PR ES EN TED BY: R A HOL R A I

( 0 9 -2 613)

Final Year Project 2A Comparative Examination of Islamic Banking

and Conventional Banking in Pakistan

Introduction

The basic purpose of the study is to make comparative analysis of Islamic banking and conventional banking in Pakistan.

In any society banking sector (conventional or Islamic) plays a central role in the development of economic of country.

I am doing this research on many factors such as current position of banking sector, in term of assets, equities, investments, financing, deposits profitability etc. my researches based on Pakistan environment.

In this study I had used the data of almost six year from 2007 to 2012. I took data from annual report Of banks, reviews and the news bulletin of state bank of Pakistan.

In Pakistan there is only five full fledged banks and 12 Islamic windows currently working .

I had selected the conventional banks, who have Islamic window for my research.

Problem Statement:

In this research I want to investigate and want to examined the growth of pure Islamicbanking stream, Islamic windows and the selected conventional banks in term ofassets , deposits, advances/financing, investments , returns on assets and equity.

This study evaluates, that what are the factors which affects and supports the growthof Islamic and conventional banking in Pakistan, which may help customers to takedecision for their deposit, selling, purchasing of services and products within Islamicbanks.

Research Questions

Which one of the banking streams is comparatively more profitable and more liquid?

Which one of the banking stream has comparatively more growing?

How are Islamic banking window performing with regard to their conventional counterparts.

Which one of the banking stream has comparatively more investments and more financing?

Research Objective

The main objective of this research is to investigate and conduct a comparative analysis of both Islamic and conventional banking.

In this study I am discussing growth in term of returns and probability and comparison between the assets, investments/advances of both banks

Primary objective:

This investigation is to understand the state of affairs in the banking sector, How is the Islamic banking sectors performing vis-à-vis the conventional banking in Pakistan.

A major gap in literature has been the focus on Islamic banks only. To the best of my knowledge there has been no prior study that has examined the Islamic banking sector as a whole which include the Islamic banking arm of the conventional banks.

Secondary objective

To make recommendation that will encourage investors and other individuals to make their future financing/deposits/investments in more secure and productive way in Pakistan.

Research Methodology:

Quantitative research

Primarily based on archival data

Data collected from annual accounts of Islamic banking and conventional banks and also from annual reports of stat bank of Pakistan.

Data collection

Data collected from annual accounts of Islamic banking and conventional banks and also from annual reports of stat bank of Pakistan.

Secondary data techniques:

Few more Data sources I used to find out more about the data and about banking sector of Pakistan theoretical information for expels books published journals and articles the internet as revealed in the literature review.

Target population:

The banking sector, more specifically the Islamic banks, the conventional banks and their Islamic banking arms which includes dedicated Islamic banking branches and Islamic window operations.

Research design

The research design for my study is based on archival data. I took all the data from annual accounts of financial institutions and banks includes (5 fully fledged Islamic banks and 12 conventional banks along with Islamic windows) for 2007 to 2012, which is 6year data I also take data from state bank of Pakistan’s annual repots.

Practical Application:

This research will help in creating public awareness to get into the knowledge of

positive and negative aspects of banking, growth rate, performance .

CONCEPTUAL FRAMEWORK

Growth of Islamic banking in Pakistan

Deposits

RELIGIOUS PERSPECTIVE

Profitability and Liquidity

Growth of Islamic banking in Pakistan

Investment

Financing/advances

Assets

Variables:

As know that it is archival based research, so in this research I examined so many deferent variables

Dependent variables Growth rate and Performance

Independent variablesAssetsFinancing/investments/deposits/liabilitiesIncreasing and decreasing market share Return of equity and return of assets

Hypothesis

H1: The growth of Islamic banking is positively and gradually eroding the market share conventional banking .

