Two types of banking are operating in the world namely conventional and Islamic. Banks offer different types of products and services for the satisfaction of customer for their financial need. Conventional banks were based on interest while Islamic banks based on free interest banking. Financial ratios techniques applied for the evaluation of financial performance of conventional &Islamic banks of Pakistan. Habib Bank Limited (HBL) & Allied Bank Limited (ABL)are typical examples of conventional bank where as Dubai Islamic Bank Limited (DIBL) & Meezan Bank Limited (MBL) was taken as an Islamic bank. Both types of banks included in the study represent whole banking industry of Pakistan. Three (03) years data were collected from Publication of State Bank of Pakistan SBP) “Financial Statement Analysis of Financial Sector of Pakistan 2009-2011”,(annual reports of respective banks, Islamic banking bulletin and their respective official websites. Analysis reflects, the liquidity ratio of Islamic banks appeared higher as compared to conventional banks, while profitability & solvency ratios of conventional banks are higher as compared to Islamic banks. Debt to asset ratio of Islamic banks seems better than conventional banks due to low debt financed. The growth rate of Islamic banks in Pakistan is comparatively higher than conventional banks in the context of new branches.

Jan, Saeedullah

Khan, Ishtiaq

Khan, Mushtaq

Rahman, Wali

Two types of banking are operating in the world namely conventional and Islamic. Banks offer different types of products and services for the satisfaction of customer for their financial need. Conventional banks were based on interest while Islamic banks based on free interest banking. Financial ratios techniques applied for the evaluation of financial performance of conventional &amp;Islamic banks of Pakistan. Habib Bank Limited (HBL) &amp; Allied Bank Limited (ABL)are typical examples of conventional bank where as Dubai Islamic Bank Limited (DIBL) &amp; Meezan Bank Limited (MBL) was taken as an Islamic bank. Both types of banks included in the study represent whole banking industry of Pakistan. Three (03) years data were collected from Publication of State Bank of Pakistan SBP) â€œFinancial Statement Analysis of Financial Sector of Pakistan 2009-2011â€,(annual reports of respective banks, Islamic banking bulletin and their respective official websites. Analysis reflects, the liquidity ratio of Islamic banks appeared higher as compared to conventional banks, while profitability &amp; solvency ratios of conventional banks are higher as compared to Islamic banks. Debt to asset ratio of Islamic banks seems better than conventional banks due to low debt financed. The growth rate of Islamic banks in Pakistan is comparatively higher than conventional banks in the context of new branches.Â

Sarhad University of Science & Information Technology (SUIT), Peshawar: E-Journals

