islamic banks vs. commercial banks
TRANSCRIPT
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A Study on Islamic Banks vs. Commercial Banks
(Comparative Financial Analysis)
By
M. Mujtaba Hussain Malik 5270-FMS/MBA/F11
Muhammad Waqas Afzal 5263-FMS/MBA/F11
A project report submitted to the Department of Business Administration
(Accounts and finance), faculty of Management Sciences, International Islamic
University Islamabad, in partial fulfillment of the requirement for the degree of
MASTERS OF BUSINESS ADMINISTRATION
(FINANCE)
Department of Business Administration(Accounts and finance)
Faculty of Management Sciences
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International Islamic University Islamabad
A Study on Islamic Banks vs. Commercial Banks
(Comparative Financial Analysis)
By
M. Mujtaba Hussain Malik 5270-FMS/MBA/F11
Muhammad Waqas Afzal 5263-FMS/MBA/F11
MASTERS OF BUSINESS ADMINISTRATION
(FINANCE)
Submitted To
Sir.Waqas Ahmad
Lecturer
Department of Business Administration (Accounts and finance)
Faculty of Management Sciences
International Islamic University Islamabad
June 2014
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Copyright 2013 by Mr. Mujtaba Hussain& Mr. Waqas Afzal.
All rights are reserved. No part of this Research Paper can be reproduced in any
form or any means such as photocopy or electronic media etc. without prior
approval of authors.
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Supervisors Certificate
This is certified that Mr. M. Mujtaba Hussain Malik 5270-FMS/MBA/F11 and
Mr. Muhammad Waqas Afzal 5263-FMS/MBA/F11 of MBA-26 have completed
their project report entitled A Study on Islamic Banks vs. Commercial Banks
under my supervision. I have checked this report and found it bonafide work of
authors.
__________________
Waqas Ahmad
SUPERVISOR
Lecturer
______________________
Dr. Zulfiqar Ali Shah
Head, Department of Accounting & Finance
Faculty of Management Sciences
International Islamic University Islamabad
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Table of contents
1. INTRODUCTION___________________________________________01
1.1.Executive summary01
1.2.Banking History..02
1.2.1.Kinds of Modern Banks..........03
1.2.2. International Monetary Fund....05
1.3.Islamic banking......................06
1.4.
Islamic banking in Pakistan......071.5.Products Offered By Islamic Banks08
1.6.Objectives of the study..12
1.7.Methodology...13
2. OVERVIEW_______________________________________________14
2.1.Business Size...14
2.2.Analysis of Growth patter.15
2.2.1.Total Assets And Growth In Total Assets..16
2.2.2.
Equity And Growth In Equity....18
2.2.3.Deposits And Growth In Deposits.....20
2.2.4.Advances And Growth In Advances.22
2.2.5.Revenues And Growth In Revenues.24
3. RATIS ANALYSIS 26
3.1.1.Return On Equity...26
3.1.2.Return On Asset 28
3.1.3.
Deposits to total asset ratio....30
3.1.4.Deposits to Equity.....32
3.1.5.Capital ratio...34
3.1.6.Earnings per share.35
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List of Graphs
Graph 1 Total Assets comparison.26
Graph 2 Equity comparison..28
Graph 3 Deposits..............................................................................................30
Graph 4 Advaces..32
Graph 5 Revenues....34
Graph 6 Ratios.. ..40
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List of tables
Table 1.01 List Of Selected Banks For Analysis.10
Table 2.01 Comparisons of branches and expansion.12
Table 2.02 The Comparison of Total Assets.13
Table 2.03 Growth Rates of Total Assets. .14
Table 2.04 Comparison Of Equity15
Table 2.05 Growth In Equity15
Table 2.06 Comparison Of Deposits.17
Table 2.07 Growth In Deposits..17
Table 2.08Comparison Of Advances.19
Table 2.09Growth in Advances.19
Table 2.10 Comparison Of Revenues20
Table 2.11 Growth In Revenues20
Table 3.03 Return On Equity.24
Table 3.04 Return On Asset...25
Table 3.06 Investment to asset ratio..27
Table 3.07 Deposits to asset ratio.28
Table 3.07 Deposit to equity ratio.29
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Table 3.09 Capital ratio.30
Table 3.10 Earnings per share..31
Table 3.13 Price earnings ratio.34
Table 3.14 Loan deposit ratio...35
Table 4.02Degree of Operating Leverage38
Table 4.03Degree of Financial Leverage.39
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1.
INTRODUCTION
1.1. EXECUTIVE SUMMARY
The Islamic banking is said to growing very fast in these days. Some sources say
Islamic banking is going to become the equal competitor of Conventional banking
in next a few years. It must be examined that the claim is really true or not. There
are a variety of financial tools that measure the financial performance and growth
of an organization. These tools can be applied to acquire better insight of these
industries. This study examines the financial growth and performance through
applying these financial tools. The top performing banks from both industries are
chosen for analysis purpose.
In the first section the brief history of Conventional banking is discussed and then
short account of history of Islamic banking is provided. The evolution of Islamic
banking in Pakistan is also described. The second section shows a closer view of
the growth pattern of Islamic banks as compared to Conventional banks. The third
section is based on financial analysis and comparison of financial performance.
Fourth and fifth sections are analyzed through investor`s point of view. Finally it
is concluded that the claim about growth of Islamic banking is true or not.
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1.2. BANKING HISTORY
Basically according to the given records banking was started approximately 1800
B.C. In its early stage it was started as prototype banks of merchant, which used
to give loans to farmers and traders. This was under practice in Egypt, Babylon,
Roman Empire and Greece where these the temples used to practice this kind of
banking to approve and issue the loans accept the deposits and was acting as
money changer. Precious metals were pledged against loans which were issued to
the borrowers. These loans were issued on high rates of interest, with the passage
of time old banking techniques were modified in to modern banking by the Greek,
Roam and Jews.The roots of modern banking techniques go to1
stCentral Bank of U.K which was
formed to advance the loans to the government and become a model for most
modern central banks. A point should not be forgotten that on the other side The
Bank of Amsterdam was formed in 17th
century to accept the deposits. During
18th
and 19th
century development in different business sectors resulted
development in banking sector as well. After words in 20th
century development
in I.T sector brought major changes in banking operations due to which there was
considerable changes were noticed in the size and geographic spread.
