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INTRODUCTION
First step toward Islamic Banking was taken in Egypt in 1963. (El Gamal, 2006) After some decades Islamic Banks has shown the tremendous achievement not only in number but also in term of size of market (Aggarwal and Yousaf 2000). Before 60s, there was only non-Islamic financial system. But now Islamic Banking is practiced in most of the countries. And some Islamic countries like Sudan and Iran had fully converted their financial system according to Islamic Law (Aggarwal and Yousaf 2000). In Pakistan this concept is introduced in 1950 by establishing of a local Islamic financial institution (Rural Cooperative West Pakistan) with very low capital and with so limited operations. Due to low level of capital that step was not fruitful (Mehboob 2007). Then next step is taken in 1970s Ashraf (2011). But that was also failed. In 2002, the private sector has initiated Islamic Banking (Meezan Islamic Bank) and MIB is now pioneer in introducing Islamic Banking in Pakistan (Mehboob 2007). There is difference between conventional banks and Islamic banks. Although both banks get deposits and lend it to needy people, but the mode of collection and lending to people is different. The basic difference is that conventional banks take and lend funds to people is to the contract which creates the relationship between the bank (financial institution) and customers. Conventional banks make the debt contract with their customer so eligibility to earn on principal is finished according to Islam while Islamic banks make the sale or profit and loss base contact which eliminates Riba in financial transactions. In this paper we are going to compare the financial performance of Islamic banks with the conventional banks (interest based) operating in Pakistan. We will compare the financial performance of four Islamic banks with four conventional banks. The secondary data will be used to analysis the performance of financial institutions. To evaluate the financial performance three types of ratios will be used namely a- profitability ratio b- liquidity ratio cefficiency ratio
2. LITERATURE REVIEW
Asaad et al (2012) made a study on the investigation of Jordanian Islamic and conventional banks stability. The purpose of the paper is to evaluate the Financial Stability of Islamic and conventional banks in Jordan before and after the financial crises. Mortgage sub-prime crises considered as one of the worst crises of the history. This crisis mainly affects the banking system of the world, even-though Gordian banking system considered as one of strong banking system but it is also affected by this crisis. Researchers want to answer two important questions: Do Islamic banks show a relative financial stability comparing with conventional banks during the recent financial crisis in the Jordanian context? And is there a statistical significant difference in financial stability between Islamic and conventional banks pre and post the recent financial crisis? The data (daily share prices) are collected from Amman Stock Exchange (ASE) from period 02/01/2005 to 26/01/2010. Volatility of returns on shares is used as a base to measure the stability of banks. For this purpose researcher used the GARCH method (Generalized Autoregressive Conditional Heteroskedasticity). In order to measure asymmetric reactions of the conditional mean and volatility researchers uses GARCH, E-GARCH and GJR-GARCH.After applying the tests it is found that Islamic banks are more stable than that of conventional banks pre and post recent financial crisis and it is also concluded that Islamic banks seems less affected by bad news. The customers of Islamic banks are more loyal and confident as compared to conventional banks because GARCH Model also shows that Islamic banks are not affected by harmful of crisis. Finally there are some recommendations for both banking systems that conventional banks should open separate branches to deal in Islamic instruments and on the other hand Islamic banks should improve their branch network through-out the country and most importantly launch the advertisement campaign in order to disclose the merits of Islamic banking.
K.K & Pillai (2012) made a comparative study on performance of Islamic banks and conventional banks in GCC region so as to made comparison between conventional banks and Islamic banks performance. For this purpose performance indicators were used. The period of study was 2005-2010 and six conventional and six Islamic banks were selected as sample. Performance indicators included the return on assets, return on equity, operating profit ratio, net profit ratio, operating expense ratio, profit as a percent of customers deposit, customer deposits as a total percent of liability, total equity as a percent of total assets, net
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operating income. During the study period, the results found that Islamic banking was a better performance as compare to conventional banks and it was also found that Islamic banks were equity financed. The ANOVA test was also used, and its results showed that there was significant relationship in selected performance indicators.
Mian & Zia (2011) made a study in Pakistan regarding the performance analysis of Islamic and conventional banks. The purpose of conducting this study was to analyze the performance of Islamic banking and conventional banking in pakistan.for this purpose financial measures were used and for sample two Islamic and two conventional banks were selected. The study covered the time period of 2007-2010.financial measures included the profitability ratio, earnings ratio, liquidity ratio, credit risk analysis and assets utilization activity ratios ware used to compare the performance of Islamic banking and conventional banking system. The results of this study revealed that banking performance of Islamic banks were less effective as compare to conventional banks due to augmented operating cost and inefficiency of management.
