A Comparison of Islamic and Conventional Banking system

Asset liability management Sources and uses of funds Similarities & dissimilarities

Qazi waqas, Zulqarnain , Nouman

Qazi waqas, Zulqarnain , Nouman

GROUP # 7

QAZI MUHAMMAD WAQAS ZULQARNAIN HAIDER SYED NOUMAN ATHER

Qazi waqas, Zulqarnain , Nouman

PIONEER BATCH RCIB MBA (IBF) RIPHAH INTERNATIONAL UNIVERSITY

Outlines:
Introduction of this Project Objective of the Project Companies selected for study Faysal Bank MEEZAN BANK LTD Conceptual Framework for Islamic Asset Liability Management Deposits Uses of funds Similarities & dissimilarities
Qazi waqas, Zulqarnain , Nouman 4

Holy Quran:
We have created the night as covering and we have created the day for the economic activities.

Qazi waqas, Zulqarnain , Nouman

Hazrat Umar R.A., said:

Every system can prevail in this world but not the one which is unjust.

Qazi waqas, Zulqarnain , Nouman

Introduction of this Project

In this Project our main focus on three main things regarding Islamic Banking system. We will discuss the Comparison of Conventional & Islamic Banking Systems According to these things:
Asset Liability Management, Sources & Uses of Funds, Similarities & Dissimilarities

Qazi waqas, Zulqarnain , Nouman

Objective of the Project

The main objective of our project is to clear the basic differences between Islamic and conventional system We will try to discuss the real face of both systems in depth. Thats why our discussion will around these things:
How Islamic Banks manage their assets and liabilities what is the main sources and uses of funds what are the main and core similarities & dissimilarities between Islamic bank and conventional bank.

Qazi waqas, Zulqarnain , Nouman

Companies selected for study

We selected two banks first is Faysal banks taken as the conventional banks representative and
Second one is Meezan bank as representative of Islamic banks,

Qazi waqas, Zulqarnain , Nouman

Faysal Bank
Faysal Bank Limited was incorporated in Pakistan on October 3, 1994, as a public limited company under the Companies Ordinance, 1984.

Currently, the Bank's shares are listed on the Karachi, Lahore and Islamabad Stock Exchanges Faysal Bank is engaged in Commercial, Consumer, Corporate and Islamic Banking activities
Qazi waqas, Zulqarnain , Nouman 10

Faysal Bank cont

The bank is principally engaged in providing consumer, corporate and investment banking services to its customers. The bank offers a wide range of consumer banking products and services which include deposit accounts, car loans, home loans and other consumer loans.
Qazi waqas, Zulqarnain , Nouman 11

Faysal Bank cont

It also provides treasury and capital market services and cash management services to its customers. Balance Sheet of Bank
Assets Loans and advances to customers Cash and cash balances with other banks Investments in associates, subsidiaries and joint ventures Financial assets held for trading Cash and cash balances with the central bank Liabilities Customers deposits Due to banks and other financial institutions Other liabilities Sundry creditors Equity and reserves
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MEEZAN BANK LTD

MEEZAN was established as an Islamic Investment Bank in 1997 as AL MEEZAN INVESTMENT BANK LTD. First Islamic Commercial Banks license was awarded to Al Meezan Investment Bank in year 2002,

They bought the local operations of Socite General (French Bank) 03 branches
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MEEZAN BANK LTD cont

In 2009, Branch network of six dedicated Islamic banks increases to 480 branches (including sub-branches) Meezan Bank having a 42% share of the Islamic Banking branch network in the country . 201branches in 54 cities across the country. Over 5.5% of the total Banking industry.

Qazi waqas, Zulqarnain , Nouman

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PRINCIPLES BASIS OF ISLAMIC FINANCE

Prohibition of RIBA Alkharaj-o-bildhaman (entitlement to profit is associated with corresponding risk)-Risk Sharing, i.e. No Risk, No Gain. Prohibition of sale of goods before acquiring ownership Prohibition of sale of food stuff before possession Prohibition of debt for debt Avoidance of Gharar (uncertainty) Time value measured only through Price or Rent. Debt contracts can be made / traded but without discount. Risk can be distributed through forward Trading / Contracts by way of Salam & Istisna. 15
Qazi waqas, Zulqarnain , Nouman

Asset Liability Management

Assets liability management is very important phenomena in banks earning strategy even in Islamic banking system, all the investments contributions to this effects to be used even on and off-balance sheet components in ALM. The risk taking is the key determinant for the banks either conventional or Islamic to portfolio or ALM.
Qazi waqas, Zulqarnain , Nouman 16

BALANCE SHEET STRUCTURE OF ISLAMIC BANK.

