A Report on thePerformance of Islamic Bank &

Conventional Bank in Bangladesh

 A Report on thePerformance of Islamic Bank &
Conventional Bank in Bangladesh

Date of Submission: 09 August 2016

Submitted To
Mr. DebashisSaha
Course Instructor
FNB 305: Islamic Banking & Investment

Submitted By:
01 DM. Golam Rabbi ID No. 2202
.
02 KaziAslam Hossain ID No. 1612
.
03 Prosenjit Biswas ID No. 1617
.
04 Burhan Uddin ID No. 1605
.
05 Rasel Ahmed ID No. 2203
.
06 MD. Motiur Rahman Rasel ID No. 1991
.
07 ArefinRokon ID No. 1595
.
08 MD. Aminul Islam ID No.1597
.
09 Mohammad MasudParvej ID No. 1613
.

Group Co-ordinator: MD. Motiur Rahman Rasel (ID: 1991)

B.B.A Program (5thBatch)

 Department of Finance & Banking
Jahangirnagar University, Savar, Dhaka-1342

Letter of Transmittal

09 August 2016
Mr. DebashisSaha
Course Instructor
FNB 305: Islamic Banking & Investment
Department of Finance & Banking
Jahangirnagar University
Savar, Dhaka-1342

Subject:Submission of Report on the Performance of Islamic Bank & Conventional Bank in

Bangladesh

Dear Sir:

Here is our Report on The Performance of Islamic Bank & Conventional Bank in Bangladesh.
that you have assigned us to submit as a partial requirement for the course Islamic Banking &
Investment In writing this report we have gone through Internet, journals and for the relevant
information of the assigned topic.

We are thankful to you, as you allowed us to perform the study. We hope that the Report will
meet the standard and will serve its purpose.
Sincerely yours,

Motiur Rahman Rasel (Co-ordinator)

On behalf of the Group
Department of Finance & Banking (5th Batch) Jahangirnagar
University, Savar, Dhaka-1342

iii

ACKNOWLEDGEMENT

All the praise is for Almighty, the most merciful and beneficent, who blesses us with the
knowledge, gave us the courage, and allowed us to accomplish this task.

As our assigned topic was to prepare a report on the The Performance of Islamic Bank &
Conventional Bank in Bangladesh for our course FNB 305of BBA program, we went through
many websites, journals and articles to complete our report and its really a great opportunity for
us to acquire valuable knowledge for this interesting subject. At the very beginning, we want to
express our profound gratitude to our respected course teacher Mr. DebashisSaha to provide you
with such a nice opportunity to prepare this kind of report.

We would also like to take this opportunity to express our wholehearted gratitude to our fellow
team members who offered encouragement, information, inspiration, and assistance during the
course of preparing this report.

This report suffers from many shortcomings; nevertheless we have exerted our best efforts in
preparing this report. We seek excuse for the errors that might have occurred in spite of our best
effort.

So lastly, we would again like to express our heartfelt thanks to our course teacher for providing
the theoretical knowledge and valuable guidelines related to recruitment process.
 iv
EXECUTIVE SUMMARY
The General Secretariat of the Organization of the Islamic Conference (OIC) defines an Islamic
Bank as Islamic Bank is a financial Institution whose statutes, rules and procedures expressly
state its commitment to the principles of Islamic Shariah and to the banning of the receipt and
payment of interest on any of its operations.
All OIC countries including Bangladesh have approved the above definition of Islamic Bank.
The Islamic Development Bank and other national and multi-national Islamic Banks have also
adopted the above definition as their operating guide.

Globally, Islamic finance has experienced rapid expansion over the past decade, growing at more
than 10% annually. Today, Shari'ah-compliant financial assets are estimated at approximately
US$2.0 trillion, covering bank and non-bank financial institutions, capital markets, money
markets and insurance. A report by the International Monetary Fund (IMF) (2015) observes that
out of all the sectors, the banking sector dominates Islamic finance sector making up about 80%
of Islamic finance in 2013 followed by the Sukuk (Shari'ahcompliant bonds) market which
accounts for 15% of the Islamic finance industry assets. Islamic banking assets have grown at a
compound annual growth rate of 20.4% between 2007 and 2013. Islamic capital markets have
also developed significantly over the past decade in terms of sophistication and size.

