudaraba certificate and starting of CTFS (Commission for Transformation of financial System) and also Islamic Banking division by the Pakistans State Bank is the important moves occupied through the Government of Pakistan. Study by the researcher looks into success and the operations of the Islamic Bank, Meezan Bank Limited which is the first and superior Islamic bank of Pakistan. The study also looks into the comparison of performance of the Meezan Bank with a typical Conventional Bank. The comparitative study is done with the help of 12 financial ratios namely Return on Assets (ROA), Return On Equity(ROE), Loan to Assets Ratio(LAR), Loan to Deposits ratio(LDR), Income to Expense Ratio(IER), Asset Utilisation(AU). The findings of the study reveal that the Meazaan Bank to be less profitable and less efficient in comparison to the Conventional Bank although in case of liquidation of the banks Mezaan Bank is stronger. The conventional bank have been in the business for a substantial amount of time and also the banks operate into various sectors giving it a wide range of control over the assets and also the funds under the management of the conventional bank is huge and generate considerable income for them. Although the study found Meezan bank to be less profitable and less efficient than the Conventional bank, however in case of Liquidation the Meezan bank races ahead of the conventional Bank. The period under consideration is 2006 to 2010. The improvement and performance of the Islamic Banks have been good considering the fact that they have been in operation for a shorter period in comparison to the conventional bank and therefore Islamic banking holds a promising future.
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Table of Contents
Page No. Acknowledgements ----------------------------------------------------------Abstract ------------------------------------------------------------------------Chapter -1 Introduction ------------------------------------------------------1.1 Aim ---------------------------------------------------------------1.2 Limitations -------------------------------------------------------1.3 Outline ------------------------------------------------------------Chapter 2 Background -----------------------------------------------------2.1 Islamic banking and finance -----------------------------------2.2 Islamic banking in a historic perspective ---------------------
2 3 6 7 8 8 9 9 11 12 14 15 18 23 23 24 26 27 29 29 32
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2.3 Differentiation among conventional and Islamic banking -Chapter 3 Pakistans banking sector -------------------------------------3.1 Islamic banking sector ---------------------------------------------
Chapter 4 Theoretical framework -------------------------------------------Chapter 5 Methodology ------------------------------------------------------5.1 Profitability Ratio -------------------------------------------------5.2 Liquidity Ratio ----------------------------------------------------5.3 Efficiency Ratio ---------------------------------------------------5.4 Risk and Solvency Ratio ------------------------------------------
Chapter 6 Findings -----------------------------------------------------------6.1 Profitability Ratio -------------------------------------------------6.2 Liquidity Ratio -----------------------------------------------------

6.3 Risk and Solvency Ratio ------------------------------------------
35 38 42 45 48 50 50 54
6.4 Efficiency Ratio ---------------------------------------------------Chapter 7 Conclusion ---------------------------------------------------------Chapter 8 References ----------------------------------------------------------8.1 websites --------------------------------------------------------------Chapter 9 Appendix -----------------------------------------------------------9.1 Appendix A ---------------------------------------------------------9.2 Appendix B ---------------------------------------------------------
9.3 Appendix C ---------------------------------------------------------- 56 9.4 Appendix D ---------------------------------------------------------- 57 9.5 Appendix E ----------------------------------------------------------- 58
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Chapter:-1 Introduction
Intensifying competition in banking worldwide and constant improvement in providing suitable financial services requires measuring the performance of all banks. This is also true for Islamic banking. The performance estimation of banks is significant for bank managers, regulators, investors and depositors. Bank performance gives the clear idea to the investors and depositors of investing and withdrawing funds from the bank in extremely competitive market. Depositors have an interest in measuring the performance of the banks as there is no guaranty of deposits nominal value and also they are not guaranteed fixed returns. Bank regulators observe the performance of the bank to identify the problems as they are responsible for protection and dependability of the banking system and also to safeguard public confidence. Managers verifies the results of management decisions taken before and also to estimate in improving its finances by providing loan services and deposit services. Samad and Hassan (2000), Hassan and Bashir (2003) stated that the consistent observing of performance is significant as current problems can be stay behind which leads to the financial breakdown in the future. Islamic banking started around three decades ago in Pakistan with a proposal of removing interest from the process of specialized organization and conventional banks in 1977-1978; however the serious efforts were made in January 2000. State Bank of Pakistan (SBP) composed a Commission for Transformation of financial System (CTFS) to introduce Shariah obeying modes of financing and in September 2003 when the State Bank of Pakistan (SBP) established the Islamic Banking Section. This results in performing significant role in fulfilling various sectors of the country with the values of Islamic shariah. In January 2002 State bank of Pakistan approved Meezan bank limited as the first Islamic bank of Pakistan to increase the process of Islamic banking. Meezan Bank Limited is the first and foremost full-fledge Islamic bank of Pakistan. In Pakistan there are just six Islamic banks and the majority of the banks have
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Hassan Mohammed/ Master of Finance/ 2011 started operating in recent times except Mezzan Bank Limited which is operating from over nine years. Whereas on other side conventional banks are large in numbers and also in volume and they are operating from more than 10 years. Current literature on Islamic banking releases a variety of studies completed on performance of Islamic banks like Sufian (2007), Bashir (2000), Saleh and Rami (2006), Hassan and Bashir (2003), Samad (2004), Samad (1999), Rosly and Abu bakar (2003), Samad and Hassan (2000). On one side the studies on evaluating Islamic banks and conventional banks financial performance in various countries is confine by the active studies on Islamic banking. However there is no study available for qualified examination on financial performance of Conventional and Islamic banks of Pakistan. 1.1 Aim:The researcher in this study aims to study the evolution of Islamic banking and this would be done by researching into the case of Meezan Bank Limited and this would in turn lead to performance measurement of Islamic bank in comparison with Conventional bank in the state of Pakistan. The early establishment of Meezan Bank Limited would give us the opportunity of thorough and deep understanding of ways of functioning of Islamic Banks and also give understanding of performance of other Islamic Banks The one more main reason for choosing Meezan Bank Ltd as Islamic bank is accessibility of information and also the reality is MBL is a single private Islamic bank that is working from over nine years in Pakistan. As Meezan Bank Limited is the private sector bank, the other conventional bank taken for the study is (Habib Bank Ltd.) which is also a private sector bank. Additionally this conventional bank is selected on the largely merit bases in private sector banking of Pakistan. This study excludes the government owned and private banks as these banks are reasonably have large volume compared with the private banking sector in Pakistan. Foreign Islamic and conventional banks are also ignored in this study as this study is completely focused on the performance of domestic banks. Different Authors used different methods and techniques to evaluate the performance. Financial ratios are used to a certain extent in literature. We used financial ratios in this study to evaluate the performance of Islamic bank and conventional bank in the form of profitability, risk and solvency, liquidity and efficiency.
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1.2 Limitations:There are total 35 conventional banks operating in Pakistan in which six are full-fledged Islamic banks. There are five private banks and one foreign bank in those six Islamic banks. Meezan Bank Limited is the only mature, experienced and large private Islamic bank functioning from more than a decade. Excluding AIB (Albaraka Islamic Bank of Bahrain) this is an overseas Islamic bank and all other banks have started functioning recently. AIB is functioning since 1991 and it is small in size. The reason behind for not selecting this bank is as our research is based on the comparative performance of conventional bank and Islamic bank of Pakistan. There are many commercial banks available but data availability and time is the main limitation restricting us to select the Habib Bank Limited (HBL) to evaluate the performance in comparison with Islamic bank. 1.3 Outline: The study mainly comprises of the discussion about the assessment performance of the banks, methods used for calculating the performance, Aim and objectives of the research and also the research limitations. The study discuss the background of Islamic banking and also a historic perspective in chapter 2 also the distinguish between conventional bank and Islamic bank. In chapter 3 it discuss about the Pakistans banking sector along with the Islamic bank. The chapter 4 is literature review which contains some review about the previous studies about the comprising performances of conventional bank and Islamic bank. In chapter 5 discuss about the data collected for this study and methods used to analyse the performance of Islamic bank compared with conventional bank. Chapter 6 discuss about the findings and chapter 7 contains the conclusion of the study. The study ends with the references used for this research and the data collected from the websites and links and lastly the appendices for the desertation in which it has principals of Islamic banking, introduction to Meezan bank, data used for calculating the performance of two banks and the output results.
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Chapter:-2 Background
Islamic Bank was first opened in Egypt in 1963 and then there were many branches opened across Middle East and Asian region. Islamic Banking has spread across the globe in both geographic terms as well as on the basis of Asset under Management which are currently worth $ 1 trillion. Iran and Sudan transformed their complete system of banking into Islamic banking system. Their operations currently run in 60 countries and in rest of economies conventional banking systems are in place. (Aggarwal and Yousaf, 2000). The growth rate of Islamic Banking is around 10% to 15% and currently there are 160 Islamic financial institutions worldwide. The rise of Islamic banking has been steady and emerging markets in Muslim countries have accepted it in a big way. The credit market of Islamic Banking has increased its market share in Muslim countries from 2% in 1970s to 15% in recent times. (Aggarwal and Yousuf, 2000). Banking system like Islamic banking is reaching popularity all over the world. Yudistira (2003) also refers to the growing number of Islamic banking products being issued by the Multinational Banks in the Middle Eastern and developing countries. The liberalization and globalization have produced tests for the Islamic Banks and they have to face tough competition from the innovative products from Multinational Banks in designing Islamic products that match the same expectations and returns. Islamic finance is based on the rules of Shariah which is the guiding principle for all kinds of investment permitted in the form of Law which also includes Sociable dependent Investment. There is no distinction between religious and secular in Islam and therefore has been able to guide the financial products. 2.1. Islamic Banking and Finance: The Islamic Banking can be described like banking based on rules as well as ethical principles of Islam which covers good Governance and risk management techniques. Islamic Banking deplores the use of interest bearing instruments and
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Hassan Mohammed/ Master of Finance/ 2011 condemns the financial products that give interest. This feature has its roots in the Shariah which is like a guiding rule book for Islamic Banking. Internet Banking is not allowed under the Islamic Banking law and also does the unethical practices are completely deplored. Islamic Economics can be also be understood as a body of text that promotes the allocation of resources and also looks into the well being of human race without any creation of economic imbalances and macroeconomic problems (Chapra, 1996). The main feature of Islamic Banking is the impartial importance to various factors of productions. Islamic Banking is in favour of equitable distribution of money and counters the flow of money into few hands and supports free flow of money in the economy, therefore equality and social goals lie at the core principles of Islamic Banking. . (Source: Bank Alfalah). Islamic Banking is based on the principles of Islamic Principles and it is a given thing for the entire activities of banks will pursue the same. Islamic principles can be said to be the principles for culturally driven and ethical form of banking. The two guiding principles of Islamic Banking are Sharing of Profit and Loss, Exclusion of Usury. The amount of interest is referred as Riba inside Islamic law. The rules of Islamic banking favour the desire to accept the divine Instructions on all the transactions and more specifically in transactions that involve money. Islamic banking cannot be relegated to only elimination of Riba, but it also mentions about Gharar (risk and Uncertainty) and Oimar (speculation). These are couple of features from a wide array of features that Islamic Banking covers. Various explanations are given by scholars in regards to interest with some of quotes are that when does gift something to the other bearing an intention such gifting would help you in getting some sort of benefit is not in good side of Gods value and if one does donate in good intentions and in name of Allah one definitely succeeds. The taking of Riba (usury) which are deplored in the rule of Islam and therefore is liable to punishment from Allah. There have been some voices in support of interest bearing loans on commercial projects and they say that interest is prohibited in retail loans that are meant for consummative purposes; however such arguments go against the understanding of rules 278 and 279 of Surah Albaqra The sermons in the holy Quran warns the subjects to be afraid of Allah and to forego whatever is remaining from the recievement of Riba (usury). The sermons say
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Hassan Mohammed/ Master of Finance/ 2011 to avoid any kind of Usury and therefore fear Allah and his messengers who are not in favour of Usury. Islamic Banking does not rule out interest completely as it says that profit is the reward for the capital and therefore when there is profit on the invested projects then that profit is the right of the owner of the capital. In the same way the loss of the venture would also have t be borne by the capital provider and also it mentions that the profit can be claimed only when the investment is done after acknowledging its risks. The gain made by the lender of the capital and the wages provided to the labourer. The depositor is compensated in the following 3 ways 1. Return on the capital provided 2. Receiving the profit of the investment in a partnership 3. Rental Earning on the asset being partially by his capital.
2.2. Islamic Banking in a Historic Perspective: The beginning of Islamic finance can be traced reverse at the period of Prophet Mohammed and Quran which is the behavioural guide and also is bedrock faith of billions of Muslims worldwide. The prophet Mohammed was a businessman working on the behalf of Khadija and his business working has been epitome of fair Trade which includes transparency in transactions and total honesty. In Muslim countries the banking concept dates back to time when individuals deposit their wealth with The Prophet and Abu Bakar Sidique who is Khalifa in Islam. In the year 1963 the first Islamic Bank was established in Egypt and it did not create any Islamic Image of itself. Mr. Ahmad EL NAJJAR was monumental in creation of the institution and it was on gain division in town of Egypt of Mit Ghamir. The number of such banks increase to 9 by 1967 and these banks were not paying any interest and engaged in trading activities and also the profit and loss sharing with the depositors was done based on the results of projects (Siddiqui, l988). Nasir social bank confirmed as an interest free commercial bank (Arif, 1988). There were many Islamic banks opened in 1970s especially in the Middle East like, The Dubai Islamic Bank (1975), The Faisal Islamic Bank of Egypt (1977), Faisal Islamic Bank of Sudan and Bahrain Islamic Bank (1979). There were banks opened in the Asia Pacific region, the Philippine Amanah Bank was opened in 1973
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Hassan Mohammed/ Master of Finance/ 2011 and it had no mention of Islamic character in the Banks Charter although efforts were made to convert the PAB into Islamic Bank. The operations that had interest giving transactions were followed according to Shariat rules. PAB functioned with two functionaries conventional and Islamic. Islamic Banking arrived in Malaysia to help the Hajj Pilgrims. MPSC was created into BANK ISLAM MALAYSIA BERHAD and opened in 1983 and had RM 80million in assets (Arif, 1988). The OIC (Organization of Islamic Countries) recognized I D B ( Islamic Development Bank) in the year l973 towards helping the member nations and also to promote social welfare of the Muslim Community based on the principles of Shariah. The IDB is involved in fee based financial services and also in profit sharing based for the member countries. (Source: IDB). There was an attempt for Islamic Banking during the 1970s for interest free saving loans and savings (Siddiqui 1988). The Islamic Banking System based in Luxembourg in 1978 was first attempt in western country and there is Islamic Bank International in Copenhagen (Denmark) and Islamic finance company set up in Australia (Melbourne) (Arif 1988). A large number of Islamic Banks were established in late 20th century to cater to the growing needs.
2.3. Differentiation among Conventional and Islamic Banking: The Islamic Banking is like Conventional bank with difference being that here the profit and loss is shared with the depositors and is mutually consented (Dar and Presley, 2000). Islamic banking favours profit and loss sharing whereas conventional bank favours interest being paid (Arif, 1988). Islamic finance is the financial system where the teachings of Quran are followed in a strict manner and in confirmation of Islamic Ethics. The financial transaction is all based on the principles laid down by the Shariah. Islamic Banking is based on the principle of free and fair system. Islam participants are free to enter in contracts but it doesnt encourage rampant and misleading transactions and also exclusion of Gharar and Riba Association of Islamic bank with depositor resting on individual part and the Entrepreneurs on other side as compared to conventional bank that only acts as lender and borrower. The governance structure also forms basis of difference. Islamic banks have to obey the rules under the holy book Quran and congregate the prospect of the
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Hassan Mohammed/ Master of Finance/ 2011 Muslim society and their financing models. (Suleiman, 2001). There are certain similarities with the conventional banks in a Way that both of them offer financial services and contribute to the growth of the economy in their own ways. Islamic Banking norms completely restrict the use of Riba (interest) or the inequitable agreements which occupy speculation or risk. The Islamic bank in comparison to other conventional banks follow the principle of fairness and is based on the tenets of shariah and function within the boundaries of Islam and this was said by Siddiqi(1985). The four rules that govern investment behaviour (Suleiman 2001) are: 1. Noninterest bearing transactions (RIBA) 2. Avoiding speculative transactions (GHARAR). 3. The application of Islamic Tax (ZAKAT) 4. Discouraging the production of goods and services which are not in confirmation of rules of Islam (HARAM).
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Chapter: - 3 Pakistans Banking Sector