17 Qazi waqas, Zulqarnain , Nouman

Objectives of ALM
To manage the portfolio in a manner consistent with the banks investment policy. To obtain the desired earning while holding risk at acceptable levels. To maintain adequate liquidity at a cost consistent with earnings goals.

On and Off-balance sheet investments are considered in ALM.

Qazi waqas, Zulqarnain , Nouman

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Techniques of ALM.
Matching Techniques. Swap Techniques. Futures as a Hedging Technique. Options as Hedging Techniques.

Effective Portfolio Management.

Qazi waqas, Zulqarnain , Nouman 19

ALM - Pillars
ALM Information Systems.
MIS Information availability Accuracy Adequacy Expediency

ALM Organization.

Structure and responsibilities Level of top management involvement Risk Parameters Risk Identification Risk Measurement Risk Management
Qazi waqas, Zulqarnain , Nouman 20

ALM Process.

Current Ratio:
The current ratio highlights
the firm ability to cover short term liabilities with its current assets. Current Ratio = Current Assets / Current Liabilities
Particulars Current Assets Current Liabilities Current Ratio Faysal Bank Meezan Bank

2007 138,762,4 62 58,877,32 0

2008 135,594, 508 65,763,5 83

2009 176,797,8 78 108,009,0 79

2007 66,145,5 96 36,967,0 02

2008 83,395,5 55 51,844,2 28

2009 121,561,1 87 77,699,05 8

Interpretation:
The current ratio of Faysal bank & Meezan Bank for the year 2007, 2008 & 2009 is, 2.36, 2.06 & 1.64, 1.79, 1.61 & 1.56 respectively, compared to standard ratio 2:1 this of Meezan Bank ratio is then Faysal Bank

2.36

2.06

1.64

1.79

1.61

1.56

Current Ratio

2.50 2.00

2.36 2.06 1.79 1.61 1.64 1.56 Faysal Bank Mezaan Bank

Ratio

1.50 1.00 0.50 0.00 2007 2008 2009

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Qazi waqas, Zulqarnain , Nouman

Sales to Working Capital = Sales / Working Capital

In this ratio we compare the working capital or net current assets with sales which are part of the revenue.
Faysal Bank Particulars Sales Working Capital Sales Working Capital To
0.15 0.19 0.25 0.16 0.22 0.23 2007 11,610, 781 79,885, 142 2008 13,404, 132 69,830, 925 2009 16,957, 875 68,788, 799

Meezan Bank
2007 4,573,7 52 29,178, 594 2008 6,803,2 13 31,551, 327 2009 10,102, 060 43,862, 129

Interpretation:
The average turnover in working capital of Faysal Bank is 19% & Meezan Bank have 20% this shows the profitability of working capital of Meezan Bank is slightly high then Faysal Bank.

Sales To Working Capital Ratio

0.30 0.25 0.20 0.22 0.19 0.150.16

0.25 0.23 Faysal Bank Mezaan Bank

Ratio

0.15 0.10 0.05 0.00 2007 2008 2009

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Qazi waqas, Zulqarnain , Nouman

Working Capital = Current Assets Current Liabilities

Arithmetically it is the difference of Current Assets and Current Liabilities.
Faysal Bank Particula rs
2007 138,762, 462 58,877,3 20 7988514 2 2008 135,594, 508 65,763,5 83 6983092 5 2009 176,797, 878 108,009, 079 6878879 9

Meezan Bank
2007 66,145, 596 36,967, 002 291785 94 2008 83,395, 555 51,844, 228 315513 27 2009 121,561, 187 77,699,0 58 4386212 9

Current Assets
Current Liabilities Working Capital

Interpretation:
The working capital ratio of Faysal Bank limited is higher which indicates that Faysal bank has have sufficient resources to meets its current obligations as compare to
Meezan Bank Limited.