Based on Islamic Financial Services Board (IFSB)'s report, Islamic banking assets in the Middle
East and North Africa (MENA) countries (excluding the Gulf Cooperation council or GCC)
makeup 40% of total global Islamic banking assets, followed by the GCC (38%) and Asia (15%).
Many European countries like the United Kingdom, Denmark, France, Switzerland and
Luxembourg have also adopted Islamic Finance. THE PRINCIPLES OF ISLAMIC BANKING:
Broadly speaking, Islamic banking is a banking system where financial resources are mobilized
and invested in accordance with principles of Islamic Shari'ah. Islamic finance is strictly equity-
based and asset-backed. There are various concepts which underlie the functions of Islamic
banking and sets it apart from conventional banking.

Under Islamic law, money must not be allowed to create more money. Any contract undertaken
where 'Gharar' exists is null and void. Gharar is the ambiguity and uncertainty surrounding a
 contractual relationship, to the extent that it might provide an unfair advantage to one of the
parties of a contract over the other. This ethical approach to banking avoids transactions
involving usury, speculation, gambling, or industries contrary to Islamic values. Gharar also
promotes risk sharing, connects the financial sector with the real economy, and emphasizes
financial inclusion and social welfare.

Islamic banks are less vulnerable to risk than conventional banks. Experts on Islamic banking
suggest that the core values of Islamic banking can help introduce greater discipline into the
system and, thereby, substantially reduce financial instability.

Table of Contents
SL. Page
Title
No. No.
Letter of Transmittal iii
Acknowledgement iv
Executive Summary v
Introduction
1.1 What is Islamic Bank & Conventional Bank?
01.
1.2 Background of the Study
1.3 Principles of Islamic banking
02. History and Growth of Islamic Banking
03. OUTLOOK OF ISLAMIC BANKING IN THE CONTEXT OF BANGLADESH
3.1Islamic Banking in Bangladesh
3.2Growth of Islamic Banking in Bangladesh
04. Characteristics of Islamic Banking and Conventional Banking
05. Comparative Analysis of Islamic Bank and Conventional Bank
06. Performance Analysis Based on Different Types of Financial
Variables
07. Corporate Social Responsibility
08. Findings
09. Conclusion
10. Recommendations
11. References

INTRODUCTION
Finance is essential for trade, commerce and industry. Now-a-days, banking sector provides the
biggest support for modern business. Banking sector paves the way for the development of a
country. Banking has a long history. Bankers kept gold and silver and lent it to others in
Mesopotamia. Ancient Rome and
Greece had similar banking systems that we are following today. Italy was the main center of
European banking in the middle ages. Jewish traders came into view as the first bankers and
became very successful businessmen. Many people of Florence and Venice earned their money
through banking. In the 15th century.

The conventional banking theories assume that banks earn profits by receiving deposits from the
depositors at a low interest rate, then providing those funds to the borrowers at a higher interest
rate (Santos, 2000). Therefore, conventional banks make their profits from the difference
between the interestrate received from borrowers and the interest rate paid to depositors. Islamic
banking performs the same function but in this system interest is strictly prohibited. That means
that they cannot receive a predetermined interest from borrowers and does not pay a
predetermined interest to the depositors. The amount of profits is based on the profit sharing
agreements with the depositors and also with the borrowers. In addition, there are fee-based
banking services that are similar to that practiced by the conventional banks as long as there is no
predetermined interest payment or receive in the transaction. Thus, Islamic banking is a separate
banking stream as it supports profit-sharing and prohibits interest. The profit sharing depends on
the extent of the risk participation of the parties. The absence of pre-determined rewards is based
on Quranic orders and as illustrated using Shariah principles (Ariff, 1988). This study focuses
on financial comparison between Islamic banking and conventional banking in Bangladesh. The
CAMEL assessment model is commonly used for the evaluation of performance and ranking.
This model assesses the performance of banks based on capital adequacy, asset quality,
management quality, earning ability and liquidity considerations. It is used as an internal
instrument to measure risk and allocate resources, and to determine the banks overall condition
by identifying its strengths and weaknesses based on financial, operational and managerial
characteristics.