In the most modern era of banking and finance there are multiple types of banks
which are operating for the different purposes.
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1.2.1.Kinds of Modern banks
Central Bank
It is a type of bank owned by the government which regulates the currency of the
country and takes all the important decisions related to the economy of the
country. It also makes all the rules and regulations about the Conventional banks.
1. Commercial banks:
Commercial bank deals with the deposits and loans with individuals as well as
corporations. Economic development is mainly based on role of These banks
because they provide different kinds of services to the individual like the basic
facility of savings, granting loans and time deposits. These banks have to maintaina specific amount of reserves.
2. Mutual savings bank:
This is a type of financial institution, regulated by central government without
capital stock, owned by the members who create a common fund. Profits are
distributed between these members. The institution provides a place where
individual can save and invest in different types of securities.
3.
Investment Bank
These banks have basic purposes of providing facility to large organizations and
about the investment across the industry. Advices are provided about investment
and in promotion of corporate transactions
Modern developments in the technology has entirely changed the world and made
it global village due to which global business or multinational companies (MNC)
have come into being and this concept leads to the emergence of global financial
institutions. The development of multinationals definitely requires a kind of
international organization which can facilitate the business activities.
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4. World Bank:
The intention behind the formation of the World Bank was to issue advances tothe investors and to the states as well, further more to enhance the trade and
investment opportunities worldwide. It was established in 1944. World Bank is
the part of the World Bank Group, as well as the member of the United Nations
Development Group.
Now The World Bank's goal is to reduce the poverty. In the beginning it
contained two institutions, International Bank for Reconstruction and
Development and International Development Association from 1944 to 1968, at
that time loans were only issued for the development of income generating
infrastructures, such as development of the seaports of any country, highways and
power generation sectors, because these are the sectors which enables the
countries to repay the debts. But after wards from 1968 to 1980 the bank
expanded its operations from basic infrastructure development to social services
and some other sectors, meanwhile the issuance of loans for the development
purposes rose near about 20% annually. Here the institution adapted few policieswhich were strongly criticized by the UNICEF such as structural adjustment
policies which were designed for the enhancement of the economies of the
developing nations, but UNICEF was having point of view that these policies
were responsible for reduction in the health and education level of young
generation of Asia, Africa and Latin America. Just for this purpose the institution
has been funding to many non-government organizations for social services and
social benefit from 1989 till today and these policies include the protection of the
environment by promoting less harmful development activities such as in 1991 it
made an announcement that it will never finance any development activity in
Amazon forest just for the purpose of protecting the forest.
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1.2.2. International Monetary Fund
It was established in 1945 started by just 29 member countries but this figure hasgone to 188.It was established to facilitate the nations to clear their debts (under
developed countries). It provides suggestions to its members related to
international banking. It has the basic function of enhancing the economic growth
and stability of the underdeveloped countries for this purpose it facilitates them by
providing the funds and suggestions for improving their economic policies.
Before it was performing only two functions i.e. monitoring the exchange rates of
the countries and helping them to manage their exchange rates by providing them
funds to manage their balance of payments (BOP) and it was done to avoid the
international economic crisis. After the Second World War it played the role in
developing the global economy. After floating exchange rates in early 70s it
changed it role and then it started to monitor and evaluate the economic policies
countries seeking loan to judge that weather their policies are capable or notofthe
economic recovery in future and by checking that policies will be helpful in the
reduction of economic crisis or not. Now its role is much more important as it
monitors the economic policies of different countries. It negotiates the policies
and put forward its conditions before issuing the loans to the country in order to
make sure that their present economic policy will be able to recover the economic
condition. It gives the facility to the low income countries by providing them
loans on non interest basis for specific time period through, Extended Credit
Facility (ECF), Standby Credit Facility (SCF) as well as Rapid Credit Facility
(RCF). On the other side it also provides loans on the basis of interest and has
adapted different policies, which includes Stand-By Arrangements (SBA),Flexible Credit Line (FCL), Precautionary and Liquidity Line (PLL), Extended
Fund Facility and Rapid Financing Instrument (RFI). The member countries
economic and financial policies are also monitored by International Monitory
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fund it analyses the economic policy of each member country just to ensure that
whether it is in accordance to its guidelines to achieve the economic growth as
well as toasses its effects on global economy.
1.3.ISLAMIC BANKING
After the hard work of Islamic scholars Islamic banking has been introduced,
abanking which is based on values of Islam, the principles and rules given to us
by Islamic Shariah.MirzaBasheerud din Mehmood Ahmed, MaulanaMaududi and
few other Islamic scholars emphasized on the need of Islamic banks. On the basis
of profit and loss shairing.In the modern era the first Islamic financial institution
was started in 1963 by Ahmed El Najar, in Egyptian town MitGharar. Itdid not
use the name of Islamic banking because of the political regime in the country
will take it as an effort to enforce Islamic fundamentalism. By 1967-1969 there
were many such banks which were running on profit loss sharing bases. They did
not use to work on the basis of interest. The depositors money was invested in
trade and industry directly. The profits or losses was shared between the
depositors and bankitself. During 1970 many Islamic banks were establishing
such as in 1973 Nassir social bank was started in Egypt, 1975 Dubai Islamic bank,
1977 Fasial Islamic bank and 1979 Bahrain Islamic bank.
In 1983 first full-fledged Islamic bank was formed in Malaysia by the name Bank
Islam Malaysia Berhad(BIMB). According to some researchers, Nasir social bank
is the first full-fledged Islamic bank but according to some say Dubai Islamic
bank was the first one. 144 Islamic institutions were established by 1955. Islamic
banking started its break through growth in 2002 and onwards. Now a days
Islamic banking prevails in more than 60countries in which Muslim and non
Muslim countries are included.