Working Capital Ratio

100000000.00 80000000.00

Ratio

60000000.00 40000000.00 20000000.00 0.00 2007 2008 2009

Faysal Bank Mezaan Bank

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Qazi waqas, Zulqarnain , Nouman

Balance Sheet Meezan Bank Limited

Horizontal Analysis
2007 ASSETS Cash and balances with treasury banks 5,644,028 2008 Rs.In ,000 5,763,710 8,387,432 100 2009 2007 2008 Rs.In ,000 102.12 148.61 2009

Balances with other banks

Due from financial institutions Investments Financings Operating fixed assets Deferred tax asset Other assets LIABILITIES Bills payable Due to financial institutions

3,729,549
8,850,000 10,535,186 34,576,339 1,032,963 2,810,494 67,178,559 1,192,160 2,415,606

1,344,974
18,108,000 14,286,949 39,768,481 1,880,515 4,123,441 85,276,070 1,057,017 4,008,496

5,260,467
34,499,500 23,290,309 44,188,066 2,416,375 204,172 5,935,413 124,181,734 1,249,210 8,468,425

100
100 100 100 100 100 100 100 100

36.06
204.61 135.61 115.02 182.05 146.72 126.94 88.66 165.94

141.05
389.82 221.07 127.80 233.93 #DIV/0! 211.19 184.85 104.79 350.57

Deposits and other accounts

Sub-ordinate loan Liabilities against assets subject to finance leases Deferred tax liabilities Other liabilities NET ASSETS

54,582,353
430,377 2,851,407 61,471,903 5,706,656

70,233,875
453,038 3,548,666 79,301,092 5,974,978

100,333,051
4,946,589 114,997,275 9,184,459

100
100 100 100 100

128.68
105.27 124.45 129.00 104.70

183.82
173.48 187.07 24 160.94

REPRESENTED BY

Share capital

3,779,897

4,925,961

6,650,048

100

130.32

175.93

Reserves
Unappropriated profit

720,785
1,219,228 5,719,910

845,022
570,114 6,341,097

1,050,092
1,390,395 9,090,535

100
100 100

117.24
46.76 110.86

145.69
114.04 158.93

Deficit on revaluation of investments

(13,254) 5,706,656

(366,119) 5,974,978

93,924 9,184,459

100 100

2,762.33 104.70

(708.65) 160.94

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Balance Sheet Faysal Bank Limited

2007 2008
Rs.In ,000

Horizontal Analysis
2009 2007 2008 2009

ASSETS Cash and balances with treasury banks Balances with other banks Lending's to financial institutions Investments Advances Operating fixed assets Deferred tax assets - net Other assets LIABILITIES Bills payable Borrowings from financial institutions Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Deferred tax liabilities - net Other liabilities
2,406,927 9,995,855 102,067,422 1,000,000 7,827 2,691,466 6,951,421 125,120,918 6,872,032 3,708,451