1.1 What is Islamic Bank & Conventional Bank?

The General Secretariat of the Organization of the Islamic Conference (OIC) defines an Islamic
Bank as Islamic Bank is a financial Institution whose statutes, rules and procedures expressly
state its commitment to the principles of Islamic Shariah and to the banning of the receipt and
payment of interest on any of its operations.
On the other hand, A conventional bank is a type of financial institution that accepts deposits,
offers checking account services, makes business, personal and mortgage loans; and offers basic
financial products like certificates of deposit and savings accounts to private individuals and
small businesses. A commercial bank is where most people do their banking

1.2 Background of the Study

Now a day, education is not just limited to books and classrooms. In todays world, education is
the tool to understand the real world and apply knowledge for the betterment of the society as
well as business. From education the theoretical knowledge is obtained from courses of study,
which is only the half way of the subject matter. Practical knowledge has no alternative. The
perfect coordination between theory and practice is of paramount importance in the context of
the modern business world in order to resolve the dichotomy between these two areas. Therefore,
an opportunity is offered by Department of Business Administration, IIUC(DC) , for its potential
BBA Degree holders to get at least 90 days practical experience, which is known as Internship
1
Program. And a report is required to be prepared to summarize the interns analysis, findings
and achieved knowledge from this program.

1.3 Principles of Islamic banking:

The motto of Islamic banking is profit sharing and loss bearing. The main objective of Islamic
banking is as same as conventional banking system which is profit making. Bank always try to
make money for the banking institute by lending out capital. As interest (riba) is forbidden in
Islamic rules on transactions which is known as Fiqh al-Muamalat that is why Islamic banking
system always follow the sharing of profit and loss. There are certain names of these terms.
Which is Mudharabah, Wadiah, Musharakah, bank in Bangladesh who has converted all of its
operations of conventional banking into sharah-based banking since July/2004. We offer banking
services for Muslims and non-Muslims alike allowing our customers choice and flexibility in
their savings and investments. Our products are approved by our Shariah Board comprising of
veteran Muslim scholars of our country who are expert in all matters of Islamic finance.
Murabahah, Ijar. Here is some detail information about these terms given below:

Mudharabah:
It is actually the profit sharing rule. Here bank gives loan to its customers to invest in his
business. If the customer gains profit the bank will take certain percentage of their profit. But if
the customer has loss in his business the bank will also share his loss.

Wadiah:
It is actually safekeeping of depositors money. In Wadiah, a bank is acted as a keeper and trustee
of funds. A person deposits his funds in the bank and the bank guarantees refund of the entire
amount of the deposit when the depositor demands it. The depositor gets certain profit as the
bank use his money as its fund.

Musharakah:
Musharakah is known as joint venture. Here the bank as its customer agrees to contribute in a
business and share all the net profit and loss together. This concept is basically used for
investment projects, letters of credit, and the purchase or real estate or property.

Murabahah:
This concept refers to the sale of goods at a price, which includes a profit margin agreed to by
both parties. This all is done by an agreement which is known as Musawamah. Here the bank
buy the product or services on behalf of its customers add certain percentage of profit in it than
sale the product to its customer. The products remain as mortgage till the final payment of the
installment.

Ijar:
Ijar means lease, rent and wage. Here bank sale the benefit of use a product or service to its
customers on a fixed price and installment payments. Under this concept, the Bank makes
available the use of service of asset/equipments such as plant, office automation, motor vehicle
for a fixed period and price to its customers.

2
History and Growth of Islamic Banking
The Islamic banking movement as we know it today is recent phenomenon. The history of
modern Islamic Banking dates back to the 1950s when a small private Islamic Bank appeared in
Pakistan but subsequently windup. In the decade of 1950s, the concept of Islamic banking was a
matter of thinking and research and the result was preserved in the papers of different scholars of
the Muslim world. The 1960s was the decade of practical experiment and 1970s was the decade
for establishment. The decade of 1980s was the decade of success and expansion at a faster rate.

During 1960s, it was observed that the Muslims of Malaysia used to save primarily for
performing Hajj and such savings are mostly kept idle in pillows, under mattresses and floors for
avoiding interest, which was unproductive and damaging for the growth and development of the
economy. For utilizing these savings, the Malaysian Government in 1962 establish an interest
free financial institution known as Pilgrim Savings Corporation. Though it was not a full-
fledged bank, even then we can say that it was the beginning of an institution free of interest,
which is unconditionally prohibited in Islam.