H2: The environment of banking sector in Pakistan became competitive, which has negatively impacted the conventional banks. The implication being Islamic banking provide an alternative avenue these institutions

Individual Islamic Banking Share from Total Islamic Assets

YEAR 2012 2011 2010 2009 2008 2007

Bank Islami 12.3% 14.0% 13.2% 13.5% 9.8% 9.5%

Burj Bank 8.0% 6.6% 5.2% 5.1% 4.9% 4.5%

MeezanBank 53.4% 47.6% 45.3% 48.8% 44.0% 44.0%

Dubai Islamic 12.4% 11.4% 11.7% 13.9% 16.5% 14.0%

Al- Baraka Bank 14.0% 17.2% 17.8% 7.8% 8.5% 5.9%

100.0% 100% 100% 100% 100% 100%

Individual Islamic Banking Market Share from whole Banking Sector In Terms Of Assets

year 2012 2011 2010 2009 2008 2007

Bank Islami 0.6% 0.7% 0.6% 0.5% 0.3% 0.3%

Burj Bank 0.4% 0.3% 0.2% 0.2% 0.2% 0.1%

Meezan Bank 2.7% 2.3% 1.9% 1.9% 1.5% 1.2%

Dubai Islamic 0.6% 0.5% 0.5% 0.5% 0.6% 0.4%

Al- Baraka Bank 0.7% 0.8% 0.8% 0.3% 0.3% 0.2%

Total marketshare 5.1% 4.8% 4.3% 3.9% 3.3% 2.7%

Percentage Change 5.88% 10.41% 9.30% 15.38% 18.18

RATIOS

Bank Islami Burj Bank Meezan Bank Dubai Islamic

Al- Baraka Bank

Return On Equity 4.3% 1.6% 23.1% 5.1% -3.0%

Return On Assets 0.4% 0% 1.3% 0.5% -0.3%

Cash And Cash Equivalent To Total Assets 6.9% 7% 8.4% 15.5% 14.6%

Investment To Total Assets Ratio 38.4% 38% 55.6% 33.6% 38.4%

Advances/Financing To Total Assets ratio 28.1% 34% 32.3% 41.4% 36.7%

Deposit To Total Assets 86% 78% 84.0% 83.6% 85.2%

Total Liabilities To Total Assets 91% 86% 94.0% 89.2% 91.2%

Individual Islamic Window Market Share In Terms of Total Islamic Banking Assets

YEAR 2012 2011 2010 2009 2008 2007

NBP 1.2% 1.4% 1.4% 0.9% 1.1% 0.9%

UBL 4.5% 3.9% 3.2% 3.4% 4.2% 3.9%

ASKARI 5.2% 6.4% 6.9% 10.1% 12.2% 8.6%

BANK ALFLAH 35.8% 39.9% 41.5% 42.3% 46.4% 50.4%

BANK AL HABIB 3.3% 3.6% 4.0% 4.0% 3.1% 4.8%

HABIB BANK 11.2% 6.7% 5.4% 1.6% 2.0% 2.4%

HABIB METROPOLATION 7.9% 8.0% 10.2% 11.7% 10.0% 12.6%

2012 2011 2010 2009 2008 2007

MCB 4.9% 5.7% 6.0% 7.5% 11.3% 14.2%

SONARI 1.4% 1.3% 1.7% 1.8% 1.6% 2.1%

S.CHARTERED 11.9% 12.3% 9.2% 9.3% 9.3% 0.0%

BANK OF KHYBAR 5.4% 5.4% 6.0% 6.8% 7.4% 9.0%

FAYSAL Bank 7.3% 5.4% 4.5% 0.6% 0.0% 0.0%

100.0% 100.0% 100.0% 100.0% 100% 100%

Individual Islamic Window Banking Market Share from whole Banking Sector In Terms Of Assets