8,927,524 876,780

8,427,202 508,795

100 100

129.91 23.64

122.63 13.72

7,078,102
31,553,108

2,861,401
30,186,168

15,017,826
56,531,338

100
100

40.43
95.67

212.17
179.16

87,346,401
2,514,959 2,204,368 141,277,421

89,758,789
2,646,978 2,983,846 138,241,486

91,346,001
2,787,617 1,279,918 4,966,716 180,865,413

100
100 100 100

102.76
105.25 135.36 97.85

104.58
110.84 100.00 225.31 128.02

1,536,517 13,027,468 102,776,793 999,600 4,103 2,483,355 6,641,542 127,469,378

1,465,451 34,985,766 123,655,188 999,200 6,977,069 168,082,674

100 100 100 100 100 100 100 100

63.84 130.33 100.70 99.96 52.42 92.27 95.54 101.88

60.88 350.00 121.15 99.92 100.37 134.34 26

Qazi waqas, Zulqarnain , Nouman

NET ASSETS REPRESENTED BY

16,156,50 3

10,772,10 8

12,782,73 9

100

66.67

79.12

Share capital
Reserves Unappropriated profit

5,296,445 3,567,033 1,481,668

5,296,445 3,790,023 1,049,519

6,090,911 4,030,056 1,215,179

100 100 100

100.00 106.25 70.83

115.00 112.98 82.01

10,345,14 6

10,135,98 7
636,121 10,772,10 8

11,336,14 6
1,446,593 12,782,73 9

100 100

97.98 10.95

109.58 24.89

Surplus on revaluation of assets

5,811,357 16,156,50 3

100

66.67

79.12

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Conclusion/Findings
Liquidity position of Faysal Bank Limited is higher then Meezan Bank Limited this indicates that Meezan Bank Limited has higher leverage. Both financial institutes should improve their current ratio & working capital position in financial year 2011. The analysis shows that its lower down gradually. Net profit margin of Meezan Bank Limited is higher then Faysal Bank Limited. Gross profit margin of Meezan Bank Limited is higher then Faysal Bank Limited so we would like to suggest Faysal Bank should improve its Gross Profit margin to meet the expenses efficiently and set a sight profit for shares holders.

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Conclusion/Findings
The Operating income margin of Faysal Bank Limited is higher then Meezan Bank Limited which indicates that Faysal Bank Limited generates higher income by its own operation as compare to Meezan Bank Limited. The Long Term debt to long term liabilities ratio of Meezan Bank Limited is higher then Faysal Bank Limited because Faysal bank limited employed its funds in short term activities more then Meezan Bank Limited Meezan Bank Limited has a good market perception due to continuous declaration of dividends but on the other hand Faysal Bank limited did not declared dividend in financial year 2009. The three years average price / earning ratio of Meezan Bank Limited 13.97 while the Faysal Bank Limited has 7.78 % this indicates the Meezan Bank Limited has much potential in stock as compare to Faysal Bank Limited.

The operating cash flow to total debt ratio of Meezan Bank Limited is little higher then Faysal Bank Limited
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Recommendations
With the assistance analyses of financial reports we would like to recommend both financial institutes should over come their pit falls, flaws and deficiencies. Meezan Bank limited should improve its current ratio. The Meezan Bank Limited Net Profit Margin is higher then Faysal Bank Limited. The Faysal Bank Limited should improve its profitability ratio by efficiently use its resources. Similarly the price earning ratio & dividend payout ratio of Meezan Bank Limited is higher then Faysal Bank this highlights good return on investment as well good market perception. Faysal should also pay dividend consistently through generate the profit by improving its operation. We would also like to recommend that financial institute should much promote the business activities and provide financial assistance to industry which will be reduce the un employment, inflation and increase productivity of Pakistan
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SIMILARITIES & DISSIMILARITIES

There are two major difference between Islamic Banking and Conventional Banking: Conventional banking practices are concerned with "elimination of risk" where as Islamic banks "bear the risk" when involve in any transaction. When Conventional banks involve in transaction with consumer they do not take the liability only get the benefit from consumer in form of interest whereas Islamic banks bear all the liability when involve in transaction with consumer. Getting out any benefit without bearing its liability is declared Haram in Islam. Qazi waqas, Zulqarnain , Nouman 31

Differences between Islamic and Banking System

Conventional System Islamic System

Money is a product besides medium of exchange and store Real Asset is a product. Money is just a of value. medium of exchange.
Time value is the basis for charging interest on capital. Profit on exchange of goods & services is the basis for earning profit.

Interest is charged even in case, the organization suffers Loss is shared when the organization losses. Thus no concept of sharing loss. suffers loss. While disbursing cash finance, running finance or working The execution of agreements for the capital finance, no agreement for exchange of goods & exchange of goods & services is must, services is made. while disbursing funds under Murabaha, Salam & Istisna contracts. Due to non existence of goods & services behind the Due to existence of goods & services no money while disbursing funds, the expansion of money expansion of money takes place and thus takes place, which creates inflation. no inflation is created. Due to inflation the entrepreneur increases prices of his goods & services, due to incorporating inflationary effect into cost of product. Bridge financing and long term loans lending is not made on the basis of existence of capital goods. Rather, they are disbursed on the basis of Windo Dressed project feasibility and credibility of the entrepreneur. Due to control over inflation, no extra price is charged by the entrepreneur. Musharakah & Diminishing Musharakah agreements are made after making sure the existence of capital good before disbursing funds for a capital project. 32

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