Mitghamr Bank is pioneer of modern Islamic Banking which was established by Dr. Ahmed-El-
Naggar in 1963 by his personal endeavor at Mitghamr in Egypt with a view to bring some
development in socio-economic field in the process of Islam. The conducted its banking
operation successfully in the light of Islamic Shariah for about of five years. Now the Islamic
Bankers of the world has treated the short life of Mitghamr Bank as the first model of Islamic
Banking. A survey report by the national Institute for management development, Cairo, Egypt
shows that the Mitghamr Bank was tremendously successful in achieving its objectives. In
addition, the tremendous success of the bank was the cause of closure by the vested interest in
1967.
Islamic Development Bank (IDB) was established in 1975 and during the following the years 7
(seven) Islami Banks and financial institutions namely (i) Dubai IslamiBank , (ii) Kuwait
Finance House, (iii) Faisal Islami Bank, Sudan (iv) Jordan Islami Bank for Finance and
Investment (v) Islamic Banking System International Holding S. A., Luxembourg, (vi) Faisal
Islami Bank of Egypt and (vii) Islamic Investment Corporation Ltd, Sharjah were established.

In 1978, Islamic Foreign Minister Conference in Dakar (senegal) recommended to the members
of OIC to make systematic efforts to establish Islamic Banks gradually and during the next three
years of their recommendation, 20 Islamic Banks and Financial Institutions came into being.
Till now near about 300 hundred Islamic Banks and financial Institutions in about 40 countries of
Asia, Africa, Europe, America and countries like U.K., U.S.A., Germany, Argentina, Denmark,
Luxembourg, Switzerland and India have been established. The banking system of Iran and
Sudan has been totally remodeled on the basis of Islamic shariah.

OUTLOOK OF ISLAMIC BANKING IN THE CONTEXT

OF BANGLADESH
The establishment of Islamic banks and adoption of Islamic banking windows by several
conventional banks over the years can be an indicator of the high acceptability of this sector by
the public. The potential of this banking sector to grow is tremendous and the reasons are
various. One of the main reasons for the continual rise in demand for Islamic banking can be
attributed to the rise in the Muslim population and their desire to engage in financial transactions
that are in compliance with the rules of Shari'ah.

The principles of risk-sharing and the strong link of credit to collateral means that Islamic
banking is compatible with the financing of cottage industries and start-ups, and can contribute to
more inclusive growth. Other reasons include the superior performance of Islamic banks over
conventional banks as revealed by profitability, liquidity and capital adequacy indicators.
From the perspective of financial system stability, Islamic banks are less vulnerable to risk than
conventional banks. Experts on Islamic banking suggest that the core values of Islamic banking
can help introduce greater discipline into the system and, thereby, substantially reduce financial
instability. Others note that during the financial crisis of 2008-09, Islamic banks performed better
than conventional banks. They are able to pass the negative shocks on the asset side (Musharaka
accounts) to the investment depositors (Mudaraba accounts). Others emphasize that Islamic
banks are more prudent taking up fewer risks and therefore providing a stable and competitive
return to investors, assigning responsibility for negligence or misconduct (operational risk) to
Shareholders, and making access to liquidity more difficult
The risks associated with Islamic finance are not generally well understood compared to
conventional banks. Therefore, national regulators should work together along with task forces to
seek a greater understanding of the money laundering (ML)/terrorist-financing (TF) risks that
may apply to Islamic finance.