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1.4.ISLAMIC BANKING IN PAKISTAN
Pakistan came into existence on 14 August 1947 as the first Islamic republic
created in the name of Islam. Now according to it, it is the duty of state to follow
the instructions of Allah Almighty according to the Objectives Resolution, passed
in 1949. Islam is the official religion of Pakistan and all rules/ regulations should
be in accordance with Islamic injunctions (1956 constitution). In 2001 a meeting
was held under the Chairmanship of the President of Pakistan and the officials of
the related ministries and organizations where it was decided that the shift to
interest free economy would be a gradual process in a phased manner that would
avoid any disruptions. The State Bank of Pakistan issued criteria in 2001 for
establishment of Islamic banks in the private sector. Al Meezan Investment Bank
in 2002 was the 1stbank which got the license. Al Meezan Investment Bank is
now known as Meezan Bank Limited is operating as full fledge Islamic bank.
Meezan Bank is a pioneer of Islamic Banking introduces theMeezan Islamic
Funds (MIF) and the countrys first open end Islamic Mutual Fund. In the year
2004 theConventional banks opened new branches being a part of Islamic
Banking such as Bank Alfalah, Habib Bank and standard chattered etc.SBP has
also given permission and approval to open 10 more branches as an Islamic
Banks. In the year of 2005 for the first time in Pakistan the Islamic Banking
welcomed in new era of Islamic Insurance(Takaful). In 2007 it has been observed
that the Islamic Banking got a remarkable feedback from customers due to the
introduction of short-term, medium-term, long-term categories of product. For the
first time in the history of Islamic Banks Meezan bank offered ijarah financing for
the stock of finished goods. In 2009 different Islamic banks launched the Hajj
and Umrah Packages. The Albarkah Bank also give a support to Pakistani
economy as it expands its branches all over the state. By the year 2010 the Islamic
Banks stood to be the priority by most of the customers.In2013 the bank Dubai
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opened 25 new branches, 40 branchless banking booths and introduced variety of
services such as Banka Takaful, and Cash Management.
The future of Islamic banking is very positive in Pakistan, as during the last forty
years it has made considerable progress. According to Governor State Bank of
Pakistan, in the last five years Islamic banking has shown impressive annual
growth rate.There are more than five hundred branches of Islamic banks in
Pakistan. Meezan Bank, Bank Islami Pakistan, Al barkah Bank and Dubai Islami
Bank are significant in Pakistan.
1.5.PRODUCTS OFFERED BY ISLAMIC BANKS
1.
Current Account
Current Account of Islamic banks provides the facility of putting money in an
interest-free account without any restrictions on withdrawal of the money.
Current Account is based onQardcontract. In this case Bank is liable to pay the
money back on demand to the customer. Bank can use these funds for different
investments. The account gives surety of money safely deposited with a bank
further more assurance that, the Bank is not investing the money in activities
which areagainstShariah principles.
Current Account can be opened by any one from individual to the limited
companies.
2. Saving Account
The riba free saving account provides expected monthly returns as well as
different free benefits.
In this case Mudarabah relationship is made between customer and bank, where
customer becomes an Investor (Rab-ul-Maal) and Bank becomes Manager
(Mudarib) of the fund. The Bank makes a pool of the funds; which is then utilized
for financing to customers in the shape of Murabaha, Ijarah, Istisnaand
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Diminishing Musharkah etc. Saving Account can be opened from Individuals to
limited companies.
3.
Foreign Saving Account
Riba-free Saving Account is aMudarabah-based account and helps the investor
to diversify their investment to meet their business needs and to save the
investment against currency fluctuations.
This Account as well can be opened by individuals to Limited Companies.
4. Business Account
Business account is a Mudaraba-based account that allows you to conduct yourbanking transactions while availing a wide range of free services and therefore
provides you the ideal blend of convenience & flexibility that you deserve in
Islamic banking.
Business Account can be opened by Individuals, businesses (Sole Proprietorships,
Partnerships and Limited Companies).
Term Certificates
1.
Certificate of Islamic Investment
The Islamic Investment certificates is a Mudarabah-based deposit product, Where
investment is done from 3 months to 5 years and earnHalalprofit on a periodic
basis.
2. Amdan and monthly Mudarbah Certificate
Both of the certificates areMudarabah-based long-term and short term deposit
product that offers a high expected return to investors and gives monthly expected
returns. It is ideal for individuals and corporate clients who need a regular
monthly income.
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Certificates work on the principle of Mudarabah where Investor (Rab-ul-Maal),
and the Bank is the Manager (Mudarib). The Bank makes pool of funds; funds
from the pool are used to provide financing to customers under Islamic modes of
financing.
3. Foregin Currency Mudaraba Certificate
This Certificate is a deposit product in which investment can be done in foreign
currency, periods ranging from 3 months to 3 years and earn six-monthly or at
maturity profit payments on investment.
This Certificates works on the principle of Mudarabah.
The Mudarabah Certificate is an ideal investment for Individuals, Sole
Proprietorships, Partnerships and Limited Companies.
Others
1. Kafalah/Takaful
A Shariah-compliant alternative to assurance that offers a unique combination of
saving, investment and protection.
It is basically for:- highereducation
- daughter'swedding
-Hajj
- having a comfortableretired life with savings
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2. Car Ijhara
Car Ijarah is Interest Free Islamic financing mode of Ijarah (Islamic leasing).
It is based on rental agreement, under which the Bank purchases the car and hand
it over to the custmour on rentbasis for an agreed period, according to the
contract. On the completion of the period the customer gets ownership of the car.
3. Home Finance
Home financing allows a customer to have a home on paying easy installments as
well as by keeping one save from interest base financing.
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1.6.OBJECTIVES OF THE STUDY
Islamic banking is one of the emerging fields of todays world. As on one hand
few new Islamic banks have came into business, on the other hand conventional
banks have started opening Islamic windows. It is being said that Islamic banks in
the near future will be equal and strong competitors of Conventional banks.