Financial sector act as an main part in the nations economy and efficient financial sector also is important determinant in growth of economy and also in the living standard of the nation. The greater the assets in the financial sector greater will be its stability and therefore the nation will have a growing economy. The Pakistan banks dominated (95%) of the financial sector and so fine strength of these banks is vital for the economy of Pakistan and also form vital form of lending mechanisms to the organization which then invests in their projects and therefore the infrastructure of the country develops and leads to the growth of the nation. Pakistan economy has 53 banks, 30 commercial banks, 4 specialized banks, Islamic Banks and 6 Micro financing banks in the banking sector. The number of Government banks is 9, Private banks is 22, foreign banks is 5, development institutions is 8, banks which are non associate are 5, and Small and medium enterprise forms 3 banks, However, market share of Big four banks is 44.2% and while other 8 second tier banks account for further 35% of market. Banks of Pakistan are looking after the funding of Pakistan Government which then invests in the infrastructure of the country and in other developmental and socially welfare schemes. The role of the bank is also in Subsidizing the fiscal deficit which arises as a result of spending more than the earning, doing trade financing and financing huge businesses. Tiny and average ventures, the housing sector and Agriculture which is one of the top employment sources in the rural Pakistan are the major job creators and play vital role in development of economy of Pakistan and its financial sector. The politicians play important role in the lending decisions and appointment of managers of the banks in Pakistan. This clearly shows the nexus between the lenders and politicians. Patti and Hardy(2005) have observed that in the past 15 years there has been liberalization and therefore number of private banks have increased and also due to privatization of public sector banks nearly 80% of banking space is guarded by the classified banks as divergent to 1990s when only 10% was under private sector. The assets have crossed 180 billion dollars with the GDP of 113% and the share of the banking sector is around 95% and also constitutes 40% of stock market capitalisation. Growing financial intermediation has increased banks profitability to
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Hassan Mohammed/ Master of Finance/ 2011 1.9 billion dollars. The foreign stake is 48% of total capital paid under the regulation of State Bank of Pakistan (SBP and Shamshad, 2007).
3.1. Islamic Banking Sector: The president of the Pakistan on 01/07/1948 had in his speech at the opening ceremony of State Bank of Pakistan had said that the state of Pakistan needs to develop its financial sector on its own and needs to be based n Islamic Concept and equality of subjects and should be on justice. The message of Shariah and muslim world needs to be shown and depicted in its actions and therefore such a thing would help in establishment of humanity and fairness. Islamic Banking in Pakistan was established in late 1970s and did not have interest component and it formed the core value of Islamic Banking and its commercial arms. On June 26 1980 efforts were made to introduce new instruments that were interest free and were called participation Term Certificate (PTC). In same time rising risk based capital Ordinance was issued in order to establish Mudaraba companies and issuance of its certificates. Rupee in Pakistan in July 1 1985 was made interest free by the all banks and they were with or without buy back agreement., however it was declared Un Islamic by the Federal Shari at Court(FSC). (Source IIFM). The commission for Transformation of Financial System (CTFS) was created in 01/01/2000 by the State Bank of Pakistan and it was done in order to ensure that all the operations and the transaction of the Islamic Banks was in accordance with Shariah and Muslim Rules. And educating the banker in regards to development in finance and also general public at large to educate them also makes them understand the banking products. This is in accordance with the basic principle that is fairness and transactions in all the trading activities as was mentioned in the Shariah law (Source IIFM). The state of Pakistan tries to move in shifting of financial market into interest free transactions and also gave a thought into the setting of subsidiaries in State Bank of Pakistan so that they follow the shariah rules and transactions are according to Islamic Law, also specifying Commercial branches which are for Islamic products and also the commercial banks which are fully fledged can do the dealing with the Islamic product. (Source IIFM).
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Hassan Mohammed/ Master of Finance/ 2011 Meezan bank limited was approved an authorization of Islamic Banking by the State Bank of Pakistan in January 2002 and on 15/09/2003 State bank of Pakistan recognized the Islamic Banking unit and its objective included the monitoring of Islamic Banking industry and bring to the notice any of the wrongdoings in the transactions and promote it based on the Shariat laws and transparency and thus make Islamic Banking the first choice for the users and the providers. Shariat compliant Islamic banking was the main objective of creation of the Islamic banking Division and parallel and compatible banking system, the departments included 1. 2.
3.
Policy division. Shariah compliance division. Business support division.
The group of directors have specialists on the various divisions of finance and they are in operations at the SBP, these include the division of Risk sharing and Compliance and also Marketing department looking after the promotions part and they are the important departments in SBP. The following banks are operating and below are mentioned with year of establishment. Dubai Islamic Bank Pakistan Limited (2005), Meezan Bank Limited (modernized as Islamic bank in 2002), Emirates Global Islamic Bank Limited (2007), Dawood Islamic Bank Limited (2007) , Bank Islami Pakistan Limited (2003), Al-Baraka Islamic Bank Pakistan (1991). Al-Baraka is a foreign Islamic bank and has branches functioning all over Pakistan from 1991. Meezan Banking Limited is the only domestically grown Commercial bank given license by the State Bank of Pakistan in January in 2002. Islamic bank share of banking sector is 6.1% at the end of June 2010 which has increased from 5.1% in June 2009. The number of branches increased to 350 from 289 in the previous years. The Islamic Banks hope to capture 7% of the market share. The Growth of the Islamic Bank has been good and it is also including various financial concepts. Meezan Bank Limited remains at the top of Islamic Banks and Alfalah as foremost foreign Owned Islamic Bank (Source SIMB) The growth of Islamic Banking has been commendable; however need of infrastructure, support and specialized Islamic Bankers has controlled the development. The above mentioned obstructions have hampered the growth of the
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Hassan Mohammed/ Master of Finance/ 2011 Islamic bank and therefore the solutions to the above problems will help in the growth of the Islamic banks
Chapter:-4
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Theoretical Framework
The first experiment of Islamic banking was started in the year 1963 in a small town of Egypt and it was commenced as small size banking. This experiment succeeded and released different ways for separate market of Islamic banking and finance. In 1970s Islamic banking started various number of full-fledge Islamic banking at a reasonable size in Asian and Arabic countries. Large amount of these Islamic banks were in Islamic countries. Islamic banking and non banking associations of finance are operating on high demanding level even though these banks started in small size. At present Islamic banking is operating in more than sixty counties and the assets are in excess of 165 billion dollars at a growth rate of 15% annually. Aggarwal and yousaf (2000) stated that In the credit market, market share of Islamic banks in Islamic countries has risen from 2% in the late 1970s to 15% till today. To hold on the teachings of Islamic law (shariah) one should follow the principals of Islamic law like staying away from giving and accepting Gharar and Riba, empowering in sharing profit businesses, avoiding investment within the unprincipled businesses, also creating the investments collectively dependable for the personal benefits as well as achieving the goals of Islamic banks. There are several questions the researchers, stakeholders and scholars have as how well the Islamic financial institutions are performing and also how well they are achieving their goals. On one side Islamic banking is consider the same as a highest developing market but also on opposite part Islamic banking be surrounded with the problems, issues and challenges. Several studies carried out because of the commencement of new Islamic banking and finance. Previous studies of Islamic banking is mainly focus on the Interest free financing (Ahmad 1981, Karsen 1982). There is not enough exposure in literature about the capability of Islamic banks and organise savings, group risk and making easy transactions (Hassan and Basheer, 2003). But there are only some studies which focus on making the policy of removing interest payments (Khan and Mirakhor, 1987). Even though the fact of Islamic banking and finance become visible recently and large development of Islamic banking, the studies focus on the competence of Islamic banks are in very few quantity (Yudistira, 2003 and Sufian, 2007). There are many studies generally conducted for calculating the performance of Islamic banks in relation to the profitability and qualities of bank. Hassan and Basheer (2003)
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Hassan Mohammed/ Master of Finance/ 2011 determine the fundamental performance of Islamic banks by collecting banks data and using regression analysis. Samad and Hassan (2000) use financial ratios in order to analyse the performance of UAE Islamic banks and Malaysian Islamic bank. In the same way Sarker (1999) measure the competence of Islamic banks in Bangladesh by using Banking efficiency model and declared that Islamic banks can be active in a usual banking manner where the profit and loss sharing manner of finance is less controlled. Moreover Sarker (1999) declared products of Islamic finance have diverse sorts of Risk, as a result altered characteristic rules must exist. Samad and Hassan (2000) assess the performances in Liquidity, Risk and Solvency, Profitability of interbanks and also society participation in BIMD (Bank Islamic Malaysia Berhad) from 1984 to 1997. It contrasts the performance of Bank Islamic Malaysia Berhed of two periods one is from 1984 to 1989 and the second is from 1990 to 1997. Elyasiani (1994) stated this method is not new to assess the performance banks. To appraise interbank performances the research contrasts BIMB with a small and large conventional bank with BIMB and also through eight conventional banks. It uses financial ratios to measure the performances and also used F test and T test to verify the consequence. The result from this study shows that BIMB make an important development in profitability for the period of 1984 to 1987. Though, development in profitability is lagging behind in comparison with conventional banks due to numerous reasons. This outcome is constant with the Samad and Hassan (1999). The study exposes that BIMB is comparatively less risky and more solvent compare to the conventional banks. Its results confirm to risk return profile that the BIMB is comparative less risky and less profitable. BIMB performance appraisal specifies it as a most liquid compare to other eight conventional banks. Bankers identify the causes of Mudarabah and Musharka be not accepted inside Malaysia by gathering primary data by surveying up to 70% banks. The considerable causes are lack of knowledge to select, appraise and manage profitable projects. Samad (2004) calculate the relative performances of conventional banks and interest free Islamic banks of Bahrain from 1991 to 2001. By using financial ratios to examine the difference in performance in terms of profitability, credit risk, liquidity risk and relating the t-test with these ratios. His study concludes with the major differentiation in credit performances among these banks. But in his study there is no major difference in profitability and liquidity among conventional and Islamic banks. Kader and Asarpota (2007) make use of bank level data to appraise the performance of
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Hassan Mohammed/ Master of Finance/ 2011 Islamic banks of UAE. Income statements and balance sheets of three Islamic banks and five conventional banks for the time period 2000-2004 are used to gather data for study. To examine the performance of Islamic banks they applied financial ratios in profitability, Risk and solvency, efficiency and liquidity. From the findings of the research Islamic banks of UAE are reasonably more profitable, less risky, less liquid and more efficient compared to other conventional banks of UAE. Kader and Asarpota concluded with the two significant suggestions associate with the findings. Firstly the key reason for the rapid growth in Islamic banking in UAE is due to the quality of Islamic profit and loss sharing concepts in banks. Secondly Islamic banking in UAE should be supervise and regulate in different ways as they are different from the conventional banks of UAE. Saleh and Rami (2006) assess the performance of Islamic banks in Jordon. They analyses and examine the experience of Jordons first Islamic bank Jordan Bank for Finance and Investment (JIBFI) and second Islamic bank Islamic International Arab Bank (IIAB). There are things to see in the study like domestic and global challenges face by this division. The paper finds some interesting results by conducting capital structure, profit maximization and liquidity test as performance appraisal methodology. Firstly the ability and efficiency of both banks have improved and both banks enlarge their activities and investments. Secondly these banks play a significant role in financing the projects in Jordon. Thirdly they are focused on short term investments. Fourthly profitability of the Jordon Bank for Finance and Investment (JIBFI) is higher. Finally profitability and credit facilities have a higher growth in Islamic banks. Bashir (2000) examine some factors of Islamic banking performances from 8 countries of Middle East during 1993-1998. The study gathered data like income statement and balance sheet of fourteen Islamic banks from 8 Middle East countries for each year from 1993 to 1998. The study also looks on the relationship between the banking characteristic and profitability. The study shows some very significant results after the control of financial composition indicator like macroeconomics background, taxation and finance markets. Firstly Islamic banks profitability measures respond optimistically to the boost in loan and capital ratios that are spontaneous and reliable by the earlier findings. Secondly the research underlines the practical responsibilities where sufficient loan portfolio and capital ratio plays while discussing the Islamic banks performance. Thirdly non interest earnings, customer and short term funding
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Hassan Mohammed/ Master of Finance/ 2011 and overheads are important for promoting profits of the banks. Fourthly the foreign owned banks are more profitable as compared to the domestically owned. Fifthly by keeping other things stable there is fact that open and hidden taxes affect the banks performance negatively. Sixthly performance measures of the banks have positive effect of encouraging macroeconomic conditions. Finally the study shows that the stock markets are praising to bank financing. Hassan and Bashir (2003) perform a similar study which examines how the Islamic banks performance is affected by the quality of bank and by a large financial environment. Their study used data of Islamic banks from 21 countries from 1994 to 2001 in order to look at the performance of Islamic banks. They find their research as a factor of consistency in profitability of Islamic banks compare to previous researches. The research shows the factors lead to higher profitability. The factors like controlling macroeconomics environment, the high capital and loan to asset ratios, financial market structure and taxation. The results of this research exposes that the bank performance measures has a unconstructive result of implied and precise taxes at the same time it has a positive effect of favourable macroeconomic conditions. Favourable macroeconomic conditions shows to encourage higher profits. The results also unexpectedly demonstrate a positive relationship between overheads and profitability with the intention to hold the expense preference behaviour in Islamic banking market and also there is a negative impact of banking system volume in profitability. In the research Yedustira (2003) compose a practical testing on efficiency and present new evidence on around 18 Islamic bank performances during 1997-2000. The data for this study is taken from the balance sheet and income statements of those Islamic banks. The main purpose of this study is to verify the Islamic bank efficiency affected by the financial crisis. This research is dissimilar to other researches as it uses non-parametric approaches, DAE (Data Envelopment Analyses) in order to evaluate the efficiency of Islamic bank. To indicate the input variables and output variables of Islamic bank it used intermediation approach as per the standard of Islamic financial system. The research discover certain outcomes, firstly the results of efficiency shows all 18 Islamic banks has very small inefficiency which is significantly balanced with conventional banks. The performance of Islamic banks was highly affected by the global crisis of 1998-99. Though they do better afterwards. Secondly the outcomes shows Islamic bank with small and medium size faced economic problems.