3.1 Islamic Banking in Bangladesh

Bangladesh is one of the largest Muslim Countries I the world. The people of this country are
deeply committed to Islamic way of life as enshrined in the holy Quran and Sunnah. Naturally,
it remains an ordeal desire in their hearts to fashion and design their economic lives in
accordance with the prospects of Islam. With this end in view, in August 1974, Bangladesh
signed the charter of Islamic Development Bank (IDB) and committed itself to recognize its
economy and financial system as per Islamic Shariah.
In November 1980, Bangladesh Bank, the countrys central bank, sent a representative to study
the working system of several Islamic banks abroad.
In January 1981, the president of peoples Republic of Bangladesh while addressing the
3rd Islamic Summitr Conference held at Makkah and Taif suggested, The Islamic countries
should develop a separate Banking system of their own in order to facilitate their trade and
commerce. This statement of the President reflected the peoples desire, attitudes and
commitment of Bangladesh towards establishing Islamic Banks and Financial Institutions in the
country.
In November 1982, a delegation of Islamic development Bank (IDB) visited Bangladesh and
showed keen interest to participate in establishing a joint venture Islamic Bank in the private
sector. They found a lot of works have already been done and Islamic banking was in a ready
form for immediate introduction. Two professional bodies namely Islamic Economic research
Bureau(BIBA) made significant contribution towards introduction of Islamic Banking in
4
Bangladesh.
At last the long drawn struggle to establish an Islamic bank in Bangladesh became a reality
and Islami Bank Bangladesh Limited (IBBL) was incorporated on 13th March, 1983 and
commenced banking operations on and from 30th March1983 as the first Islamic Bank in the
south East Asia. It is the first joint venture in Bangladesh with the equity participation of Islamic
Development bank (IDB), Kingdom of Saudi Arabia, Bahrain and Kuwait.
Thereafter as of now, six other Bangladeshi Banks have launched banking operations in the
private sector based on Islamic shariah. Some other newly established traditional private banks
have also set up some Islamic banking branches in the country.
3.2 Growth of Islamic Banking in Bangladesh
Bangladesh is the third largest Muslim country in the world with around 139 million populations
of which 90 percent are Muslim. Islamic banking system started operation in Bangladesh in 1983
with the establishment of first Islamic bank Islami Bank Bangladesh Limited. The growth of
Islamic banking in Bangladesh is progressing day by day. The remarkable shifting or conversion
of the conventional banks and their branches into the Islamic lines, signals high acceptance of the
interest-free banking by the public in general. The Islamic banking industry continued to show
strong growth since its inception in 1983 to June 2008 in tandem with the growth in the
economy, as reflected by the increased market share of the Islamic banking industry in terms of
assets, financing and deposits of the total banking system. The products being offered by these
banks range from consumer credit to long term finance for big investment projects using Islamic
modes of financing such as Marahaba, Bia-Muazzal and Ijarah.
The Islamic banks in Bangladesh started from a very limited resource base right from the
beginning. But with the passage of time, they have excelled strong performance in respect of
mobilization of deposits as well as in investments. Total deposits of the Islamic banks and
Islamic banking branches of the conventional banks stood at Taka 232981.00 million at end June
2006. This was 28.46 percent of the deposits of all private commercial banks and 9.67 percent of
the deposits of the total banking system at the end of June, 2006. Total investment of the Islamic
banks and the Islamic banking branches of the conventional banks stood at Taka 210493.80
million at end June 2006. This was 29.35 percent of all private banks and 14.88 percent of the
total banking system of the country.
The Statutory Liquidity Requirement (SLR) for the Islamic banks is fixed at 10 percent since
inception of first Islamic Bank in 1983. This has remained unchanged till date while SLR for the
traditional commercial banks has been changed several times which presently is fixed at 18
percent. The low requirement of SLR for Islamic banks is due to the non-holding of interest
bearing types of eligible securities. In order to overcome the situation, the Bangladesh Bank has
issued an Islamic Bond on behalf of the government namely Government Islamic Investment
Bond (GIIB) in October 2004, which is governed by the Islamic Shariah. However, efforts are
underway to develop Islamic inter-bank market instruments to help banks in managing their
liquidities.
The role of Bangladesh Bank in regulating, guiding and supervising the Islamic Banks in
Bangladesh in accordance with Islamic Shariah is at the preparatory stage. The inspectors and
supervisors of Bangladesh Bank have been undergoing massive training programme on Islamic
banking both at home and abroad to be equally familiar with the technicalities of the different
operational methodologies of the Islamic banking system.

Characteristics of Islamic Banking and Conventional

Banking
Islamic Banking is a progressive and revolutionary banking system, working effectively and
reputedly in modern days in many parts of the globe. Sin developed and developing countries,
this unique banking system works side by side with other conventional banking.

Characteristics of aIslamic Bank

Prohibition of Interest:The traditional capitalist banking system depends on interest. It

receives interest for providing loans and pays interest for taking loans. The spread between
these two interests is the source of its profit. But according to Islamic Shariah all types of
interest is banned. So, Islamic Bank does not carry on business of interest and it completely
avoids the transaction of interest.

Investment based on profit:After departing from interest, the alternate ways of income for
Islamic Bank are investment and profit. Thus Islamic Bank gives up any transaction of
interest and makes investments based on profit. Bank distributes its profit to its depositors and
shareholders.
 Investment in Halal Business: Islamic Shariah has banned the business of haram goods. For
example Islam not only forbids the drinking of alcohol but also banned any business of
alcohol. Therefore Islamic Bank does not get any haram business and only do halal business.