The purpose of our study is simply what to apply the financial tools, which we
have learned during our Masters of Business Administration program on both, the
Islamic as well as Conventional banking, for the purpose of knowing where the
Islamic banking is standing today?The ambiguities and the few critics about
Islamic banking and the question about the income of the Islamic windows of the
conventional banks are related to Sharia Advisory Board which is keeping a strict
eye on it. We are more concern with the financial performance of the banking
industry.
The financial tools used in this study are
growth formula
financial statement analysis,
valuation models (capital asset pricing model)
To complete the project we have selected fewConventional banks from
conventional banking industry and few emerging Islamic banks from Islamic
banking industry. The list of selected banks is as follows:
Convention
albanks
Islamicban
ks
Askari Bank Meezan bank limited
Habib bank limited Al-Baraka bank
Standard chartered Burj bank limited
Muslim Commercial bank Dubai Islamic bank
Allied bank limited Bank Islamipakistan
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1.7. METHODOLOGY
Different financial tools are used for financial analysis, in which some are for
internal analysis and some are for external analysis. Our focus is on external
analysis so we will use external analysis tools which consist of growth formula,
financial ratios and capital asset pricing model (CAPM).
The growth formula tells, the increase in the amount in any specific variable,
which it has gained in any specific time period. The formula is as follows:
P.R= (VprVp)*100Vp
P.R = % Rate
Vpr = Current Value
Vp = Previous Value
We will use this formulain order to find out the growth in
BRANCH NETWORK
TOTAL ASSET
TOTAL EQUITY
TOTAL DEPOSITS
TOTAL ADVANCES
TOTAL REVENUES
After averaging all of the growth rates then comparison will be done for Six years
from 2008 to 2013, with graphical representation. Specific ratios for banks are
included which will measure profitability, liquidity, leverage and other financial
indicators of the banks. Risk and return analysis are also incorporated.
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2. OVERVIEW
Here attention will be given on banking industry with its growth pattern.
Comparison of increasing or decreasing trends and the comparative growth of
five conventional banks with five Islamic banks will take place including
comparison of branch networks with study of their assets, equity, deposits,
advances, and revenues.
2.1. BUSINESS SIZE
Business size includes the no. of branches which any particular business has.
Table 2.01Comparison of Branches and Expansion:
From the table one can easily extract out that the branch network of
Conventionalbanksis much higher in numbers then Islamic banks but with the
passage of time the branch network of Islamic banks have shown considerable
growth as compared to the Conventional banks and have decreased the gap,
difference between the no. of branches between them.
When we have applied growth formula, we discover that Conventional banks
have growth rate of 12%while Islamic banks have growth rate 140% in there
branch network during the last six years.
Conventional banks 2008 2013 Islamic banks 2008 2013
Allied bank limited 766 950 BankIslamiPakistan 102 201
Habib bank limited 1508 1547 Al-Baraka bank 30 110
Muslim Commercial bank 1040 1200 Burj bank limited 42 74
Standard chartered ltd 174 116 Dubai Islamic bank 25 124
Askari Bank 160 281 Meezan bank limited 160 351
Total 3648 4094 Total 359 860
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2.2. ANALYSIS OF GROWTH PATTERN
First of all we will have an overview of overall growth patternsofbothbanking
sectors i.e. (Islamic and Conventional). By applying the growth formula we will
find out the increasing, decreasing or stable trends in both of the banking
sectors.The data is collected from the annual reports of the banks. Assessments
are as follows,
2.2.1. Total Assets &their Growth
An asset is a resource, may be tangible or intangible which is being owned and
controlled to produce value.Table 2.02 Comparison Total Assets & their Growth
(All amounts in billion Rupees)
Year2008 2009 2010 2011 2012
2013
Conventional banks 1774 2613 3223 3855 4535 5844
Islamic banks 349 451 693 787 551 636
Year 2008 2009 2010 2011 2012 2013
Conventional banks 12% 47% 23% 20% 18% 22%
Islamic banks 23% 53% 29% 14% 8% 15%
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Graph 1
Graph 2
0
2000
4000
6000
2008 2009 2010 2011 2012 2013
Conventional Bank
Islamic Bank
0%
10%
20%
30%
40%
50%
60%
20082009 2010 2011
20122013
Conventional Bank
Islamic Bank
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banks 408
Islamic banks 25 30 32 37 40 45
Graph 3
Graph 4
0
2
4
2008 2009 20102011
20122013
Conventional Bank
Islamic Bank
0%
10%
20%
30%
2008 2009 20102011
20122013
Conventional Bank
Islamic Bank
Growth In Equity
Year 2008 2009 2010 2011 2012 2013
Conventional
banks 5% 5% 27% 26% 3% 13%
Islamic banks 12% 20% 7% 16% 8% 13%
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Explanation of Graphs & Tables:
Islamic banks are for behind than conventional banks if we see them on the bases
of equity. By putting glance on the growth pattern both of the banks there is bit up
& down in the Islamic banks, but even than they must be appreciated because
there are very new & showing good performance. The performance of
Conventional banks is batter in terms of growth rate as there are fully mature & at
there peak. The difference in both of the sectors may be due to there nature of
bushiness as Islamic banks shares profit & loss while conventional banks take
fixed amount of interest.
2.2.3.Deposits and their Growth:Deposits plays the role of life blood in all of the organization and sectors. In
banking sector specialy deposits increases the worth of that business. All the
investment and generation of revenue all depends upon the amount of deposits
that specific bank has. Table 2.06 shows comparison of deposits in both of the
sectors
Table 2.04 Comparison Deposit & their growth
All amounts are in billion Rs.
Year 2008 2009 2010 2011 2012 2013
Conventional
banks 1867 2090 2338 2694 3000 3300
Islamic banks 281 369 469 571 662 791
Year 2008 2009 2010 2011 2012 2013
Conventional
banks 13% 12% 11% 15% 11% 10%
Islamic banks 24% 31% 27% 22% 16% 20%
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Graph 5
Graph 6
Explanation of Graphs & Tables:
Conventional Bank
0
500
1000
1500
2000
2500
3000
3500
2008 2009 2010 2011 2012 2013
Conventional Bank
Islamic Bank
Conventional Bank
0%
5%
10%
15%
20%
25%
30%35%
2008 2009 2010 2011 2012 2013
Conventional Bank
Islamic Bank
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From the data one can easily say that number of peoples deposits areincreasing in
Islamic banks as compaired to theConventional banks. There can be multiple
reasons in it such as increased awairnes about Islamic banking, their products etc.