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Hassan Mohammed/ Master of Finance/ 2011 Additionally public listed Islamic banks are less efficient. Finally the main explicit reasons of the country resolved the efficiency variations of complete data. Sufian (2007) carry out a parallel research to give latest confirmation on the comparative efficiency among foreign and domestic Islamic banking process in Malaysia from the period of 2001 to 2004. The methodology used in this research is unparametric data envelopment examination to differentiate the practical efficiency and pure practical scale efficiency. The research also used input and output variables of Islamic banks. A sequence of tests carried out to observe whether the foreign and domestic banks were drawn from the same inhabitants as the majority of the outcomes cannot reject the hypothesis with the significance of 5%. Lastly the parametric correlation coefficients were used to analyses the relation of scores output from traditional accounting ratios with DEA. A number of outcomes are drawn from the study. The outcome shows the efficiency of the Malaysian banks recovered in 2003 and 2004 after the decrease in 2002. The foreign Islamic banks are less efficient compare to domestic Islamic banks. The major cause of the inefficiency of the Malaysian banks is wrong scale of operations. The outcomes of the correlation coefficients confirmed the dominance of scale in measuring the technical efficiency of Malaysian Islamic banks. The outcomes of this research also specify the profitability is considerable and absolutely correlated with all efficiency processes.
Chapter:-5 METHODOLOGY
The research methodology applied is comparative study in which comparison is done between Islamic Bank and a Conventional Bank over the period 2006 to 2010. Data has been taken from the income statements and the Balance sheets and is
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Hassan Mohammed/ Master of Finance/ 2011 common technique used in bank study (Sabi 1966). In todays environment comparative study of banking environment is useful as it shows that which bank is better in the selected parameters of the researcher and helps the fund manager in making informed decisions. Various theories have been proposed in measuring banking performance and they are financial management theories. Accounting ratios is among term. Financial ratios have been commonly used in study of Banks. The case of financial ratios in examining the banks were given by (Samad and Hasan, 2000), Akkas (1994), Samad (1999), Sabi (1997), Patnam (1983). The comparison of the banks of Islamic bank and the Conventional Bank is done for 5 years interval and the readings are for 12 financial ratios. The ratios are divided into four classes which are: Profitability Ratio, Liquidity ratio, Risk and Solvency ratio and Efficiency Ratio. 5.1. Profitability Ratio Accounting profits means the difference between the revenues and Loss and it is one of the most difficult factors to measure. (Ross, Westerfield and Jaffe, 2005). These ratios help in determining the profits of the bank and also its expenses and costs involved over a period of time. They also indicate a firms profitability over the specified time period and only after taking into consideration expenses and income tax is the profitability of the firm determined. Profitability ratios are used to measure the profitability of the bank, if it is higher in comparison to the opponent and industries average or the previous years ratio than it indicates the good results of the institutions and the tests that apply to meet the benchmark are Return on Equity (ROE), Return on assets (ROA) and Profit Expense Ratio (PER). Return on Asset ROA is the indicator of profitability of the firm after deductions of expenses and taxes (Van Home 2005). This is the measure which is keenly looked forward to by the analysts in measuring the usefulness of the bank to invest their money into. It is a regular method of administrative performance as it indicates the effectiveness with which the mangers have been successful in running the operations of the bank and also shows how competent the bank is in its business areas (Ross, Westerfield, and Jaffe, 2005). It measures the earning of the banks after the taxes have been deducted and
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Hassan Mohammed/ Master of Finance/ 2011 represents its net earnings. A higher ratio is an indication of good management performance and lower ratio indicated the failure of the managers ROA can be increased by the banks by improving performance and efficiency ROA= Net Profit after tax/Total Assets Return on Equity The ratio indicates the gains to the shareholders of the company and this is after the deductions of taxes and expenses. It represents the earnings of the firm tax has been deducted. (Samad and Hassan, 2000). This will indicate and measure managerial efficiency (Hassan 1999, and Samad, 1998).The larger the ROE indicates the better the efficiency in functioning of managers. The better return indicates that it may be due to better performance of debt and also of Equity. The ROA and ROE differs as the higher leverage acts in favour of ROE ROE = Net profit after Tax / Shareholders Equity Profit to Expense Ratio (PER) This is a measurement of operating profit of the bank in regards to its operating expenses. Operating profit refers to the earnings before taxes and operating expenses relate to noninterest expense. The ratio is measurement of operating profit Earned for each dollar of operating expense. The ratio indicates the efficiency of the banks in handling its operating expenses. A higher PER refers to profitability of the banks and cost efficiency. PER= Profit per tax/operating expenses 5.2. Liquidity Ratio Above mentioned ratio represents the capability of the company in meeting the requirements. Liquidity helps the banks in order to avoid a sudden rush of demanding customers who want to withdraw their funds and it also represents the cash maintained and therefore the higher the cash maintained and higher the liquidity position of the bank the safer the bank will be.( Ross ,Jaffe , Weterfield 2005). The savings accounts and transaction deposits come with a feature of anytime withdrawal and therefore there is a risk of their removal and thus pose liquidity risk to the bank and depository institution and withdrawal exceeds certain proportions then it s a liquidity risk to the banks. Liquidity methods like Loan to Deposit Ratio (LDR),
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Hassan Mohammed/ Master of Finance/ 2011 Loan to Asset Ratio (LAR) and Cash and Portfolio Investment to Deposit Ratio (CPID), Loan to Deposit Ratio (LDR) LDR is a measure of liquidity circumstance of the banks and at this point loan is defined as advances to the commercial organization and institutions and because it is prohibited for Islamic Banks to attain interest (Riba) and they have to follow Shariah Principles in conduct of their banking operations they can use their finance s to provide various types of financial Products. Banks having lower LDR is considered to have higher levels of cash and therefore lesser profits and lower loan portfolio but a higher LDR is an inductiveness of the excessive loans and therefore the risks to the banks are higher. LDR= Loan/Deposits. Cash and Portfolio Investments to Deposits Ratio (CPIDR) This is the other method to find the liquidity of the bank and therefore the higher the ratio the higher the confidence that the depositor has on the banks financial soundness. It helps in boosting the trust of the depositors as they know that bank have enough cash but bank also makes some investment portfolios and earn a little helpful return from the invested securities. Also if the bank needs some cash then they can sell these securities. CPIDR= Cash and Portfolio Investment/ Deposits Loan to Asset Ratio (LAR) The ratio indicates that bit measures the solvency of the bank and where LDR measures the liquidity of the banks in terms of deposits bank hold LAR measures the liquidity of bank in terms of the assets of the bank. A bank having lower LAR is said to be having more liquidity and one with higher LAR shows that bank is more profitable and also highly solvent. It is measured as LAR= Loan/ Total Assets 5.3. Efficiency Ratio The efficiency of the managers of the bank can be measured through this ratio and also the profitability of the bank in increasing the number of products sold.
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Hassan Mohammed/ Master of Finance/ 2011 The profitability of the bank also rests in the effectiveness of the bank in collecting its loans and dues. The banks managers should also make the proper use of its reserve inventory and save on expenses. The higher the value of this ratio the better is for the firm. This shows that the bank is effective in inventory management practices and efficient in control of expenses. The higher the ratio value the greater its effectiveness. The measure as mentioned above in measuring efficiency of the bank is 1. Asset Utilisation 2. Income to Expense Ratio 3. Operating Efficiency. Asset Utilisation (AU) The effectiveness of the banks is utilization of all kind of assets and can be calculated with the Asset utilization Ratio. Utilization of assets effectively by the bank is reflected in the higher value of this ratio and lower value of the ratio indicates that the bank is not using its assets effectively (Ross, Westerfield and Jaffe 2005). The calculation of the assets utilisation ratio can be stated as below. The complete revenue is the net spread before provision in addition to other income. AU= Total Revenue/ Total assets. Operating Efficiency (OE) The operations of bank lead to profits and it is measured as the profit earned for every dollar that is spent on the operations expenses and in managing the operations. The bank needs to improve the efficiency of its operations. The bank would like to have higher value for the operational efficiency as lower efficiency would show that bank has failed in managing its operations efficiently. The revenue of the operations of the banks can be calculated as the ratio is OE= Total operating Expenses / Total operating Revenue Income Expenses Ratio (IER) The above mentioned ratio indicates that the income which is got for every dollar of the operating expense. The ratio is very popular in measurement of financial ratios. The managers can be assessed for their good work on this parameter and also the income of the bank can be dwelled upon with use of this ratio. The total income got by the bank is specified as net income of the bank and this is arrived at before any kind of provisions being applied and these figures are arrived from the income statement of the bank and the ratio is found with.
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Hassan Mohammed/ Master of Finance/ 2011 IER= Total Income / Total operating Expenses. 5.4. Risk and Solvency Ratio This measures the risk and solvency of the firms. they are also known as the gearing, debt or the financial leverage ratios the extent of dependence of the firm on debt rather than equity to fulfil its contractual obligations will determine that how solvent the firm is. The higher the debt of the firm the greater difficult it is for the bank to repay. The debt is crucial way to finance and it may give conflicting interest to creditors and debtors. The assets have to be greater than the liability of the company in order for the firm to be solvent. Deposits are the major source of liability for the conventional or the Islamic Bank and therefore the borrowed money in any form is a liability to both forms of the banks as it has to be repaid. To calculate the banks solvency and risk the most used methods like, 1. Debt to Total Asset Ratio (DTAR), 2. Debt to Equity Ratio (DER) and 3. Equity Multiplier (EM). Debt to Total Asset Ratio (DTAR) The ratio is the measurement of total amount of debt firm uses to finance its divisions. It is the ability of the banks to protect its subsidiaries and the additional banking arms which are its own divisions. The bank if it finances its subsidiaries through debt then it shows that bank has higher DTAR and bank is considered risky. The calculation of the ratio is done as. DTAR= Total Debt/Total Assets Debt to Equity Ratio (DER) The usage of the debt of the bank can be measured by this ratio and also the capability of the banks to understand the surprises that arises financially. In emergence of non-payment of major loans this can act as buffer. A bank with lower DER is considered to be better than one with higher DER. DER= Total Debt/ Shareholders Equity. Equity Multiplier (EM) The equity multiplier indicates the number of times the assets held by the bank is more than the shareholders equity. The ratio also shows that what amount of
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Hassan Mohammed/ Master of Finance/ 2011 assets per dollar is equity of the consumer. The greater the ratio used bank more of debt in conversion of assets into share capital. The higher value of the ratio indicates the danger to the bank and also some kind of loss to the depositors. The calculation of the ratio is done as. EM= Total Assets/ Total shareholders Equity.
Chapter:-6 Findings
6.1. Profitability Ratio Return on Asset The outcome shows some significant points of comparing ROA among the Islamic bank and conventional bank. Firstly Return on Asset of Islamic bank is lower than conventional bank apart from the 2007 where the Islamic bank ROA is 1.43%
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Hassan Mohammed/ Master of Finance/ 2011 somewhat exceeded to conventional banks (1.23%) ROA. Secondly there is a considerably decrease in ROA of conventional bank ROA from 2.54% to 1.23% during the year 2006 to 2007 and at the same time ROA of Islamic bank increased from 1.30% to 1.43%. Thirdly conventional bank ROA recovered consistently after the radical decrease in 2006- 2007, whereas Islamic banks ROA has decreased from 1.43% in the year 2007 to 0.73% in 2008. Then the ROA of Islamic bank has recovered in 2009-2010. Finally the average ROA of Islamic bank is 1.07% whereas the average ROA of conventional bank is 1.68% which is higher compare to Islamic banks. The financial outcomes of 2011 of conventional bank and Islamic bank determination exposes this increasing movement in ROA of conventional bank will carry on and Islamic bank ROA will increase or decrease. However Pakistans banking sector is increasing considerably but taking into consideration of last five years ROA both Islamic bank and conventional bank are facing problems in profitability.
Bank Islamic Bank Conventional Bank 2006 1.30% 2.54% 2007 1.43% 1.23% 2008 0.73% 1.39% 2009 0.83% 1.49% 2010 1.07% 1.76% Mean 1.07% 1.68% S.D 0.0030 0.0052
Return on Equity The study of Return on Equity of both Islamic bank and conventional bank it supports some significant points to think comparable to ROA. The outcome shows
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Hassan Mohammed/ Master of Finance/ 2011 that Islamic banks ROE is lower 12.68% compare to the ROE of conventional bank 26.88% in 2006. ROE of Islamic bank increased to 16.84% during 2006-2007 at the same time ROE of conventional banks has decreased to 13.88%. Then in the year 2008 Islamic bank ROE decline to 9.79% whereas conventional bank ROE recovered. After the huge decline in ROE of Islamic bank it has recovered during the year 2008 to 2010. ROE of conventional bank is slightly improved. The last 5 years financial statements highlights the overall profits base has improved comparatively more than equity base in Islamic bank which has lead to increase in ROE. However Islamic bank ROE is recovering. Still the average ROE of Islamic bank is 13.19% and ROE of conventional bank is 17.82%.
Bank Islamic Bank Conventiona l Bank 2006 12.68% 26.88% 2007 16.84 % 13.88 % 15.37 % 15.55 % 2008 9.79% 2009 11.27% 2010 15.35 % 17.44 % Mean 13.19 % 17.81 % 0.0523 S.D 0.0290
Profit Expense Ratio One more profitability method of calculating is Profit Expense Ratio. According to PER conventional bank is more profitable compare to the Islamic bank during 2006-2010. The study of PER of conventional bank and Islamic bank shows that conventional bank produced constantly higher profits for every single amount spent from 2006 to 2010. The PER of Conventional bank reduced to 0.76 in 2007 and remain same in 2008 than it has
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Hassan Mohammed/ Master of Finance/ 2011 increased in the year 2009 and 2010 to 1.05. The PER of Islamic bank has reduced from 0.76 in 2006 to 0.47 in 2010. The financial statements of conventional bank over a period of five years show expenses have increased but at the same time Islamic banks expenses decreased during 2006 to 2010. Mean of Islamic bank PER is 0.56 and mean of Conventional bank PER is 0.97.
Bank Islamic Bank Conventional Bank 2006 0.76 1.39 2007 0.72 0.76 2008 0.37 0.76 2009 0.50 0.87 2010 0.47 1.05 Mean 0.56 0.97 S.D 0.0017 0.0026
On the other hand all the outcomes of profitability ratios are in favour of conventional bank. The results show that the Islamic bank is less profitable as compared to conventional bank. Though Islamic bank is constantly performing better in satisfying the shareholders by offering better returns, managing the operating expenses and also making good return on assets.
6.2. Liquidity Ratio Loan to Deposit Ratio The results for LDR shows there is higher loan to deposit ratio (78.47%) for Islamic bank compare to conventional bank in 2006 and from then it has decreased consistently to 41.35% during 2009-2010. The LDR of conventional bank has a regular decrease from 77.90 in 2006 to 64.53% in 2010. The liquidity of Islamic bank
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Hassan Mohammed/ Master of Finance/ 2011 was comparatively less with the conventional bank in the year 2006 however it has improved consistently and have more liquidity compare to conventional bank during 2009-2010. On the whole decreasing movement of Islamic bank LDR shows the tendency of reasonable increase in deposits than loans and improved the liquidity of Islamic bank. Though mean of Islamic bank LDR is 56.27% which is lower to the mean of conventional bank 71.62%.
Bank Islamic Bank Conventiona l Bank 2006 78.47% 77.90% 2007 63.35% 71.49% 2008 56.62% 77.20% 2009 41.57% 66.97% 2010 41.35% 64.53% Mean 56.27% 71.62% S.D 0.1567 0.0597
Cash & Portfolio Investments to Deposits & Borrowings Ratio The Cash and portfolio investments to deposit and borrowing ratio of conventional bank increased from 37.61% to 44.66% and The CPIDBR of Islamic bank increased from 25.46% to 29.64% during 2006-2007. But in 2007-2008 the CPIDBR of Islamic bank and conventional bank considerably decreased to 28.55% and 21.17% respectively. From there CPIDBR of both conventional and Islamic bank increased and as of 2010 it has 45.28% and 51.69%. The CPIDBR increasing movement of Islamic bank and conventional bank shows the increase in liquidity. The conventional banks have more liquidity compare to Islamic bank as per the cash and portfolio investment to deposit ratio. The table below explains that mean CPIDBR of Islamic bank is 33.38% which is lower than the mean CPIDBR of conventional bank
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Hassan Mohammed/ Master of Finance/ 2011 40.79%.