223 Vol. 3, Issue 2   ISSN 2414-2336 (Print), ISSN 2523-2525 (Online)   COMPARATIVE ANALYSIS OF FINANCIAL PERFORMANCE AND GROWTH OF CONVENTIONAL AND ISLAMIC BANKS OF PAKISTAN Ishtiaq Khan, Sarhad University of Science & IT, Peshawar. Email: ishtiaqkhan2005@gmail.com Wali Rahman, Associate Professor, Sarhad University of Science & IT, Peshawar. Email: wali.ba@suit.edu.pk Saeedullah Jan, Khushal Khan Khattak University, Karak. Email: saadullahjan2002@gmail.com Mustaq Khan, Abasyn University of Science & IT, Peshawar Email: mushtaqkhan2009@yahoo.com Abstract. Various types of the banking system are operating in the world. The most commons are conventional and Islamic. Customers evaluate these systems before they decide in invest. The prime aim of this study is to assess and compare the financial performance and growth of conventional and Islamic banks operating in Pakistan. Banks offer different types of products and services for the satisfaction of customers for their financial needs. Conventional banking is based on interest while Islamic banking offers interest-free banking. To compare their respective performance financial ratios are applied. In Pakistan, Habib Bank Limited and Allied Bank Limited are typical examples of the conventional banking whereas Dubai Islamic Bank Limited and Meezan Bank Limited are operating as Islamic banking. Three (03) years data were obtained from the “Financial Statement Analysis of Financial Sector of Pakistan 2009-2011” State Bank of Pakistan publication. The analyses reflect that the liquidity ratio of Islamic banks appeared higher as compared to conventional banks, whereas the profitability and solvency ratios of conventional banks were comparatively higher than Islamic banks. Debt to asset ratio of Islamic banks seemed better than conventional banks due to low debt financing. Also, with regard to expansion, the growth rate of Islamic banks in Pakistan is comparatively higher than conventional banks. Keywords:  Islamic bank, conventional bank, financial analysis, banking sector, Pakistan, financial performance.  Khan, et al. 224 Vol. 3, Issue 2   ISSN 2414-2336 (Print), ISSN 2523-2525 (Online)  Introduction Two types of banking systems are prevalent in the world i.e. conventional and Islamic. Islamic banking has been initiated around the sixties in the world. This mode offers different operations as compared to conventional banking which concentrates on the concept of Riba. Islamic banking enjoys under the patronization of religious scholars. It is to be remembered that this philosophies and principles have been outlined in the Holy Quran and Sunnah of Prophet Muhammad (Peace be Upon Him) more than 1400 years ago. Islamic banking was initiated by two financial institutions i.e. Nile Deltaa and Mit Ghamar and later on, they developed to Islamic banking. In 1965, Dubai Islamic Bank started operation in Karachi with full-fledged Islamic banking. Later on, in 1996, the number of Islamic banks/financial institutions jumped to 166 in 34 countries (Muslims & Non-Muslims). Chapra (2001) highlighted that in 1970’s popularity of Islamic banking increased and is being operated in sixty countries of the world providing their services to their customers Aggarwal, Rajesh and Tarik (2000). History of banking in Pakistan  Pakistan came into existence on 14th August 1947 and there was no banking channel to run financial affairs of the new state. HBL being established in 1942, only a few branches in major cities was commissioned to fill the gap and acted as a central bank of Pakistan. In July 1948, the Government established State Bank of Pakistan (SBP) as Semi government organization. Financial assistance and professional guidance were provided by HBL. In 1974, as per policy all the commercial banks of the country were nationalized and merged into five large banks as Habib Bank Limited, Allied Bank Limited, United Bank Limited, Muslim Commercial Bank and National Bank of Pakistan. In all the un-banking areas of the country, branches of these nationalized banks were opened to provide their services. For coordination and centrally monitoring a “Pakistan Banking Council” was established to work as a regulator. In 1991, the bank nationalization act was amended and privatization policy generated to privatize all the nationalized banks. As a result, twenty-three (23) commercial banks have been established in the private as well as public sector. After that Pakistan Banking Council was resolved and monitoring of the entire schedule banks were handed over to State Bank of Pakistan.    