Bintawim (2011) made a study on the performance analysis of Islamic banking operated in Saudi Arabia. There were two purposes of conducting this study. One is to do comparison of Islamic banks performance operated in Saudia Arab and secondly, to analyze that whether there was any impact of banks internal characteristics on the financial performance or not. For this purpose, eleven banks of Saudi Arabian sector were taken for analysis. This study covered the time period of 2005-2009. A well known ratio analysis was used to compare the performance of Islamic banks, while panel data regression analysis was used to check the
impact of banks internal characteristics on the performance of Islamic banks. The results found that all Saudi banks were performing well so as to maintain the stability of banking sector. The results also found that the large banks were at mature stage, the medium sized banks were trying to attain the mature stage, while small sized banks were facing difficulty in getting growth stage. This was also found by regression analysis that there was negative impact of the size of the bank on the financial performance while at the same time there was a positive impact of assets utilization on profitability of banks
Awan (2009) made a study on the comparison of Islamic and conventional banking in Pakistan. The aim of this paper was to examine and analyze the performance and profitability of newly opened Islamic Banks with the same scale of conventional banks. Economies of world had been hit by many crises in last two decades but subprime mortgage crisis is considering one of the saviors of all. It majorly hits the United States, European countries and slightly Asian countries. The reason for this crisis is vitality of interest rate. The central banks of world try very hard to eliminate the impact of this crisis by reducing interest rate to zero but fail. But here it is important to note that Islamic banks survive to this crisis. Author also discusses the evolution, theoretical and practical difference, ways of investing and financing, goals and values and different products of Islamic & conventional banks. At the time of study there are only six Islamic banks (Al-Baraka Islamic Bank, Bankislami Pakistan Limited, Dawood Islamic Bank Limited, Dubai Islamic Bank Pakistan Limited, Emirates Global Islamic Bank Pakistan Limited and Meezan Bank Limited) are in operational foam and are small in size. Therefore despite of 23 conventional banks only six conventional banks (Askari Commercial Bank Limited, Atlas Bank Limited, Bank of Khyber Limited, KASB Bank Limited, SAMBA Bank Limited and Saudi Pak Commercial Bank Ltd) are considered that are equal in size to the Islamic banks. The span of study ranges from 30-09-2006 to 30-092008. The data are collected from both primary and secondary sources. Primary data are collected through questionnaires and secondary data are obtained from banks annual statements, from state bank site and from different research journals. Ratio analysis technique was used to analyze the efficiency of asset utilization, profitability and earning capability of Islamic and conventional banks. Whereas the interviews are conducted of Islamic and conventional bankers and operational framework of Islamic and conventional banks are compared through analysis technique. The result of the study is very surprising because Islamic banks are much better than the conventional banks in all respects. Whether it is assets, deposits, financing, investments, efficiency, and quality of services and recovery of loans the Islamic banks are far better.
Shah (2009) made a study on the performance of Islamic banking against the commercial banking operated in Malaysia. The purpose of this study was to analyze the accounting performance of Islamic banks over commercial banks and also to examine whether the type and age of banks (Islamic and conventional) had any influence or not. .For this purpose 14
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commercial banks and 4 Islamic banks were selected as sample. This study covered the time period of 1st January 2000 to 31 December 2006. Here in this study, to measure the
Accounting performance only the return on assets ratio and return on equity ratio was used. The study found that there was no significant difference found from the independent t-test on the performance of the Islamic and the conventional banking operated in Malaysia. While on the other hand, through the regression analysis it was that found there was positive impact of the age of banks on the performance of banks. However there was no any influence found of the type of banks on the performance of banks.
Shehzad (2008) made a comparative study on the performance of Islamic banking and conventional banking of pakistan.the purpose of this study was to compare the performance of Islamic bank in pakistan.for this purpose one full fledged first Islamic bank i.e. Meezan Bank Limited was taken against five conventional banks. The time period of this study was 2003 to 2007 .like other studies, this study also used the ratio analysis to evaluate the performance of meezan Islamic bank. The measures of ratios included the return on assets, return on equity, loan to deposit ratio, loan to asset ratio, debt to equity ratio, asset utilization ratio and income to expense ratio. To check the significance relationship-test and F-test was used. The results of the study found that meezan bank limited was less profitable, less efficient and less risky as compare to the average of 5 conventional banks.