Bank Islamic Bank Conventiona l Bank 2006 25.46% 37.61% 2007 29.64% 44.66% 2008 28.55% 32.17% 2009 31.57% 44.22% 2010 51.69% 45.28% Mean 33.38% 40.79% S.D 0.1047 0.0573
Loan to Asset Ratio The Loan to Deposit Ratio shows Islamic bank liquidity situation is improving but LAR has different results. The figure given below shows the swinging trend of both Islamic bank and conventional bank. The LAR movement of Islamic bank is in between 41.81% and 68% and the LAR movement of conventional bank is in between 52.46 and 61.61%. Though Islamic banks loan to asset ratio decrease every year it is still higher compare to conventional bank. Islamic bank has more financial stress providing too much loans and holds less assets liquidity. On the other hand it shows better profitability of Islamic bank. The LAR of Islamic bank and conventional bank decreased from 66.17% to 41.81% and 60.85% to 52.46% respectively during 2006-2010. More LAR analyses shows the Murabaha as the well-known and mainly used method of finance after Ijara, Export refinance under Islamic scheme and Dimishing Musharaka. Generally conventional bank has higher liquididity compare to Islamic bank. The below table shows the average LAR for Islamic bank is higher (60.40%) with the conventional bank LAR (56.74%).
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As a whole result of liquidity it shows that conventional bank and Islamic bank are similar to each other apart from LDR. In LDR of Islamic bank is less liquid compare to Islamic bank. Furthermore the study initiate that Ijarah, Dimishing Musharaka, Mrabaha and export refinance under Islamic scheme is used mostly in finance.
6.3. Risk and Solvency Ratio