2012 2011 2010 2009 2008 2007

NBP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

UBL 0.1% 0.1% 0.1% 0.1% 0.1% 0.0%

ASKARI 0.2% 0.2% 0.1% 0.2% 0.2% 0.1%

BANK ALFLAH 1.1% 1.1% 0.8% 0.7% 0.7% 0.5%

BANK AL HABIB 0.1% 0.1% 0.1% 0.1% 0.0% 0.0%

HABIB BANK 0.3% 0.2% 0.1% 0.0% 0.0% 0.0%

HABIB METROPOLATION 0.2% 0.2% 0.2% 0.2% 0.1% 0.1%

MCB 0.1% 0.1% 0.1% 0.1% 0.2% 0.1%

SONARI 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

S.CHARTERED 0.4% 0.3% 0.2% 0.2% 0.1% 0.0%

BANK OF KHYBAR 0.2% 0.1% 0.1% 0.1% 0.1% 0.1%

FAYSAL NAMK 0.2% 0.1% 0.1% 0.0% 0.0% 0.0%

Share of Islamic Banking

Arms of Conventional Banks 3.0% 2.6% 2.0% 1.7% 1.4% 0.9%

Percentage Change 13.5% 33.5% 17.5% 9.1% 51.9% 0

Ratios

NBP-2012 UBL ASKARI

BANK ALFLAH Bank al

habibHABIB BANK

HABIB METROPOL

ATIONReturn On Equity

-34.7% 1.0% 8.6% 21.6% 25% 35.2%

Return On Assets -2.2% 0.0% 0.5% 1.4% 3% 1% 2.3%Cash And Cash Equivalent To Total Assets 2.17 15.2% 11.0% 19.4% 33% 6% 4.5%Investment To Total Assets Ratio 34.3% 59.7% 64.6% 46.9% 16% 66% 69.3%Advances/Financing To Total Assets ratio 37.2% 23.1% 19.8% 28.5% 78% 9% 22.5%Deposit To Total Assets 41.6% 13.8% 81.6% 86.7% 69% 92% 87.0%Total Liabilities To Total Assets 93.8% 96.0% 94.9% 92.5% 87% 96% 92.9%

MCB SONARI S.CHARTERED

BANK OF KHYBAR

FAYSAL BANK

Return On Equity 3.3% -3.1% 40.9% 20.6% 16.6%

Return On Assets 0.3% -0.3% 3.5% 3.0% 1.0%

Cash And Cash Equivalent To Total Assets 4.8% 6.1% 5.5% 9.9% 10.0%

Investment To Total Assets Ratio 13.2% 29.0% 24.2% 59.4% 44.2%

Advances/Financing To Total Assets ratio 69.0% 51.2% 51.8% 19.8% 41.8%

Deposit To Total Assets 70.2% 85.3% 84.3% 82.1% 86.8%

Total Liabilities To Total Assets 90.8% 90.8% 91.6% 85.6% 93.6%

Overall Market Share Of Both Streams

Year 2012 2011 2010 2009 2008 2007

Share of Islamic banks

in overall banking

industry in term of

assets 5.1% 4.8% 4.3% 3.9% 3.3% 2.7%

Share of Islamic

Banking Arms of

Conventional Banks 3.0% 2.6% 2.0% 1.7% 1.4% 0.9%

Total of Islamic banking

stream share 8.1% 7.4% 6.3% 5.6% 4.7% 3.6%

Market Conventional

Banks with Islamic

Banking Arms 67.7% 64.6% 62.4% 69.1% 67.1% 49.3%

Total assets of the Banking Industry 10,058,900 8,852,600 7,942,300 6,492,400 5,789,500 5,668,200

Distributed Portion within banks

Year 2012 2011 2010 2009 2008

NBP Islamic 0.3% 0.3% 0.2% 0.1%

conventional 99.7% 99.7% 99.8% 99.9%

UBL Islamic 1.5% 1.2% 0.7% 0.6% 0.6%

conventional 98.5% 98.8% 99.3% 99.4% 99.4%

ASKARIIslamic

4.5% 4.4% 3.4% 4.3% 4.9%

conventional 95.5% 95.6% 96.6% 95.7% 95.1%BANK ALFLAH Islamic 20.1% 19.9% 15.8% 11.9% 11.0%