The data clearly shows that the growth rate of deposiits in Islamic banks are in
better position thanConventional banks.
2.2.4. Advances and their Growth:
Advance of the banks are completely dependent upon the no of deposits and the
amount available with that specific bank.Advances of conventional banks are on
the basis of loans while Islamic banks does the same thing on the basis of riskshairing and profit shairingi.e.musharakah and mudarbah etc.
Table 2.05 Comparison Advaces & their growth
All amounts are in billion Rs.
Year 2008 2009 2010 2011 2012 2013
Conventional
banks 1336 1491 1302 1232 1158 1456
Islamic banks 189 283 222 282 320 340
Year 2008 2009 2010 2011 2012 2013
Conventional
banks 21% 13% 2% -4% 3% 7%
Islamic banks 21% 8% 22% 8% 9% 10%
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2.2.5 Revenues and their Growth:
Revenues are the back bone of any kind of business, no matter what kind of
business it may be. Now nature of business is very much different of both of the
sectors, therefore there is much difference in their revennu generation. Revenues
of Islamic banks are fluctuating may be due to profit and loss sharing, while
Conventional banks gets the fixed amount i.e. interest.
Table 2.06 Comparison Revenues & their growth
All amounts are in billionRs.
Year 2008 2009 2010 2011 2012 2013Conventional
banks 555 618 564 722 740 860
Islamic banks 107 160 212 334 462 610
Year 2008 2009 2010 2011 2012 2013
Conventional
banks 7% 11% -12% 28% 3% 16%
Islamic banks 76% 49% 33% 58% 38% 32%
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Graph 8
Graph 9
Explanation of Graphs & Tables:
Now from the results it is crystal clear that both of the sectors are showing the
increasing trend but over all Islamic banks are showing nice performance in it as
compaired to fully developed conventional banks.
0
200
400
600
800
1000
20082009
20102011
20122013
Conventional Bank
Islamic Bank
-20%
0%
20%
40%
60%
80%
2008 2009 20102011
20122013
Conventional Bank
Islamic Bank
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3.
Ratio Analysis
A management always planes for the efficient use of resources and for this
purpose Ratio analysis is considered as a powerful tool. The ratios basically tell
about thefinancial results, trends, and key indicators of financial performance.
Company uses these tools to find out where the improvement is required and what
are the strengths and weaknessesof their firm. These ratios are also used by the
outsiders just in order to get information about the company and to comp[iar the
results with the other organizations in order to come on the result where should
they invest.
3.1. Return on Equity
This ratio measures the overall performance of the instition. It is of great
imp[ortance for the shareholders as well as the management of the company. High
ratio is better for the instirtion
ROE= Net Profit after tax
Equity
Table 3.01 Return on Equity
Return On Equity
Year 2008 2009 2010 2011 2012 2013
Allied bank limited 18.98% 26.65% 25.56% 26.16% 26.46% 28%
Habib bank limited 15.32% 16.87% 18.62% 21.30% 19.78% 20.78%
Muslim Conventional
bank
28.43% 24.98% 22.69% 24.82% 22.43% 24.43%
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Graph 9 of averages
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
2008 2009 2010
2011 2012 2013
Conventional Bank
Islamic Bank
Standard chartered bank
limited
1.64% 1.99% 8.74% 11.78% 12.94% 13.4%
Askari Bank 12.74% 18.97% 19.24% 20.13% 22.29% 24.9%
Conventional Banks
Average 15.40% 16.84% 17.97% 18.84% 19.98% 22.10%
Bank IslamiPakistan -1.22% -10.2% 0.77% 8.96% 8.40% 7.0%
Al baraka Bank 3.31% 8.82% 6.30% 11.28% 5.25% 8.5%
Burj bank limited 0.70% -6.29% -12.5% -5.99% 4.44% 2.40%
Dubai Islamic bank -3.80% 3.25% 0.23% 4.05% 2.10% 6%
Meezan bank limited 9.70% 18.08% 17.79% 24.45% 22.66% 25.67%
Islamic banks average 1.54% 2.81% 2.87% 8.45% 8.57% 9.71%
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Figures are showing the return on equity of bothe the banks. The results are
showing that Conventional banks are in much better position then the Islamic
banks, the latest signals have shown that Islamic banks have shown improvement
in this regard but over all gap is much higher it may be due to that Islamic banks
are very new in the field of banking as compired to the conventional banks.
3.2. Return On Asset
It is the one of the most comprehencive measurement regarding banks earning
capacity.It is used to tell that how much per rupee is eared by investing in assets.
ROA takes efficiency concept and earning percpective into its account due to this
characterstic it is widely used for representing the earning of the banks. How
much higher it is that much better it is for that instition. An increasing trend of it
shows the effiency of the management iof the bank.
ROA= Net Profit after Tax
Total Asset
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Table 3.02 Return On Asset
Year 2008 2009 2010 2011 2012 2013
Allied bank limited 1.15% 1.80% 1.90% 1.52% 1.97% 2.2%
Habib bank limited 1.40% 1.60% 1.74% 1.95% 1.38% 1.9%
Muslim Conventional bank 3.52% 3.26% 2.86% 2.74% 2.56% 3.23%
Standard chartered bank
limited
0.25% 0.30% 1.20% 1.56% 1.77% 1.92%
Askari Bank 1.44% 1.52% 1.62% 1.48% 2.05% 2.09%
Conventional Banks
Average 1.55% 1.70% 1.76% 2.15% 1.90% 2.27%
Bank islamiPakistan
-
0.25%
-
1.45%
0.10% 0.52% 0.53% 1%
Al baraka Bank 0.20% 0.45% 0.30% 0.53% 0.46% 0.58%
Burj bank limited
0.40% -
2.52%
-
3.04%
-
1.06%
0.20% 0.35%
Dubai Islamic bank
-
0.55%
0.46% 0.06% 0.50% 0.55% 0.65%
Meezan bank limited 0.75% 1.43% 1.32% 1.70% 1.30% 1.79%
Islamic banks average 0.08% 0.25% 0.28% 0.45% 0.58% .87%
Graph 10 of Averages
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From the facts and figure of ROA of both of the sectors i.e. Islamic banks and
Conventional banks, conventional banks are showing an increasing trend and their
returns are much higher then the Islamic banks on the other side Islamic banks are
showing progress but again as compaired to the conventional banks they are much
behind.