Debt to Equity Ratio Islamic bank DER increased to 13.63 times in 2010 from 8.76 times in 2006 presenting considerable increasing movement compared to DER of conventional bank which decreased from 10.17 times in 2006 to 9.25 times in 2010. The increase in DER of Islamic bank is more than the decrease in DER of conventional bank. The result indicates that Islamic bank is more risky compare to conventional bank. A Deposit composes liability for all kind of banks whether it is a conventional bank or Islamic bank. Borrowings is the second part of liabilities for all the conventional banks apart from the Islamic bank as it is prohibited in Shariah by giving or taking interest loans. The increasing movement of Islamic bank DER specify the development of deposit base Islamic banks rather than equity base Islamic bank. From the financial statement of conventional bank over a period of five years has a decreasing movement of DER as they are based on equity financing and less with
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Hassan Mohammed/ Master of Finance/ 2011 deposit base. Islamic banks are more risky compare to conventional bank as the DER of Islamic bank is higher than the conventional bank for the period of 2006 to 2010. The average Islamic bank DER is 11.68 times whereas conventional bank has 9.89.
Debt to Total Asset Ratio The outcome of DTAR is significantly different from DER. The result shows the conventional bank is constantly higher compare to the Islamic bank DTAR. Conventional bank is more risky compare to Islamic bank as per the DTAR. Though DTAR of Islamic bank has increased significantly from 2006 to 2010. It has increased from 89.81% to 94.59%. The DER of conventional bank decreased from 95.96% to 93.39% during 2006-2010. Even though the conventional bank DTAR is higher it h ad continued constantly among the range of 93% to 96% for last five years. The average Islamic bank DTAR is 92.46% whereas average DTAR of conventional bank is 95.09%.
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Equity Multiplier The equity multiplier is other method of calculating Risk and solvency ratios. Islamic bank has higher risk and less solvent compare to Conventional bank. Result of EM is same as the DER for both conventional and Islamic bank. Islamic bank equity multiplier increased to 14.41 times in 2010 from 9.75 times in 2006. Conventional bank equity multiplier decreased to 9.91 times in 2010 from 10.60 times in 2006. These results confirm that conventional bank increased more in equity base and debts. The table below shows the average EM of Islamic bank is 12.61 times which is higher than the 10.65 times of conventional bank EM.
Bank Islamic Bank Conventional Bank
2006 9.75 10.60
2007 11.74 11.32
2008 13.49 11.03
2009 13.66 10.38
2010 14.41 9.91
Mean 12.61 10.65
S.D 0.0187 0.0055
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As a whole results of risk and solvency ratios Debt to Equity Ratio and Equity Multiplier shows Islamic bank to have higher risk and less solvent compare to the conventional bank. Since we practice in Loan to Deposit Ratio that Islamic bank wich are based on deposits are rising fast as the deposit compose total liabilities of banks. For this reason the movement of Islamic bank debt to equity ratio, debt to total asset ratio and equity multiplier is going up.
6.4. Efficiency Ratio Asset Utilization Graph below shows the performance and practical information on Asset Utilization of conventional and Islamic bank. Islamic bank asset utilization increased from 3.79% in 2006 to 4.51% in 2008 and then it has decreased to 3.02% in 2010. Asset utilization of conventional bank radical decreased from 5.34% in 2006 to 4.78% in 2009 and then it has increased to 5.41% in 2010. The trend shows that conventional bank is doing better compared to Islamic bank and also the Asset utilization ratio of conventional bank is higher than Islamic bank from 2006 to 2010. The average asset utilization ratio of conventional bank is 5.19% which is higher than the Islamic bank 3.77%. The asset utilization proves conventional bank have higher efficiency compare to Islamic bank in generating total revenue.
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Income to Expense Ratio The graph below shows the performance of Income expense ratio of Islamic bank and conventional bank. The outcome shows that the Income expense ratio is higher for conventional bank as compared to Islamic bank during 2006-2010. IER proves conventional bank to be more efficient compare to Islamic bank in managing expenses. Conventional bank generate more income than the amount they spent on expenses. But both conventional bank and Islamic bank are on decreasing trend. Conventional bank decreased from 2.51 to 2.05 times and Islamic bank decreased from 1.75 to 1.47 times during 2006 to 2010. The average IER of conventional bank is 1.56 times lower than the conventional bank which is 1.99 times.
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Operating Efficiency One more method of measuring efficiency of the bank is Operating Efficiency. OE is calculated through separating operating expense and operating revenue. The preceding outcomes of efficiency ratios strengthens conventional bank as more efficient than Islamic bank but OE shows it is more efficient than conventional bank. There is a huge difference in OE performance of Islamic and conventional bank. OE of Islamic bank slightly decreased from 77.85% in 2006 to 77.83% in 2010 whereas OE of conventional bank is decreased from 56.84% in 2006 then the efficiency increased in 2007-2008 but in 2009 to 2010 OE decreased to 53.09%. Islamic bank is considerably getting better in their performance in managing the operations as it has higher operating efficiency compare to conventional bank. The average OE ratio of Islamic bank is 77.83% which is higher than the 56.29% OE ratio of conventional bank.
Bank Islamic Bank Conventiona l Bank 2006 77.85 % 56.84 % 2007 84.97 % 57.80 % 2008 74.09 % 59.31 % 2009 69.67 % 54.40 % 2010 82.55% 53.09 % Mean 77.83 % 56.29% S.D 0.06201 0.02525
As a whole analysis of efficiency ratios shows Islamic bank to have less efficiency than conventional bank in AU and IER, but at the same time Islamic bank more efficient than conventional bank in Operating efficiency ratio. On the other
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Hassan Mohammed/ Master of Finance/ 2011 hand Islamic bank is getting better significantly in these efficiencies.
Chapter:-7 Conclusion
Considerations of the findings lead to certain conclusions. Firstly, the finding of profitability measures shows that Islamic bank is less profitable compare to conventional bank in ROA (Return on Asset), ROE (Return on Equity), PER (Profit Expense Ratio). Though, Islamic bank has a little difference in profitability measures with conventional bank. More findings exposes that the trend of Islamic bank is rising upwards close to conventional bank in ROA and ROE. In the future it is expected that Islamic bank can overtake the conventional bank as the trend of ROA and ROE is slightly below. As a whole the trend of Return on Asset of Islamic bank is upwards in 2010 it has dropped in 2007-2008 significantly in arrears of profitability. The trend of ROE of Islamic bank rose at the same time ROE of conventional bank decreased
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Hassan Mohammed/ Master of Finance/ 2011 during the year 2006 to 2010 and this is because of the difference in equity stand of the bank as the equity of Islamic bank is increasing. Islamic bank creates more profits than equity so this is effecting in increase of Return on Equitys growth, while at the same time it is reverse with the conventional bank ROE which leads to the decrease in Return on Equity of conventional bank. The profit expense ratio of conventional bank decreasing from 2006 to 2010 but it is still slightly rising upwards. Whereas as the findings for Profit Expense Ratio of Islamic bank is not as much of conventional bank Profit Expense Ratio but it is increasing more than conventional bank. After the huge increase in trend of ROE of Islamic bank, the ratio is still bellow the conventional bank. Liquidity measures findings of both Islamic bank and conventional bank shows the results in the form of LAR and LDR as the Liquidity of Islamic bank does not have much difference with the conventional bank. But on the other hand CPIDBR of the conventional bank initiate to have more liquidity compared with Islamic bank. The analysis also reveals that Loan to Deposit Ratio of conventional bank is declining to some extent but it is still stable where as the Loan to Deposit Ratio of Islamic bank is decreasing more. The higher decrease in trend of Islamic bank is due to the increase in deposit base system and this decline is measured as a help full and excellent symbol for Islamic bank, as Islamic bank is creating ways in the world. Furthermore there is an increase in the expectation and self-belief of the individuals in Islamic bank with in the course of time and also the expression of people is positive in view of Islamic financial products as feasible financial option. More findings of Loan to Asset Ratio show Murabaha as the well known and largely used method of financing along with Export Refinancing under Islamic Scheme, Ijara and Dimishing Musharaka correspondingly. After initiating Islamic bank as not as much profitable with the conventional bank, we expect about the risk and solvency as per the vital rule of finance The risk will be higher when there is higher expected return. The analysis of Risk and Solvency completely in format of risk return profile and allocate us in bringing to a close that Islamic bank is less profitable, less risky and more solvent compare to conventional bank. The findings measures of risk and solvency DER, EM and DTAR, shows that Conventional bank is less solvent and have higher risk than Islamic bank. We practice in the loan to deposit that Islamic banks deposit stand