Hadeel made a study on answering the question of do Islamic banks perform better than conventional banks?This paper examines the financial performance of Islamic and conventional banks in GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and Arab Emirates) in term of profitability, liquidity and structure. This is done by using different financial ratios (profitability, liquidity, leverage, structure and other measures) and by estimating Logistic model. The data is obtained from Institute of Banking Studies in Kuwait (IBS) and from databases of Islamic and conventional banks of GCC. There are total of 342 semi-annual observations that include 273 and 69 observations of Islamic and conventional banks respectively. The range of data spread from year 2000 to 2005.By applying financial
ratios and logistic model we find that there is no difference in term of profitability in conventional and Islamic banks of GCC but in some countries like Kuwait, Saudi Arabia, Qatar and Bahrain, Islamic banks are seems more profitable because here customers like the products of Islamic banks and interested to become part of it. If we look at the liquidity ratios we would find that Islamic banks relatively high liquidity as compared to conventional banks, that is because Islamic banks does not take loans from central banks and other financial institutions who lend money on interest basis. On the other hand conventional banks totally rely on borrowings from central bank and other financial institutions. Debt to Asset, Deposit to equity, Deposit to Asset and Investment and Equity to Asset ratios favors conventional banks whereas Loans/Receivable to Asset and Fixed Asset to Asset ratios favours Islamic banks. Islamic banking is emerging very fast in all over the world especially in South-East Asia and Middle East. Profitability of conventional and Islamic banks is not contradictory but Islamic banks are better in term of liquidity. Finally internal growth of both banking systems is not significantly different. That suggests that growth of such banks depends on management and general performance. Ali (2012) the performance of Islamic banks and conventional banks are compared operating in Pakistan in the period of financial crises.4 Islamic banks and 4 conventional banks are selected to do this analysis. The data was taken from 2006-2009.four ratios are applied to reach the conclusion .ratios were profitability.liquidity,risk and solvency and efficiency ratio.t-test and f-test were used to determined the significance of the performance two groups. All ratios represented that the conventional banks have positive sign but with decreasing trend. M.M (1997) made a study on the differences between the financial characteristics of interest free banking and conventional banking. In different countries, there is dual banking system. It means two different systems are running side by side. One is interest free and second one is interest based. Interest free banking system is regulated under the Islamic jurisdiction in which any financial interest on capital (the capital based on debt agreement) is prohibited. They operate on the basis of profit and loss sharing (PLS) concept. so main aim of this paper is to find out the structural differences due to PLS agreement in both banking systems. First country where the dual system was introduced is the United Arab Emirate (UAE) in 1973, where Dubai Islamic Bank was established with $14 million capital. Now more than 100 interest free banks are operating in 45 countries including UK, USA etc. To see the differences three analyses are used namely Logit model analysis, probit model analysis and
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the discriminate analysis. From 30 banks for three years (1992-1994) the financial data is collected to make the analysis. In total half of them is interest free banks and half are conventional banks to represent the fair conclusion of the research. There are five ways to financial analysis given by wood and parter (1979) namely liquidity, leverage, credit risk, profitability, efficiency. Findings are that interest free banks more rely on equity financing than conventional banks. As compare to conventional banks, an Interest free bank faces more problems to attract the deposits which are main source for banking sector to run their total operations. There is lackness of investment opportunity for interest free banks than conventional banks, so their liquidity ratio is higher. Due to PLS, interest free banks have too low amount in personal loans. But both sectors are offering same rate of return to their clients and their profitability and efficiency ratios are also same. On the basis of that we can conclude that interest free banks has more emphasized on mark-up based contact such as MURABAHA and IJARA which are more likely to interest based agreement concept.