3.3.Deposits to total asset ratio:
This tool is used to show total debt verses total assets owned by the firm. This
ratio aiso tells the total worth/value of the company. Higher the ratio higher the
risk.
Deposits to asset ratio = Total depositsTotal asset
Conventional Bank
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
2008 2009 2010 2011 2012 2013
Conventional Bank
Islamic Bank
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Table 3.03 Deposit to total asset ratio
2008 2009 2010 2011 2012 2013
Allied bank limited
81.1% 78.6% 82.1% 77.5% 81.3% 81
Habib bank limited
79.9% 79.3% 80.8% 81.3% 75.5% 78.02
Muslim Commercial bank
74.3% 71% 75.5% 74.8% 70.5% 75.12
Standard chartered banklimited
65.6% 65.1% 67.28% 64.7% 66.7% 68
Askari Bank 79.1% 78.69% 78.4% 78.5% 78.% 80.12
Conventional Banks
Average 76% 74.5% 76.8% 75.36% 74% 76.69%
bank islamiPakistan
65.7% 81.6% 84.83% 85.7% 86.5% 85.06
Al baraka Bank 81.2% 80.9% 81.4% 84.7% 86.0% 85.48
Burj bank limited 53.0% 52.1% 71.5% 72.55% 76.3% 76.59
Dubai Islamic bank
79.3% 79.1% 78.7% 79.6% 83.4% 83.98
Meezan bank limited
82.6% 79.9% 84.7% 83.78% 83.6% 84
Islamic banks average 72.36% 74.72% 80.23% 81.23% 83.1% 83.02%
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Graph 11 of averages
The ratio tells that Islamic banks are higher than conventional banks in this
matter which means that Islamic banks have more risk factor as they work on the
basis of shairing risk and profit, bank works as partner with its custumer just due
to this reason Islamic banks have high risk factor than the conventional banks.
3.4.Deposit to equity ratio:
It basically tells the policy of the management of the company. It tells how the
company finances its projects i.e how much from debt and equity.
Deposit to equity ratio= Total deposit
Total equity
Conventional Bank
65%
70%
75%
80%
85%
2008 2009 2010 2011 2012 2013
Conventional Bank
Islamic Bank
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Table 3.04 Deposit to equity ratio
Year 2008 2009 2010 2011 2012 2013Allied bank limited 1.3 1.4 0.7 1.3 0.80 1.2
Habib bank limited 0.7 0.80 0.4 0.49 1.6 1.69
Muslim Conventional bank 0.4 0.7 0.3 0.4 0.8 1.00
Standard chartered bank limited 0.30 0.3 0.3 0.3 0.4 0.6
Askari Bank 0.9 0.6 0.8 0.69 0.85 .96
Conventional Banks Average 0.72 0.64 0.5 0.63 0.89 1.09
bank islamiPakistan 0.06 0.04 0.08 0.17 0.3 0.5
Al baraka Bank 1.36 1.4 1.7 1.05 0.4 0.6
Burj bank limited 0.02 0.3 0.08 0.09 0.54 0.78
Dubai Islamic bank 0.01 0.03 0.17 0.3 0.25 0.4
Meezan bank limited 0.64 0.89 0.56 0.7 1.2 1.5
Islamic banks average 0.41 0.53 0.518 0.46 0.53 0.75
Graph 12 of averages
0
0.5
1
1.5
20082009
2010
2011 20122013
Conventional Bank
Islamic Bank
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From the data we can conclude that conventional banks has greater deposit to
equity ratio which shows that conventional banks are using more debt financing
as compaired to the equity, while Islamic banks are using equity in greater ratio
for financing the result may be due to that still no. of deposits are not very much
with them and due to the rules and regulations which they are working on..
3.5.Capital ratio:
It is also known as Capital to risk asset ratio. It is a ratuio of the risk of the bank
to its capital. The purp[ose is, the safety of the accountholders and the promotion
of the efficiency of financial system.
Capital ratio= Total equity
Total asset
Table 3.05 Capital Ratios
Year 2008 2009 2010 2011 2012 2013
Allied bank limited 5.7% 6.19% 6.9% 7.3% 6.85% 7.2
Habib bank limited 8.5% 8.71% 9.4% 8.8% 7.4% 7.9
Muslim Conventional bank 11.8% 12.3% 12.5% 12.3% 11.78% 12
Standard chartered bank limited 16.6% 14.1% 14.8% 14.2% 12.7% 13.2
Askari Bank 7.6% 8.7% 8.8% 9.2% 8.6% 8.9
Conventional Banks Average 10.04% 10% 10.49% 10.36% 9.46% 9.84%
bank islamiPakistan 27.4% 13.7% 10.5% 8.75% 7.5% 7.9
Al baraka Bank 5.8% 5.19% 4.72% 4.8% 5.05% 5.09
Burj bank limited 43.9% 36.9% 24.15% 20.9% 12.4% 13.02
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Dubai Islamic bank 15.7% 17.09% 15.17% 12.9% 10.7% 11.2
Meezan bank limited 7.4% 7.8% 6.9% 6.66% 5.65% 6.02
Islamic banks average 18.56% 16.01% 12.28% 10.80% 8.22% 8.64%
Graph 13 of Averages:
Ratios of Islamic banks are higher then the Conventional banks which may give
the impact that Islamic banks are more cautious about it as they are in their
developing stage.