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Hassan Mohammed/ Master of Finance/ 2011 increasing largely as deposits contribute in large elements to the liability of the bank. Debt Equity Ratio, Debt to Total Asset Ratio and Equity Multiplier of Islamic bank is also on increasing trend. The distinction in the performance is considerable as it suggest that Islamic bank and conventional bank do not appear in the same line of risk. So this assures the willing investors to invest in Islamic banking as it has feasible products at exceptional risk. Similar to the financial ratios Conventional bank is dissimilar and more efficient than Islamic bank in the provisions of utilizing the assets. All the efficiency ratios, Asset Utilization and Income Expense Ratio imply that Islamic bank is less efficient compared to conventional bank from 2006 to 2010. But in terms of Operating Efficiency Islamic banking is performing better with the conventional bank. Islamic banking is operating well but not generating much income and also not utilizing the Assets. The results of the performance evaluation of Islamic banking are different in Pakistan as compared to the other findings occupied in several researches from different people of different countries. For instance, Samad and Hassan (2000) exposed that Bank Islam Malaysia Berhad (BIMB) is less profitable, comparatively more solvent and less risky evaluate to the conventional banks in Malaysia. Kader and Asarpota (2007) initiate that Islamic bank in UAE have higher profits, more efficient, and less risky, less liquidity with that of conventional banks of UAE. Abdus Samad (2004) performed a comparative study on the performances of Islamic bank and the commercial conventional bank of Bahrain and come to a conclusion that the difference exist in credit risk among the two banks. But did not originate any dissimilarity in liquidity and profitability performance of both conventional banks and Islamic banks. This dissimilarity in outcomes is highly appropriate to the reality that these countries have longer history of Islamic banking compare to Pakistan as Islamic banking started several years before. Furthermore, there is a longer history, huge practice of learning from the financial markets method, deeper roots and more shares in financial sector for conventional banks of Pakistan. Taking into consideration of the facts we are not surprised by the results of our findings. Nevertheless Islamic banking in Pakistan is on the road to recovery and rising. In the future it is expected that Islamic banking sector in Pakistan to perform better or balanced with the conventional bank.
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Hassan Mohammed/ Master of Finance/ 2011 Ultimately, as the time goes on and when there are more number of Islamic banks to revise with having lengthy period then the comparable research will give good and clear sketch on the comparative performance of evaluation and also gives better proves on performance either side of the banks.
Chapter:-8 References
Aggarwal, Rajesh K. And Tarik Yousef (2000) Islamic Banking and Investment Financing Journal of Money, Credit and Banking. Volume 32, Number 1, February 2000, pp. 93-107. Arif, Mohamed (1988), Islamic Banking. AsianPacific Economic Literature, Vol. 2, No. 2, pp.46-62. Bashir, A. (2000), Assessing the Performance of Islamic Banks: Some Evidence from the Middle East, Paper Presented at the ERF 8th meeting in Jordan. Chapra, M. Umar (1996), Islam and Economic Development, The International Institute of Islamic Thought and Islamic Research Institute.
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Hassan Mohammed/ Master of Finance/ 2011 Dar, H., 2003, Handbook of International Banking Edward Elgar, chap. 8. Dar, H., and J. Presley, 2000, Lack of Profit Loss Sharing in Islamic Banking: Management and Control Imbalances, International Journal of Islamic Financial Services, 2. Hardy, D., 2005. Financial sector liberalization, bank privatization, and efficiency: Evidence from Pakistan. Journal of Banking and Finance 29(8- 9), 2381-2406. Hassan, Kabir and Bashir, M. Abdel-Hameed (2003), Determinants of Islamic Banking Profitability, Proceedings of the ERF 10th Annual Conference, Marrakesh, Morocco, 16-18 December, 2003. Ishrat Hussain (2005), Banking Sector Reforms in Pakistan: Blue Chip The Business Peoples Magazine, January 2005. Kader, J. M., Asarpota, A. J. & Al-Maghaireh, A. (2007). Comparative Financial Performance of Islamic Banks vis--vis Conventional Banks in the UAE. Proceeding on Annual Student Research Symposium and the Chancellors Undergraduate Research Award. Karsten, I., 1982. 'Islam and financial intermediation', IMF Staff Papers, March, 29(1):10842. Khan, M. S.,1986. 'Islamic interestfree banking', I M F Staff Papers, March, 33(1):127. Khan, M. S., 1987 'Principles of monetary policy in an Islamic framework', paper presented to the International Institute of Islamic Economics, Islamabad, Pakistan, July. KHURSHID AHMAD, (1981)., Studies in Islamic Economics, Published for the International Center for Research in Islamic Economics, King Abdulaziz University, Jeddah (Leicester: The Islamic Foundation, 1981). pp. 413. Kamal Naser, Luiz Moutinho, (1997) "Strategic marketing management: the case of Islamic banks", International Journal of Bank Marketing, Vol. 15 Iss: 6, pp.187 203 Meinster, David and Elyasian, Elyas (1994), An Empirical test of Test of Association between Production and Financial Performance: The case of Commercial banking industry. Applied Financial Economics, Vol.4, pp. 55-59. Muhammad Taqi Usmani (1998), An Introduction to Islamic Finance. Idaratul Ma'arif, 1st addition, Karachi, Pakistan
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Hassan Mohammed/ Master of Finance/ 2011 Mastura, Michael O., 1988. 'Islamic banking: the Philippine experience', in M. Ariff (ed.), above. M.A. El-Gamal (2006), Overview of Islamic Finance Occ. Paper No.4, Aug. 2006. Ross, S. A., Westerfield, R. W, Jaffe, J. (2005), Corporate Finance. McGraw-Hill Inc., 7th Ed. Ross, S. A., Westerfield, R. W, Jaffe, J. (2005), Corporate Finance. McGraw-Hill Inc., 7th Ed. Sabi, M. (1996) Comparative Analysis of Foreign and Domestic Bank Operations in Hungary, Journal of Comparative Economics 22, 179 - 188. Saiful Azhar Rosly, Mohd Afandi Abu Bakar, (2003) "Performance of Islamic and mainstream banks in Malaysia", International Journal of Social Economics, Vol. 30 Iss: 12, pp.1249 1265 Saleh, Ali Salman and Zeitun, Rami. 2006. Islamic Banking Performance in the Middle East: A Case Study of Jordan, Economics Working Paper Series: University of. Wollongong 06-21. Samad, Abdus 2004. Performance of Interest Free Islamic Banks vis--vis InterestBased Conventional Banks of Bahrain IIUM Journal of Economics and Management, Vol: 12, No:2, pp.1-15. Samad, A., and M. K. Hassan, 1999, The Performance of Malaysian Islamic Bank During 1984-1997: An Exploratory Study, International Journal of Islamic Financial Services, 1. Sarkar, M. A. A. (1999). Islamic banking in Bangladesh: Performance, problems & prospects. International Journal of Islamic Financial Services, 1(3). Shamshad Akhter, (2007), Pakistan Banking Sector Reforms: Performance and Challenges, Speech delivered by Dr. Shamshad Akhtar Governor State Bank of Pakistan, Geneva, 1 February 2007. Siddiqi, M.N. 1988 Islamic Banking: Theory and Practice. In Ariff, M. Ed. Monetary and Fiscal Economics of Islam, Jeddah: International Centre for Research in Islamic Economics. Samad, Abdus, and Kabir Hassan (2000), The Performance of Malaysian Islamic Bank During 1984-1997: An Exploratory Study. Thoughts on Economics 10, no. 1 & 2: 7-26.
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Hassan Mohammed/ Master of Finance/ 2011 Spindler, Andrew et. Al (1991). "The Performance of Internationally Active Banks and Securities Firms based on conventional measure of competitiveness, In Federal Reserve Bank, NY. Salman, Syed Ali (2004), Islamic Modes of Finance and Associated Liquidity Risks. Paper prepared for Conference on Monetary Sector in Iran: Strtucture, Performance and Challenging Issues, Tehran. Sufian Fadzlan, (2007), THE EFFICIENCY OF ISLAMIC BANKING INDUSTRY: A NON-PARAMETRIC ANALYSIS WITH NON-DISCRETIONARY INPUT VARIABLE, Islamic Economic Studies, Vol. 14, No. 1 & 2, Aug. 2006 & Jan. 2007 Suleman, M. Nasser. Corporate Governance in Islamic Banks, Society and Economy in Central and Eastern Europe, Quarterly Journal of Budapest University of Economic Sciences and Public Administration XXII(3), 2001. Van Horne, James and Wachowicz, John (2005), Fundamentals of Financial Management. Pearson Education Limited, 12th Ed.
Yudistira, Donsyah (2003), Efficiency of Islamic Banks: an Empirical Analysis of 18 Banks, Finance No. 0406007, EconWPA.
8.1 Websites: www.bankalhabib.com www.meezanbank.com www.sbp.org. www.albaraka.com. www.bankislami.com.pk www.dibpak.com www.egibl.com www.dawoodislamic.com www.askaribank.com.pk www.bankalfalah.com www.faysalbank.com www.soneri.com
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Hassan Mohammed/ Master of Finance/ 2011 www.sbp.org.pk
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Chapter:-9 Appendix- A
Islamic Method of Financing The ideology of Islamic banking which hold the behaviour and the transactions of commercial nature date back to the historic time of origination of Islam in Arabia. There was a concerted effort by the Islamic Teachers who made all the hard work which resulted in creation of mode of finance. The foremost thing is to discourage the Riba among the rules (Aggarwal & Yusuf, 2000). Islamic banking and their operating subsidiaries have devised a new instrument that is interest free. The main basic ways of financing which are in consent with the Islamic rules and conditions and also apply to financial conditions are Mishawaka, Salam, Artisan, Ijara, Murabaha, Mudarabah. These types of Instruments are used on the base of principals are Sharing Profit and Loss and The Mark UP Principle. The Islamic Institutions stand Musharaka and Mudarabah are depending on Profit Loss Sharing rule and Murabaha, Salam, Istisna and Ijara is on the Mark-up principle (Aggarwal & Yousaf, 2000). Dar (2003) divides the types of financing into: Investment based, Sale based, Service based, Rent based.
1. Sharing Profit and Loss
The Islamic Banks have to run without earning any interest and therefore one needs to understand the difference between the rate of interest and return. Rate of interest is not allowed in Islam however Islam encourages the trade. In the interest free system the subjects are able to earn the money on their investment only when they are ready for sharing the risk involved for getting the profit. Banks have to operate on this principle of sharing profit and loss and other satisfactory forms of business (Suleiman 2001).In the books on Islamic literature of the economics the PLS principle is granted on the basis of the financial transactions.
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Hassan Mohammed/ Master of Finance/ 2011 The bank is involved in both the profit and loss sharing and therefore takes the risk on its investment (Aggarwal & Yousuf, 2000). The following transactions are used by the bank on the PLS principles that is Musharka (Joint Venture) and Mudarabah
a. Musharka (Joint Venture):
The most wanted form of investing under the rules of Shariah is Musharka as it is satisfying the criterias of shariah in the absence of interest as it involves risk, loss bearing and interest free and also links the capital investment to the assets under the transactions. Musharaka is a kind of joint partnership where the loss and the share of the profit are taken by both the partners and also the investment returns are also shared. The sharing of returns is done on basis of their proportional investment. Musharka is similar in principles of Western style of investments that talk of equal shareholding rights and partnership in the company (Aggarwal &Yousuf, 2000). The bank can supervise the implementation of the project (Naser). The promoter keeps on returning the loan to the bank as and when the promoter receives the cash flows from the projects. b. Mudarabah This method of financing holds almost the same level of importance as Musharaka. In this method of financing one partner gives the amount to the other partner for investing in the commercial organization. The investment is done by the first partner who is named as Rabb-ul-mal and the management of the firm is done by the other partner who is called Mudarib (Mufti Muhammad Taqi Usmani, 1998). Mudarabah I also known as the contract of two parties in which there is one financer and the other looks after the management and profits of the company. The financer of the company holds the right to attend the board meetings and also participate in the decisions of the company (Rajesh and Tarik, 2000). The Profit sharing of the partners is decide at start of the venture, it can be taken as an example where the financer gets the 60% share in the profits and 40% of the profits are taken by the mangers. In case of negative returns banks dont earn anything and the entrepreneurs have remuneration for his efforts (Aggarwal & Yousuf 2000). The