conventional 79.9% 80.1% 84.2% 88.1% 89.0%BANK AL HABIB Islamic 2.2% 2.2% 2.1% 1.7% 1.4%

conventional 97.8% 97.8% 97.9% 98.3% 98.6%

Distributed Portion within banks

Year 2012 2011 2010 2009 2008

HABIB BANK Islamic 2.1% 1.4% 0.9% 0.2% 0.2%conventional 98% 99% 99% 100% 100%

HABIB METROPOLATION Islamic 7.9% 6.5% 6.4% 5.4% 4.5%

conventional 92.1% 93.5% 93.6% 94.6% 95.5%MCB Islamic 1.9% 2.0% 1.6% 1.6% 2.1%

conventional 98.1% 98.0% 98.4% 98.4% 97.9%SONARI Islamic 2.7% 2.3% 2.5% 2.1% 1.6%

conventional 97.3% 97.7% 97.5% 97.9% 98.4%

S.CHARTEREDIslamic banking 9.2% 8.1% 4.5% 3.2% 2.9%

conventional 90.8% 91.9% 95.5% 96.8% 97.1%BANK OF KHYBAR

Islamic banking 19.8% 18.4% 18.5% 19.2% 19.4%

conventional 80.2% 81.6% 81.5% 80.8% 80.6%

FAYSAL Bank Islamic 7.1% 4.3% 2.6% 0.3%conventional 92.9% 95.7% 97.4% 99.7%

Conclusion

Finally I found that the total market share of Islamic banking stream out of overall banking sector of Pakistan.

Which shows that Islamic banking stream of Pakistan is performing well in the market, although the market share is low but it is gradually increasing with time period.

In comparison we can see that the market share of Islamic stream is lower than conventional but at the same time we have to see that the increasing pace of both than we can observed that Islamic stream is relatively growing more than conventional banking the Islamic stream is comparatively new than conventional banking.

Recommendation

Based on the analysis I found that some of the conventional banks, who also have Islamic window and when we make comparisons of the business of both portions , we found that the Islamic window is doing well compare to conventional operations and the returns on Islamic windows is also high Wise versa for Islamic windows also.

So In my perceptions some of the banks who performing well in the Islamic window, than they must have to shift their banking system from conventional to fully fledged Islamic banking. Same on the other side that the banks, whose windows not performing well they make close their windows operations.

References and bibliography.

Khan, Hareem Nayyar, and Nadia Asghar. "Customer awareness and adoption of Islamic Banking in Pakistan." (2012).

Awan, A. G. (2009, November). Comparison of Islamic and Conventional Banking in Pakistan. In Proceeding of 2nd COMSATS International Business Research Conference.

Awan, Abdul Ghafoor. "Comparison of Islamic and Conventional Banking in Pakistan." In Proceeding of 2nd COMSATS International Business Research Conference. 2009.

Hassan, Ahmad Fahmi Sheikh. AN EMPIRICAL INVESTIGATION INTO THE ROLE, A study published by Humayun.ADar and John R. Presley tells that profit loss sharing profit and loss dominates literature on Islamic finance.

A review of conventional and Islamic banking, dr. khawaja amjad saeed. Hailey college of banking and finance, university of the Punjab, Lahore.

A study published by Humayun.A Dar and John R. Presley tells that profit loss sharing profit and loss dominates literature on

Islamic finance.

A review of conventional and Islamic banking, dr. khawaja amjad saeed. Hailey college of banking and finance, university of the

Punjab, Lahore.

Comparative performance study of conventional ans islamic banking in Pakistan.(muhammad hanif , professor , fast national

university Islamabad).

Erol and el bdour 1989 are considered to be first study of individual consumers attitude toward Islamic banks.

Islamic banking bulletin 2012 , state bank of Pakistan.

Government of Pakistan: “Mudarabah Companies and Mudarabah (Flotation and Control) Ordinance, 1980”.

Ahmad, Ausaf (1995), “The Development and Problems of Islamic Banks”, Jeddah: Islamic Research and Training

Institute, Islamic Development Bank.

Thank you