3.6.Earnings per share:
The ratio tells about the profit allocation of a company against its every
outstanding share. It also tells the profitability of the organization.
Earnings per share= Earnings available to ordinary shareholdersNumber of ordinary shares in issue
0.00%
5.00%
10.00%
15.00%
20.00%
20082009
20102011
20122013
Conventional BankIslamic Bank
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Table .06 Earnings per share
Year 2008 2009 2010 2011 2012 2013Allied bank limited 6.44 10.07 10.6 11.9 12.56 13
Habib bank limited 13.2 14.72 17.0 20.27 18.44 19.02
Muslim Conventional bank 24.5 22.6 22.21 23.09 23.09 23.19
Standard chartered bank limited 0.18 0.24 0.98 1.44 1.56 1.68
Askari Bank 8.35 8.54 9.0 12.17 15.75 15.92
Conventional Banks Average 10.53 11.23 11.958 13.78 14.28 14.56
bank islamiPakistan -0.10 -0.92 0.09 0.79 0.79 0.82
Al baraka Bank 0.96 2.12 1.44 2.4 1.6 1.8
Burj bank limited 0.09 -0.59 -1.07 -0.39 0.12 0.16
Dubai Islamic bank -0.31 0.4 0.02 0.29 0.52 0.62
Meezan bank limited 1.27 2.53 2.73 4.23 3.89 4.02
Islamic banks average 0.382 0.70 0.64 1.47 1.384 1.48
Graph 14 of Averages
0
5
10
15
20082009
20102011
20122013
Conventional Bank
Islamic Bank
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Conventional banks are having more earning per share as compaired to the
Islamic banks whoch in simple words attracts more investor then the Islamic
banks. But with passage of time it is hope ful that Islamic banks will also come in
good position.
3.7.Loan deposit ratio:
Thus ratio is very much specific to the banking sector as they deal in the
advancing of loans. This ratio tells about the liquidity of the company further
more it should be stable as if it is high or on the other hand if it is very much lowboth situations are not ideal for the bank, it should be moderate one.
Loan deposit ratio= Advances
Deposits
Table 3.07 Loan to deposit Ratios
2008 2009 2010 2011 2012 2013
Allied bank limited 75.19% 76% 72.32% 65.64% 56.15% 56
Habib bank limited 80.42% 71.79% 67.33% 53.94% 45% 44.65
Muslim
Conventional bank
82.65% 73.4% 63.58% 50.90% 48.2% 48
Standard chartered
bank limited
78.91% 70.69% 74.36% 70% 63.60% 63.24
Askari Bank 80.82% 77.52% 66.35% 60.48% 57.05% 57
Conventional
Banks Average 79.60% 73.86% 68.76% 59.68% 53.97% 54%
bank islamiPakistan 53.60% 38.35% 52.1% 49.58% 43.52% 44%
Al baraka Bank 83.40% 71.74% 65.85% 57.45% 53.08% 53%
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Burj bank limited 111.50% 73.74% 49.38% 65.08% 67.05% 66.05%
Dubai Islamic bank 73% 74.93% 74% 63.56% 51% 50.6%
Meezan bank limited 57.84% 44.09% 49% 44.54% 41% 40.86%
Islamic banks
average 75.67% 60.56% 58.22% 56.02% 51.11% 50.90%
Graph 15 of Averages
The figers are giving the result that both of the sectors are moving towards the
minimum amount. Why they are doing this?the factors may be many. Such types
of institutions try their level best to keep minimum amount of cash with them in
order to invest more and more, and to generate more profit for them. We can see
that the conventional banks have higher ratios as compared to the Islamic banks.
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
2008 2009 2010 20112012
2013
Conventional Bank
Islamic Bank
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Standard chartered bank
limited 2.88 1.98 1.46 1.04 1.28
1.3
Askari Bank 12.19 5.97 4.87 4.04 3.38 3.4
Conventional Banks
Average 3.4 2.03 1.62 1.39 1.28 1.30
bank islamiPakistan 1.88 1.98 0.95 0.83 0.74 0.72
Al baraka Bank 0.52 0.46 0.60 0.38 0.35 0.41
Burj bank limited 0.54 0.55 0.46 0.46 0.39 0.41
Dubai Islamic bank 0.56 0.65 0.68 0.68 0.67 0.66
Meezan bank limited 0.078 0.231 0.194 0.235 0.26 0.265
Islamic banks average 0.7 0.77 0.49 0.57 0.48 0.49
Graph 15 of Averages
0
0.5
1
1.5
2
2.5
3
3.5
2008 20092010
20112012
2013
Conventional Bank
Islamic Bank
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The data shows that both of trhe sectors are round about in the same position and
showing round about the same results i.e impact of EBIT is normal to both of the
sectors. If the amount becomes to high the company becomes inpredectable about
the earnings
Degree of Financial Leverage:
It helps in calculation of the comparative change in net income due to change in
the capital structure of the company. Higher the leverage of the company higher
risk it has.Further more it tells the effect of change in EBIT on EPS of a company.
Degree of Financial Leverage = % change in EPS/ % Change in EBIT
Table 4.02 Degree of Financial Leverage
Year 2008 2009 2010 2011 2012 2013
Allied bank limited (%) 4.97 3.92 4.22 2.97 3.14 3.44
Habib bank limited 2.6 2.66 2.38 2.32 5.85 4.22
Muslim Conventional
bank 2.12 2.46 2.35 2.46 2.44
2.46
Standard chartered bank
limited 7.29 9.2 2.95 2.38 2.3
3.05
Askari Bank 5.06 3.05 3.65 3 3.18 3.32
Conventional Banks
Average 4.4 4.9 2.5 2.22 3.3 3.2
bank islami Pakistan -2.19 -1.18 4.2 5.75 6.62 7.02
Al baraka Bank 0.0045 0.0013 0.0017 0.0009 0.0013 0.002
Burj bank limited 1.4 -2.8 -1.54 -6.86 1.87 2.00
Dubai Islamic bank -10.02 10.37 22.00 -9.02 -1.45 -12.01
Meezan bank limited 1.54 1.69 1.7 1.76 1.8 1.92
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Islamic banks average -1.8 1.61 5.2 -1.6 -1.68 -0.2
Graph 16 of averages
Data shows conventional banks has greater DFL then Islamic banks which clearly
states high risk in them and % change in the EPS of conventional bank has greater
effect on EBIT.