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Hassan Mohammed/ Master of Finance/ 2011 set up treats the capital in equal proportion with the human capital (Suleiman 2001). Musharka and Mudarabah are in sense equity investments. The latter is akin to partnership structure and latter with the equity structure (Aggarwal & Yousuf, 2000). 2. Mark-Up Principle: The principles of this kind of investing can be seen in commercial investments. The banks here take a share in the profits in lieu of capital financing of the assets required by the company (Aggarwal & Yousuf, 2000). The instruments following this principle include, Murabaha, Salam, Istisna, Ijarah. 1. Murabaha This kind of investment is a unparticipatory way of Islamic Financing and here the bank is in selling of the investment needed by the customer and this is done on the behalf of the Entrepreneur and may also seal to the promoter at a price previously fixed and the profit which was already negotiated (Aggarwal & Yousuf, 2000). The bank first purchases the asset which is therefore involved in sharing the profits and also the loss is shared by the banks. The Payment of the banks is also decide upon the start of the project and therefore the promoter also gives the bank instalments or does the payment in lump sum which is also known as Mujjal. The agreement is bound on the two parties concerned even if the client fails to give the sum (Aggarwal & Yousuf, 2000). 2. Salam This is the kind of payment where advance is given and the release of the payment is delayed (Salman 2004). The expenses are done by the vendor in lieu of goods that are to be given to the buyers at a future date (source, Bank Alfalah). The commodity becomes the property of the bank at the pre decided date and this is done only after the payment of Salam and gives the price. The shariah rules forbid the bank to sell any of its holdings as they have been banned in the rules of Islam and therefore the bank cannot exit salaam contract. Therefore there is no secondary market for such contracts. The market is therefore primary with the entrepreneurs and the banks forming the two parties of the contract.
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Hassan Mohammed/ Master of Finance/ 2011 3. Ijara and Ijara Wa- Iqtina (Islamic Leasing) Ijara is the Islamic way of leasing of assets, in this case it is the banks which have to lend the assets or there can be case where the banks also get the assets on lease from a party (Salman, 2004). In the standard hire agreement the clients rents out the car, property or any other form of real asset. The client is involved in the periodical rent for the asset to be used. The rental payment can be fixed or the floating way of payment. The client gives the rental to the institution and the changes to be made in agreement about the payment of the rental have to be done with mutual consent (Bank Alfalah). The Ijara contract has some aspects in common with the western form of leasing in which bank is the lessor and the entrepreneur is the lessee. The Islamic Bank under the contract has to lease an asset which is under the agreement and the payment schedule is already decided by the parties. The responsibility of supervision and its maintaining part is done by the lessor. Ijara Wa Iqtina is almost on the same line as the western part of investments on the capital or the financing lease. The Islamic Bank which has to operate under the Islamic Law under Ijara Wa Iqtina contract buys the financial Asset as the building, machinery and may be it can purchase the entire project and then it leases it to the concerned entrepreneur which can be done for the limited period or as the case may be. The client can also pay periodical rentals for the asset purchase (Salman, 2004). This contract can be seen in same vein as Ijara although it has an option of the ownership of the financial object at the ending of the contract period. Therefore to avoid any kind of conflicting views things have to agree at the starting itself.
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APPENDIX B
Introduction of Meezan Bank Limited MBL is stock market listed corporation and it was started in the year 1997 on 27th of January and also started functioning as investment bank in August month of the same year. Meezan bank was also granted the banking license of commercial undertaking and as an Islamic Bank by the State Bank of Pakistan. Meezan Bank is currently established as largest Islamic Bank in Pakistan with the branch network being one of the largest in the sector. The standard development in the deposits is around 60% per year and through this time the number of the branches rose to 100. The bank can boast of a reliable and capable team of the Investment bankers and also has as strong balance sheet with the operational efficiency and profits being one of the best in the sector. The Bank has been assigned rating of A+ and for term purposes it is around A1. The main shareholders of the bank include Noor Financial Investment Company which is an AAA rated company in the country, Shamil Bank of Bahrain which is one of leading bank in Bahrain and the Developmental Bank of Jeddah. The international reputation and the sound fundamentals of the bank ass to the value of the bank and also helps the bank in achieving its objectives. The bank has an able leader in the form of (Retd.) Justice Maulana-TaqiUsmani, who is an acclaimed finance specialist in the international finance arena and one who is known for his high caliber. He is currently the deputy chairman of Islamic Fiqh Academy, Jeddah and he also served as the Judge in the sharia Appellate bench at the apex court in Pakistan. The board of Directors has Dr. Imran Usmani who is also a Shariat advisor of the bank. The functions of Mr. Imrans department includes that the transaction of the bank are carried out as per the Islamic Laws and in fair manner. The objectives of the Meezan bank include that they also have to find the common functionalities with the conventional Banking system. The Meezan bank has developed an excellent research and development capability in combination with the investment bankers and commercial bankers, shariah scholars an legal experts to who
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Hassan Mohammed/ Master of Finance/ 2011 can create the new, affordable and competitive features that c meet the complex financial requirements of the financial world and also provides service that are of World Standards and also the demand of the customers are given top priority. The technological advancement of the Meezan Bank can also be seen from the strong IT department and has strong technology systems. The corporate and the investment banking divisions are having good infrastructure and the client relationship are given high importance and also the complaint financing solutions would be done through the structured financing way.
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Appendix:-3
Data collection for findings from Meezan bank
(RUPEES IN MILLION S) 2009 2008 1025 1241 69 9091 1740 3458 7639 5 1003 33 3167 7 1152 90 5223 5198 3639 621
Meezan Bank
2010 net profit after tax/ (NI) 1649
2007 963 6717 9 5720 1269 1765 4342 6 5458 2 1617 9 6171 3 2235 3033 1899
2006 604 4643 9 4763 780 1028 3073 1 3444 9
total assets shareholders equity profit before tax operating expenses
154752 10740 2126 4536
85276 6341 992 2713
loan
64706
57876
deposit cash & portfolio investment
131070
70234
67746
20049
8774 4170 5 1404 1807 1093
total debt total revenue total income noninterest expenses
146383 5867 6662 4843
79453 3844 3705 2848
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Appendix:-4
Data collection for findings from Habib bank
(RUPEES IN MILLION S) 2009 2008 1229 8 8211 27 7909 5 1948 5 2250 7 4376 35 6534 52 2889 48 7794 08 4293 4 4199 3 2335 8
Habib Bank
2010
2007
2006 1427 6 5629 15 5311 1 2050 2 1476 6 3425 35 4397 24 1653 72 5401 68 3048 1 3699 2 1732 6
net profit after tax/(NI)
15613 88705 2
10000
8041 6558 38 5794 3 1312 7 1716 4 3638 88 5089 86 2272 93 6287 54 3132 7 3029 1 1810 6
total assets
717302
shareholders equity
89524
65044
profit before tax
25057
15855
operating expenses
23922 46533 7 72106 9 32653 2 82844 8
20820
loan
441901
deposit cash & portfolio investment
572399
184145
total debt
683498
total revenue
47338
37118
total income
48979
36675
noninterest expenses
25131
22013
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Appendix:-5
Data Analysis
2010 1.07 % 1.76 % 15.35 % 17.44 % 0.47 % 1.05 % 41.35 % 64.53 % 51.69 % 45.28 % 41.81 % 52.46 % 13.63 % 9.25 2009 0.83 % 1.49 % 11.27 % 15.55 % 0.50 % 0.87 % 41.57 % 66.97 % 31.57 % 44.22 % 61.53 % 53.30 % 12.68 % 9.85 200 8 0.73 % 1.39 % 9.79 % 15.3 7% 0.37 % 0.76 % 56.6 2% 77.2 0% 28.5 5% 32.1 7% 67.8 7% 61.6 1% 12.5 3% 10.5 200 7 1.43 % 1.23 % 16.8 4% 13.8 8% 0.72 % 0.76 % 63.3 5% 71.4 9% 29.6 4% 44.6 6% 64.6 4% 55.4 8% 10.7 9% 9.67 200 Mean 6 1.30 1.07 % % 2.54 1.68 % % 12.6 8% 26.8 8% 0.76 % 1.39 % 78.4 7% 77.9 0% 25.4 6% 37.6 1% 66.1 7% 60.8 5% 8.76 % 10.1 13.19 % 17.82 % 0.56 % 0.97 % 56.27 % 71.62 % 33.38 % 40.79 % 60.40 % 56.74 % 11.68 % 9.89
S.D
0.0029 819 0.0051 688 0.0289 372 0.0521 792 0.0016 959 0.0026 339 0.1566 673 0.0596 83 0.1047 109 0.0572 972 0.1065 289 0.0425 29 0.0192 636 0.0048
Return on Asset
Meeza n Bank Habib Bank Meeza n Bank Habib Bank Meeza n Bank Habib Bank
Return on Equity
Profit to Expense Ratio
Loan to Meeza Deposit Ratio n Bank Habib Bank (CPIDR) Meeza n Bank Habib Bank Meeza n Bank Habib Bank Meeza n Bank Habib
Loan to Asset Ratio
Debt-Equity Ratio
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Bank Debt to Total Asset Ratio Meeza n Bank Habib Bank Meeza n Bank Habib Bank Meeza n Bank Habib Bank Meeza n Bank Habib Bank Meeza n Bank Habib Bank % 94.59 % 93.39 % 14.41 % 9.91 % 3.79 % 5.34 % 82.55 % 53.09 % 1.47 % 2.05 % % 92.85 % 94.92 % 13.66 % 10.38 % 4.21 % 5.23 % 69.67 % 54.40 % 1.50 % 1.87 % 1% 93.1 7% 95.2 9% 13.4 9% 11.0 3% 4.51 % 5.17 % 74.0 9% 59.3 1% 1.37 % 1.76 % % 91.8 6% 95.8 7% 11.7 4% 11.3 2% 3.33 % 4.78 % 84.9 7% 57.8 0% 1.72 % 1.76 % 7% 89.8 1% 95.9 6% 9.75 % 10.6 0% 3.02 % 5.41 % 77.8 5% 56.8 4% 1.75 % 2.51 % % 92.46 % 95.09 % 12.61 % 10.65 % 3.77 % 5.19 % 77.83 % 56.29 % 1.56 % 1.99 % 021 0.0177 31 0.0103 973 0.0187 439 0.0055 143 0.0061 19 0.0024 542 0.0620 144 0.0252 562 0.0016 544 0.0031 393
Equity Multiplier
Asset Utilization
Operating Efficiency
Income Expense Ratio
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Comparison of Islamic and Conventional Banks