Halal Paths and Procedures: Islamic Shariah also reject any haram path or process in case
of a halal business. Therefore Islamic Banking system only allows the halal path procedures
of Halal business

Characteristics of a conventional Bank

1. Dealing in Money: Bank is a financial institution which deals with other peoples money
i.e. money given by depositors.

2. Individual Firm Company: A bank may be a person, firm or a company. A banking company
means a company which is in the business of banking.

3. Acceptance of Deposit: A bank accepts money from the people in the form of deposits which
are usually repayable on demand or after the expiry of a fixed period. It gives safety to the
deposits of its customers. It also acts as a custodian of funds of its customers.

4. Giving Advances: A bank lends out money in the form of loans to those who require it for
different purposes.

5. Payment and Withdrawal: A bank provides easy payment and withdrawal facility to its
customers in the form of cheques and drafts, It also brings bank money in circulation. This
money is in the form of cheques, drafts, etc. 6

6. Agency and Utility Services: A bank provides various banking facilities to its customers.
They include general utility services and agency services.

7. Profit and Service Orientation: A bank is a profit seeking institution having service-oriented
approach.

Comparative Analysis of Islamic Bank and Conventional

Bank

Comparisons on the Basis of Performance

For conducting business in accordance with Islamic Shariah the differences on performance
level are significant. Here we have tried to give a distinguished picture of the performance level.
They are:
Conventional Banking Islamic Banking
The main objective of conventional banking is to The main objective of Islamic banking is to help in
help the maximization of profit motive of the building development and helping welfare of the
business, commerce and industry. human being by ending exploitation and Zulm from
the society through the directives of the Almighty

Earning of profit
Creating medium of exchange
Development of industry and commerce
Development of a healthy money market
Allah.
Establishment of an Interest-free financial system
Ensuring justice to both suppliers of fund
(depositor) and user of fund (Investment
Encouraging and patronizing entrepreneurship
Alleviating poverty through Zakat and profit
sharing micro-finance.

Differences on the basis of performance depend on the various performance level of banking
performance in the Islamic Banking Branch that varies from the performance level of AB bank
Limited. For conducting business in accordance with Islamic Shariah the differences on
performance level are significant.
Here we have tried to give a distinguished picture of the performance level of ABBL from the
perspective of practicing IslamicBanking and Conventional Banking-

Deposit of ABBL 7

Deposit of IBB(THE INSTITUTE OF BANKERS, BANGLADESH)

Deposit % of IBB in ABBL Deposit (Year 2006& 2007)

Comparisons on the basis of Investment

Conventional Banking Islamic Banking

Leading money and getting it back with Participation in partnership business is the
interest is the fundamental function of the fundamental function of the Islamic banks.
conventional banks.
Collection of deposit on the basis of interest
Collection of deposit on the basis of profit sharing
Extending credit on the basis of interest. Investment following Buy mode/investment mode/
lease mode
Creating medium of exchange and credit Acting against Creation of medium of exchange and
credit
Investment in shares and securities having Investment in shares and Mudarabah bond
coupon rate of interest
Discounting of bill No discounting of bill

Conventional Banking Islamic Banking

The mode of investment is basically lending. The basic mode is investment through
Bai+lease+direct Investment
Since income from the advances is fixed, it gives Since it shares profit and loss, the Islamic banks pay
little importance to developing expertise in project greater attention to developing project appraisal and
appraisal and evaluations. evaluations.
 Purpose of the loan is considered with less
importance.
National interest is the secondary consideration.
Diversification of profit is the most important
consideration
Close and constant supervision and monitoring is
must be a routine work
They do not pay a certain amount to the depositor
from their investment income, rather pay fixed rate
of interest irrespective of investment income.
It is the most important to consider the purpose of
the loan.
National interest is the primary consideration.
Diversification is not a prime consideration.
Close and constant supervision and monitoring is
not a routine work
Islamic Bank is to pay zakat 2.50% or 2.58% on its
reserves.