-2
-1
01
2
3
4
5
6
2008 2009 2010 2011 20122013
Conventional Bank
Islamic Bank
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5.
CONCLUSION
After analyzing the facts and figures available to us we have reached to the
conclusion that Islamic banking industry is a fast growing industry as people are
now accepting it. It has to cross still multiple of hurdles as its compitator is
Conventional bank which is touching its peak and has fully matured and Islamic
banks are very much behind from them in multiple fields, ofcourse due to the
reason that they are very new and facing problems from people as well as through
regulations by the government. Some of the Islamic banks are showing great
growth signals but still there performance needs improvements. It is quite obvious
that any new sector or field always needs a lot of improvements by this way or by
that way. Hopefully in the coming few years Islamic banks will be as huge and
large industry as today conventional banks are. The biggest indicator of the
success of Islamic banks is, round about all of the Conventional banks have
opened their Islamic windows whuich clearly states that there is huge demand of
Islamic banking industry by the general public.
5.1. LIMITATIONS
Every kind of reacerh has bundle of limitations, same is the case here.Evolution Stage.
Islamic banks came infront of the public since last two decades on the other side
conventional banks are working for a century, in a nut shell there is no
compairision of both of these industories because shuch types of reaseaches goes
completely in the favor of one or the other.
Environment
State bank of Pakistan is the regulator In the country all of the rules and
regulations related to banking sector is completely on the basis of intrest,
Although it is Islamic Republic of Pakistan but Islamic laws are merely followed
in the country.Hardly one can find a rule which will be proIslamic. In this type of
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situation poor performance of Islamic banks can easiliy be justified and
supported.
Windows Islamic banking
As the Islamic banking is now moving towards progress, due to the increased
demand of of Islamic banking now a days, Conventional banks have started their
windows operation as Islamic banking due to which now while analysis it is really
difficult to under stand that how much contribution is their of Islamic windows in
their revenue and how much of conventional branches.
Differences in operations methods
Both of the banks have very much different operating methodology. Conventional
banks purly work on the basis of Interest with merely no chances of loss on the
other side Islamic banks work on Islamic principles on the basis of profit and loss
shairing, due to which results will automically differ of both of the sectors.
Research
Whole the work is done on the analysis without deeply moving in the banking
field. All the work is done on the basis of available data through differentresources which cant be claimed as 100% correct.
5.2. RECOMMENDATIONS
On the basis of study done by us we have come to the conclusion that by
taking following steps Islamic banking can be improved very soon.
Employment of effective management, which will lead the bank to more
customers.
Full support by state bank of Pakistan, so that it can come as a great
competator of Conventional banking system.
Shariah advisors should be the part of State Bank of Pakistan, as a
permanent membors.
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Educational campaigns should be started by the Islamic Banks them selves
to educate people.
Salybus should be introduced at bechlors level of Islamic banking which
will attract people to wards Islamic banking.
People should be hired who have thoroughly studied the Islamic banking,
and must be awaire of the basic concepts of Islamic transactions.
Islamic banks should try their level best to move their branches to the
remote areas of yhe country including the main cities.
They have to do promotions through different and unique ways, such as
using the FATVAS and by requesting the ULAMAS to say some thing or
to tell the right thing to yhe people.
Islamic banks should concentrate on niche market, i.e. they should work
with small and medium enterprises, should concentrate on farmers and
enterprenures.
In order to attract people ther must have to give more profit then
conventional banks just to get once their confidence.
Such types of rules should be made by the govt. that Internationallyrenouned Islamic Banks should vome and invest in Pakistan, through
which not only direct forien investment will come in the country but as
well as poverty reduction will take place.
Internationally financially strong groups will easily compete with present
conventional banks.
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6.
REFERENCES
1. Jones Stephany .2001. Governance of the World Bank . DFID
2. Lastra Rosa.2010. The role of the IMF as a global financial authority .LSE
Financial Markets Group Paper Series
3. Weiss A.Martin.2013 International Monetary Fund: Background and Issues for
Congress. Congressional Research Service
4. Bossone Biagio.2008. The Effectiveness of IMF Surveillance A study on global
financial governance. World Economics.Vol 9 No 4
5.Malik, M., 1999, Financing in Islam: an operational approach, 1st ed, Islamabad
(Pakistan), malik publications
6.Meezan bank ltd, (nd), 2010, history of Islamic banking and highlights of
Meezan bank ltd, [online], available at
http://www.meezanbank.com/pages.aspx?iPageID=34, [accessed on 15 dec,
2012].
7.Commerce solutions, 2010, assignment on state bank of Pakistan and Islamic
banking, [online], 17 july, available at
http://commerceplus.blogspot.com/2010/07/assignment-on-state-bank-of-
pakistan.html, [accessed on 15 dec, 2012].
8.Van Horne, J., Wachowicz, J., 2006, Fundamentals of Financial Management,
13th ed, UK, Pearson Education.
9.Market Treasury Bills Auction Results, 2005 (Revised), EDMD, (Cmnd.
Circular 07), Karachi, State Bank of Pakistan.
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Links to financial statements:
http://www.dibpak.com/AboutUs.aspx?tab=6
http://www.burjbankltd.com/about/financial-highlights
http://www.meezanbank.com/pages.aspx?iPageID=403
http://www.albaraka.com.pk/investor-relation/financial-statements.php
https://www.mcb.com.pk/ir/fin_data_rep.asp
http://www.standardchartered.com.pk/pk/about-us/financial-statements.html
https://www.abl.com/investor-relations/financials-reports/
http://www.hbl.com/investor-relations-annual-reports-2012.php
http://www.askaribank.com.pk/financial_report.php
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