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Hassan Mohammed/ Master of Finance/ 2011

A Dissertation Submitted In Fulfilment of Partial Requirement of Master of Finance

Glasgow Caledonian University

Hassan Mohammed/ Master of Finance/ 2011

Hassan Mohammed/ Master of Finance/ 2011

Hassan Mohammed/ Master of Finance/ 2011

Chapter 6 Findings -----------------------------------------------------------6.1 Profitability Ratio -------------------------------------------------6.2 Liquidity Ratio -----------------------------------------------------

Hassan Mohammed/ Master of Finance/ 2011

9.3 Appendix C ---------------------------------------------------------- 56 9.4 Appendix D ---------------------------------------------------------- 57 9.5 Appendix E ----------------------------------------------------------- 58

Hassan Mohammed/ Master of Finance/ 2011

Hassan Mohammed/ Master of Finance/ 2011

Hassan Mohammed/ Master of Finance/ 2011

Hassan Mohammed/ Master of Finance/ 2011

Chapter: - 3 Pakistans Banking Sector

Policy division. Shariah compliance division. Business support division.

Hassan Mohammed/ Master of Finance/ 2011

Hassan Mohammed/ Master of Finance/ 2011 40.79%.

Hassan Mohammed/ Master of Finance/ 2011

6.3. Risk and Solvency Ratio

Hassan Mohammed/ Master of Finance/ 2011

Bank Islamic Bank Conventional Bank

2006 9.75 10.60

2007 11.74 11.32

2008 13.49 11.03

2009 13.66 10.38

2010 14.41 9.91

Mean 12.61 10.65

S.D 0.0187 0.0055

Hassan Mohammed/ Master of Finance/ 2011

Hassan Mohammed/ Master of Finance/ 2011

Hassan Mohammed/ Master of Finance/ 2011

Hassan Mohammed/ Master of Finance/ 2011 www.sbp.org.pk

Hassan Mohammed/ Master of Finance/ 2011

Hassan Mohammed/ Master of Finance/ 2011

Hassan Mohammed/ Master of Finance/ 2011

2006 604 4643 9 4763 780 1028 3073 1 3444 9

total assets shareholders equity profit before tax operating expenses

154752 10740 2126 4536

85276 6341 992 2713

deposit cash & portfolio investment

8774 4170 5 1404 1807 1093

total debt total revenue total income noninterest expenses

146383 5867 6662 4843

79453 3844 3705 2848

Hassan Mohammed/ Master of Finance/ 2011

net profit after tax/(NI)

profit before tax

23922 46533 7 72106 9 32653 2 82844 8

deposit cash & portfolio investment

Hassan Mohammed/ Master of Finance/ 2011

Profit to Expense Ratio

Loan to Asset Ratio

Hassan Mohammed/ Master of Finance/ 2011

Income Expense Ratio

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