Siddique (2008) made a study on the financial contracts, risk and performance of Islamic banking. In Islamic banking system (interest free banking) there different types of modes of financing are used which are mostly based on profit and loss sharing. Banking system is main source of the flow of financial resources. There are some risks related to every financial system. This paper has worked on to describe the modes of financing used in Islamic banking and examined their risks by literature review. And also two Islamic banks operating in Pakistan are analyse by different financial indicators and copared with conventional banking. In mid 2004 Islamic financial market had 265 banks with asset of more than $ 262 billion and investments by Islamic banks are approximately $400 billion. The financing modes (financial instrument) are murabaha, ijarah, mudarbah, musharka, Salam, istisna. as compare to conventional system, there is enough financial instruments to survive in the competition but there is shortage to cover the risk related to the system arises by the using of these instruments. In conventional banking they have different financial derivatives to hedge the financial risk. Due to the presence of the interest (riba), uncertainty (gharar), and gambling these risk mitigation instruments cannot be used. And other issue is related to the relationship with central bank. There is legal requirement for every bank to put some portion of the total reserve with central bank. On that base, every bank has two main relations with central bank. First one is to take interest on that reserve and second is to take loan as a last resort, from
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central bank and central bank charges interest on that loan. So due to the involment of interest Islamic bank can not avail both opportunity. At the result Islamic bank has to sacrifice the profit on reserve and face liquidity issue in case of the shortage of the liquidity. In conclusion we can say that Islamic bank has problems in money market operations. So central bank has to make some other regulation for Islamic banks to provide a safe way (no invoment of any prohibited thing) for money market operation. In Pakistan Islamic banking was introduced in 1979. In 2004 there was 25 branches of Islamic banks operating in Pakistan. This paper examined two Islamic banks namely Meezan Bank and Al Baraka Bank. Analysis of financial statement of 2003 and 2004 showed the results that more than 75% of total investment of both banks has in mark-up contracts that are murabaha and ijarah which makes not much difference between both conflicting systems.
Samad (2004) made a comparative study on the performance of interest-free Islamic banks and the interest-based conventional banks of Bahrain. The purpose of this study was to examine the performance of Islamic banks and conventional banks of Bahrain during the post Gulf war. The study covered the time period during the post Gulf War i.e. 1991-2001.this study have also used the ratio analysis to measure the performances. These included the profitability ratio, liquidity risk ratio, and credit risk ratio. Like other studies, these studies have also used the t-test and f-test to financial ratios for the significant relationship. The results of the study found that there was a significant difference of credit performance
between the Islamic bank and conventional banks. While in terms of liquidity and profitability there was no significant difference found.
Kader (2007) made a study on the performance of Islamic banks in UAE. The researcher has chosen 3 Islamic banks and 5 conventional banks. The researcher has used the balance sheets and income statements for data gathering. The study covered the time period of 2000 to
2004. To analyse the performance of Islamic banks, financial measures were used. These included the profitability ratio, liquidity ratio, risk and solvency ratio, and efficiency ratio. The results of the study found that Islamic banks were more profitable in profitability ratio, less liquid in liquidity ratio, less risky in risk and solvency, and more efficient in efficiency ratio as compare to UAE conventional banks.
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Saleh (2006) made a case study of Jordan on Islamic banking performance in the Middle East. The purpose of this study was to examine the Islamic banks performance in the
Middle East. According to Saleh and Rami as there was limited study on this region regarding Islamic banking. So the objective of this study was to examine and analyze the experience with Islamic banking of two banks, and these two banks was Jordan Islamic
Bank for Finance and Investment (JIBFI), and Islamic International Arab Bank (IIAB) in Jordon. So to evaluate the performance of these two banks profit maximization ratio, capital structure ratio and liquidity ratio were used. The study revealed that the domestic and global challenges were faced by Islamic banking sector. The results of the study found that there was increase in the efficiency of both banks as well as both banks have expanded their investment. However the results found that Jordon Islamic bank of finance and investment was in higher profitability as compare to Islamic international Arab bank.
Bashir (2000) made a study on assessing the performance of Islamic banks. The purpose of this study was to examine the determinants of Islamic banks performance. This performance was examined across eight Middle Eastern countries that took the time period of 1993 to 1998.in this study, the data was collected from 14 Islamic banks. As there were eight Middle Eastern countries so researcher has used the cross-country bank-level data. The researcher has explained that if economic and financial structure were controlled then the results have shown that profitability ratios were positively related with increased capital and loan ratio. In this study it was also found that what the reason for banks such profit is, and this reason was due to the non-interest earnings assets and overheads.
Kamal Naser et al (1999).In global economy the competition is increasing in every field of economy. As competition increase there are less ways to race the competitors. In this case the customer preference is the main factor to increase the performance. And customers priority is mainly depending on his/her satisfaction. Satisfaction may rely on different reason. One of them is quality of good. This study is about the banking sector. Product of these sectors is intangibles. So it is very difficult to assess the quality of intangible goods. In this study author is made to assess the awareness of the customer about Islamic banking and their satisfaction
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toward the Islamic bank and their products. This study is conducted in Jordan (Middle East country). Primary data is collected by sample of 300 questioners. Out of 300, 206 respondents replied. Results show that there is more confidence of the Islamic banking customers on their bank than conventional banks, on the basis of that we can easily say that they are more satisfied.