Comparisons on the basis of Functions

Performance Analysis Based on Different Types of

Financial Variables
a) Return on Asset (ROA): Return on Asset (ROA) is a financial ratio that shows the financial
performance of a bank. The return on assets (ROA) is the net income for the year divided by
total assets, usually the average value over the year. This ratio measures the ability of the bank
management to generate income by utilizing company assets at their disposal. A higher ROA
shows that the company is more efficient in using its resources.

b) Return on Equity (ROE): Return on Equity (ROE) is a financial ratio that refers to how much
profit a company earned compared to the total amount of shareholder equity invested. ROE is what
the shareholders look in return for their investment. A business that has a high return on equity is
more likely to be one that is capable of generating cash internally. Thus, the higher the ROE the
better the company is in terms of profit generation.

c) Earnings per Share (EPS)

The portion of a company's profit allocated to each outstanding share of common stock. Earnings
per share serve as an indicator of a company's profitability. When calculating, it is more accurate
to use a weighted average number of shares outstanding over the reporting term, because the
number of shares outstanding can change over time. Earnings per share are generally considered
to be the single most important variable in determining a share's price. It is also a major
component used to calculate the price-to-earnings valuation ratio.

Empirical Results and Analysis

Descriptive Statistics:
The financial performance of Islamic vs. Conventional commercial banks from 2008 to 2012

10

Profitability in this study is measured by three indicators; Return on Asset (ROA), Return on
Equity (ROE) and Earnings per Share (EPS). It can be seen (Table 4.1above and Figure 1-3 in
appendix) that, all banks group are profitable under the period of study nobanks group
recorded the negative return on assets. Islamic banks are more profitable than Conventional
banks in term of ROA, ROE and EPS. ROA had increasing trends from 2008 to 2010 and
after that it was decreasing. ROE also had increasing trends from 2008 to 2010 and after that
it was decreasing. EPS had decreasing trends from 2008 to 2012.

ROA of Islamic vs. Conventional commercial banks from 2008 to 2012

Descriptive statistics Table shows; Islamic banks (1.82%) have more ROA than Conventional
Banks (1.61%). Islamic banks have lower risk on ROA with the standard deviation of 0.59
and range of 2.40% in which the maximum and minimum are recorded as 3.01% and0.61%
respectively. Conventional banks have higher risk on ROA with the standard deviation of 0.62
and range of 2.63% in which the maximum and minimum are recorded as 2.84% and 0.21%
 respectively. The results further more found that, Islamic banks have moderate right skewed
distribution on ROA which is approximately to symmetric with the measure of skewness of
0.207 while Conventional banks distribution on ROA is negatively skewed with the measure
of skewness of -0.145.

11

ROE of Islamic vs. Conventional commercial banks from 2008 to 2012

Descriptive statistics table shows; Islamic banks (18.77%) have more ROE than Conventional
Banks (18.41%). Islamic banks have higher risk on ROE with the standard deviation of 7.39
and range of 26.60% in which the maximum and minimum are recorded as 30.71% and
4.11% respectively. Conventional banks have lowerrisk on ROE with the standard deviation
of 7.32 and range of 29.10% in which the maximum and minimum are recorded as 32.12%
and 3.02% respectively. The results further more found that, Islamic banks have moderate
right skewed distribution on ROE which is approximately to symmetric with the measure of
skewness of 0.129 while Conventional banks distribution on ROE is approximate 0 skewed
with the measure of skewness of 0.004.
 EPS of Islamic vs. Conventional commercial banks from 2008 to 2012

Descriptive statistics table shows; Islamic banks (17.74) have more EPS than Conventional
Banks (11.95). Islamic banks have higher risk on EPS with the standard deviation of 49.01 and

12

range of 236.62 in which the maximum and minimum are recorded as 237.37 and 0.75
respectively. Conventional banks have lowerrisk on EPS with the standard deviation of 16.43
and range of 70.73 in which the maximum and minimum are recorded as 71.28 and 0.55
respectively. The results further more found that, Islamic banks have highly right skewed
distribution on EPS with the measure of skewness of 4.145 while Conventional banks
distribution on EPS is also highly right skewed with the measure of skewness of 2.008.