Ridh Ladhari et al (2011).Banking sector is the service provider sector. In service sector, for the long term survival in the competitive business environment, service provider sector has to build positive image in the mind of their customer. To built the positive image banks have to provide better service quality as service quality is increased the customer satisfaction on banks also increase which lead to more profitability. In this study perception of customer of the bank about service quality among two (Canadian, Tunisian) countries which have different economical and cultural environment is compared service quality make the greatest contribution to overall customer satisfaction service quality is measured by five SERVQUAL dimension model given by Parasuraman et al (1988). Convenience way is adopted to collect the sample of 250 from Canada and 222 from Tunisia.ANOVA, linear regression analysis and confirmatory factor analysis is used. Result shows that perception of the customer about the banking services depend upon the satisfaction on the services which is driven by the service quality. In Canada most important factor for the prediction of the satisfaction are empathy and reliability. Manager of the Canadian banks has to use customer oriented strategy. In Tunisia reliability and responsiveness are the important factor. Manager should focus on the fulfilling of the promised service.
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3. RESAERCH METHODOLOGY
The purpose of our study is to compare financial performance of both sectors (Islamic banking and conventional banking) in Pakistan. We are going to use the financial data of 4 Islamic banks and 4 conventional banks for our study. The time period of our study is from 2006-2011. Data for each year have been collected from the income statements and balance sheets of these two sets of banks. Using accounting ratios is one of tool to measure performance, (Shezad 2008) financial ratios have been used quite commonly and extensively in the literature. In order to see how Islamic bank has performed in comparison with the conventional banks over 5 years, the study uses 9 financial ratios for the banks performance. These ratios are broadly categorized into three groups: (a) profitability ratios; (b) liquidity ratios; (c) efficiency ratios.
There are dual banking systems in Pakistan. (M.M.Metwally, 1997) in Pakistan there is three main categories of the companies. A) Government sector, B) private sector, C) semi Government. In Pakistan all Islamic banks are under private sector.(Mehboob 2007) so for our we selected the privates banks only in both( conventional and Islamic banks). there are four conventional banks in a group to compare with 4 Islamic banks, so we first calculated ratio in each year for each bank and then calculated average of five year answer of each ratio for each bank (phalpoto L.A 2012).now to compare the two sector we will take average ratios of all banks to ease the better understanding of analysis. Using financial information we evaluate the performance of the banks and then compare both sectors. We have three types of financial statements. A) Balance sheet B) Income statement C) cash flow statement. We will use the information of first two statements.
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3.4.2Vertical analysis
In this analysis, analyst focus on analysis the changing in financial components of financial firm.(IbP)
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14
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This ratio explains the relationship between the administration expenses and income. This ratio is low; it is good for the bank = Adm. Exp / PBT (Answer will be in times)
This ratio is more useful for the financial institution itself because it tells about the efficiency of the managing in core working of the financial institution which is earning of the interest earning. Net Int Income to Asset = (NII / A)%
C) Spread Ratio
This ratio is the relationship between the earning and expense. It means that how much interest is earned and how much is paid. Nomary this is in the form of times. To present in percentage we divide the net interest income by total interest income. = (net interest income / interest income) %
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4. DATA ANALYSIS
Results & Discussion
2007
-0.64% -2.0% -0.19
2008
-1.5% -6.4% -0.58
2009
-2.8% -16.1% -1.25
2010
-1.71% -15.1% -1.16
2011 AVERAGE
0.57% 5.63% 0.48 -1.24% -6.82% -0.54
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2007
0.17% 0.69% 0.07 -5.67% -276.3% -6.08 1.27% 3.64%
2008
0.26% 0.96% 0.1 -3.62% -65.2% -2.24 -0.77% -3.12%
SILKBANK LIMITED
EARNIG PER SHARE(EPS) RETURN ON ASSETS (ROA) RETURN ON EQUITYROE) EARNIG PER SHARE(EPS)
0.51
-0.38
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2007
6.68% 71.50% 16.67%
2008
11.62% 64.72% 16.99%
2009
19.53% 58.43% 25.70%
2010
15.88% 48.09% 36.09%
2011
13.90% 60.07% 24.18%
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liquidity ratio
cash and cash equivalent to total assets gross advances to deposits= investment to total assets
2011
7.42% 46.16% 42.03% 5.00% 93.78% 19.35% 8.32% 58.16% 31.93% 5.33% 94.52% 24.35%
liquidity ratio
cash and cash equivalent to total assets gross advances to deposits= investment to total assets
SILKBANK LIMITED
liquidity ratio
cash and cash equivalent to total assets gross advances to deposits= investment to total assets 4.45% 86.19% 29.85% 5.17% 56.19% 19.11%
liquidity ratio
cash and cash equivalent to total assets gross advances to deposits= investment to total assets
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EFFICIENCY RATIOS
spread ratio admin. Exp to non-markup income(TIMES) Net Int. Income To Asset spread ratio admin. Exp to non-markup income(TIMES) Net Int. Income To Asset spread ratio admin. Exp to non-markup income(TIMES) Net Int. Income To Asset
2010
31.66% 5.56 2.31% 12.53% 2.66 0.85% 13.70% 4.48 1.75%
2011 AVG
40.19% 2.74 3.46% 22.31% 4.48 4.96% 5.33% 4.96 0.12% 30.98% 3.43 1.93% 10.27% 3.592 -0.99% 26.43% 3.216 0.25%
SILKBANK LIMITED
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LIQUIDITY RATIO
A/D I/A
EFFICIENCY RATIO
AD. SPREAD EX NII/A
ISLAMIC BANKS
ALBARAKA ISLAMI BURJ MEEZAN -1.24% -0.24% -1.05% 1.24% -6.82% -0.75% -4.82% 16.34% 0.54 -0.058 -0.364 2.568 13.90% 17.21% 9.57% 11.38% 60.07% 43.46% 83.82% 49.69% 24.18% 27.65% 25.50% 3.37% 39.24% 47.64% 50.95% 49.98% 6.18 5.59 10.72 2.32 1.91% 3.18% 2.50% 3.07%
-0.3%
JS SILK SUMMIT SAMBA -0.35% -2.86% -2.07% -2.61%
0.99%
-2.15% -364.09% -33.18% -3.78%
6.20 2.67%
3.34 3.59 3.61 9.52 1.93% -0.9% 0.25% 1.85%
CONVENTIONAL BANKS
-1.9%
-100.8%
-1.2590
5.02 0.76%
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The net result indicates that the overall return on asset of Islamic bank is better than conventional banks. Although both Islamic and conventional banks shows negative return on asset i.e. -0.32% and -1.97% respectively but in comparison Islamic banks have better ROA. Return on equity of Islamic bank is 0.99% whereas return on equity of conventional banks is -100.80%. as we clearly see that return on equity of Islamic banks are for better than conventional banks but one thing that we should note that the reason of such declining of ROE(conventional bank) is due to Silk bank. Similarly earning per share of Islamic banks i.e. 0.67 is better than the conventional banks which is -0.125. Now if we analyze the liquidity ratio then it would be found that cash & cash equivalent ratio of Islamic bank is 13.02% which is better than the conventional bank i.e. 6.30%. It means that the Islamic banks are more protected against liquidation than the conventional banks. Conventional bank utilize almost 80% of its deposits as advances, where as Islamic banks utilized almost 60% of its deposits. Conventional bank invested almost 28% of its assets as a investment in different marketable securities, while on the other hand Islamic banks invested 20% of its assets as investment. Islamic banks charge almost 47% more interest on advances against deposits whereas conventional banks charge 26.38%.islamic bank bear more administrative expenses then that of commercial banks. As compare to conventional bank the interest income (profit) of the Islamic bank is much better which shows that the recovery of the principal amount and return on it is better i.e. 2.67% while the interest income of the conventional bank on average is 0.67%.
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5. CONCLUSION:
Our empirical analysis of profitability measures shows that Islamic banks have performed better than conventional banks. However in case of ROE, Islamic banks outperform conventional banks. Examination of liquidity ratio reveals that Islamic banks liquidity is better than conventional banks. However Islamic banks are not efficient enough to convert deposits into advances due to fewer opportunities for investment. Similarly Islamic banks have less opportunity for investment in marketable securities. Islamic banks earns far better than the conventional banks on advances but have some issues on the part of administrative expenses.
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