Corporate Social Responsibility

 Islamic banks undertake and implement various types of social programs under Corporate Social
Responsibility (CSR) activities. Sources of funds of Islamic banks available for CSR activities
include Zakat, compensation charges (penal charges from defaulting investment clients) and
Sharia'h-permitted other sources of earnings. These funds are spent among different types of
education, training, health and charity-based organizations in Bangladesh. Islamic banksserve the
deprived and disadvantaged segments of people, who, because of extreme poverty, remain
outside the purview of the conventional banking system; the banks make financial transactions
based on human necessities and embark upon productivity-oriented projects or activities to
reduce the incidence of poverty. Expenditure on CSR activities declined by 1.57% in this quarter
compared to the previous quarter. At the end of July-September 2015 quarter, total expenditure on
CSR activities of Islamic Banking Industry stood at Tk.37.04 crores which was Tk. 37.62 crores
during the previous quarter.

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Findings
Islamic Banks use money as a media not goods, but conventional bank use money as a goods
There is no scope of compound interest in the Islamic Banking system, bank charges one time
profit and it calculates on the simple basis. But conventional bank charges compound interest.
In the Islamic banking system depositor get profit on the basis of weight age if the bank earn or
make profit otherwise depositor must share loss. But in the conventional system depositor get
interest on the basis of predetermined rate. Here depositor does not share any loss.
Islamic banks must have to be related with the business or investment or transaction of goods.
But traditional banks are not bound to do this.
In Islamic banking system bank invest in profit and loss system (PLS), for this cause bank bear
profit as well as loss in predetermined ratio. But traditional banking system does not bear any
loss. They charge interest in case of loss.

Conclusion
The concept of Islamic Banking is a very recent innovation to the Banking world. At the
beginning the world was not familiar with Islamic Banking. In the very recent stage banking
system was only understood a Capitalist system based on interest. Islamic Banking system
emerged with its unique feature of interest free system. The focal point around which Islamic
banking system revolved is the straight departure from interest. Based on the Shariah law all
dealing, transaction, business approach, product feature, investment focus, responsibility of
Islamic Banking lead to the significant difference in many part of the operations with as of the
 conventional. The growth of Islamic banking in Bangladesh is progressing day by day. The
remarkable shifting or conversion of the conventional banks and their branches into the
Islamic lines, signals high acceptance of the interest-free banking by the public in general.
Moreover like their counterparts around the world, the Islamic Banks in Bangladesh as well
as in Islamic Banking branch of ABBL are also facing some legal and practical constraints.
But with only minor changes in their practices, Islamic banking can get rid of all their
cumbersome, burdensome and sometimes doubtful forms of financing and offer a clean and
efficient interest-free banking. All the necessary ingredients are already there. The modified
system will make use of only two forms of financing loans with a service charge
and Mudaraba participatory financing both of which are fully accepted by all the Muslims.
Thus such a system will offer an effective banking system where Islamic banking is
obligatory and a powerful alternative to conventional banking where both co-exist.
Additionally, such a system will have no problem in obtaining authorization to operate in non-
Muslim countries.

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Recommendations
To sustain and develop the Islamic banking system with its ethical and intrinsic values system,
Islamic banking practiced banks and branch of the country have to strive to solve the
problems mentioned in the findings, which stand in the way of their growth and survival.
However, the recommendations may be the following-

It requires complete examination on the Islamic Banks whether they are run by
Shariah Council and competent professionals who are really practicing Muslims.
The initiative, drive, farsightedness and relentless efforts of the people who are
associated with the Islamic banking system may give it a great boost & momentum.
The personnel should be equipped enough with proper Islamic Banking knowledge to
meet the growing demands of Islamic Banking
All of the people working in Islamic Banks should be well conversant with Islamic
Banking modes and its operations
The inspection and supervision of Bangladesh Bank and its massive training program
on Islamic banking both at home and abroad should be equally familiar with different
operational methodologies of the Islamic banking system.
People should be made convinced and understood about the justification of real
meaning and practice of Islamic Banking. They should really understand the basic
difference between Conventional and Islamic banking.
Lack of Regulatory and Supervisory Framework for Islamic Banking, Shortage of
Supportive and Link Institutions are to be met up to meet the growing demand and sustain
the growth of Islamic Banking.

References
 www.assignmentpoint.com
Quarterly Report of Bangladesh Bank
Journal of Business and Technology (Dhaka)
Comparative Analysis of Financial Performance of Islamic vs. Conventional Banks in
Bangladesh by Md. Shamim Hossain
Various Websites
Commercial Bank - Video |
Investopedia http://www.investopedia.com/video/play/commercial-bank/#ixzz4GezlwzvF
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