Sarhad Journal of Management Sciences (SJMS)  225 Vol. 3, Issue 2   ISSN 2414-2336 (Print), ISSN 2523-2525 (Online)  Objective of the study The core objectives of the study are as under: i) To analyze the financial performance of conventional banks of Pakistan ii) To analyze the financial performance of Islamic banks of Pakistan iii) To compare the financial performances of both the conventional and Islamic banks of Pakistan. iv) Whether Conventional banks or Islamic banks are operated well in Pakistan? Literature Review  Erol, Baklaci, Aydog, and Tune (2014) analyzed both Islamic and conventional banks of Turkey. They observed that liquidity ratio of Islamic banks is better as compared to conventional banks. International firms are likely to invest in Turkeys Islamic Banks that’s why the outcomes of Islamic banks have increased and so the market share also increased. Khattak and Rehman (2010) pointed out the customer’s difficulties which they faced in Islamic banks of Pakistan such as the customers of Islamic banks are less motivated than conventional banks. Conventional banks care for customer’s motivation more than Islamic banks being more experienced in the banking industry. Awan (2009) during 2006-2008 analyzed the performance of conventional banks that was not better than Islamic bank. The Islamic bank market shares experienced is increased from 2.5% to 5%, showed 100% result. SBP regulated conventional banks to open Islamic branches in all over the country. Bader, et al. (2008) are of the view that Islamic banking and conventional banking have no big difference in term of resource utilization. Islamic banks are better than conventional banks in the response of profit generations. By using of six financial ratios, it is revealed that Islamic banks generate more profit, revenue, and even low cost effective than conventional banks. Akhter (2007) concluded that the market share of conventional banks in the banking sector of Pakistan is lower than Islamic banks. Islamic banks increased their market share by 3.2% per year, as when Islamic banks have 170 branches in Pakistan and conventional banks have 700 branches. They further predicted that if Islamic banks provide better services to the customers, they will increase their share by13% - 20% per year in near future.  Khan, et al. 226 Vol. 3, Issue 2   ISSN 2414-2336 (Print), ISSN 2523-2525 (Online)  Islamic banks are operating all over the world in both Muslim and non-Muslim countries with a reasonable increasing trend. Schmith (2005) has analyzed that 1.5 billion population of the world is looking for interest-free banking. 15% -20% increases in the population of America and Europe have moved toward Islamic Banks due to noninterest banking per year. Samad (2004) compared Islamic and conventional banks regarding their profitability, liquidity and credit performance in Bahrain and found that there was a significant difference of credit performance between the two banking system, but no significant difference in liquidity ratio and profitability ratio between two. Hassan and Bashir (2003) collected data of twenty-one (21) foreign countries of Conventional and Islamic banks of tenure 1994-2001, concluded that Islamic banks are more profitable & low risky as compared to conventional banks. Sources of Data  The data has been collected from the State Bank of Pakistan Publication named “Financial Statement Analysis of Financial Sector of Pakistan 2009-2011”, annual reports of respective banks, SBP Islamic Banking Bulletin, and their respective official websites. Population  The population of the study is Banking Sector of Pakistan, from which two Conventional and two Islamic banks, namely Habib Bank Ltd, Allied Bank Ltd and Meezan Bank Ltd, Dubai Islamic Bank Ltd respectively are being selected.  Sample Twenty five conventional banks and six Islamic banks are currently operating in the banking industry of Pakistan. This research is restricted to four banks (two Islamic & two conventional banks).The researcher used simple random sample technique for choosing the said four banks. These four banks represent whole Banking Industry of Pakistan. Research Method  For comparative study of both banking systems (Conventional and Islamic Banks) of Pakistan; by testing different financial ratios i-e liquidity ratio (current ratio, loan-deposit ratio), profitability ratios (Return on asset, return on equity & earning per share), solvency ratio (debt to equity ratio, debt to asset ratio & breakup value per share) of both banking system, Ratio Analysis Techniques is being used focusing.    Sarhad Journal of Management Sciences (SJMS)  227 Vol. 3, Issue 2   ISSN 2414-2336 (Print), ISSN 2523-2525 (Online)  Table 1 Ratios and their respective formulae Ratio Name Formula  Liquidity Ratio i. Current Ratio ii. Loan Deposit Ratio  i. Cash + Bank Balance/Current Liabilities  ii. Total Liabilities/Total Deposits Profitability Ratio i. ROA (Return on Asset) ii. ROE (Return on Equity) iii. iii.EPS (Earning Per Share)  i. Profit/Loss after taxation/Total Asset ii. Profit/Loss after taxation/Total Share Holder Equity iii. Profit / Loss after taxation / Number of Share  Solvency Ratio i. Debt to Equity Ratio ii. Debt to Asset Ratio iii. Breakup value per Share  i. Total Debt / Total Share Holder Equity  ii. Total Debt / Total Asset  iii. Total Share Holder Equity / Number of Share  Analysis To statistically analyze the date different ratios have been employed. Table 2 summarizes the results.  Table 2 Financial Ratio’s Analysis   Conventional Banks Islamic Banks Name of Ratio HBL   ABL Average of Both Banks Dubai Islamic Bank Meezan Bank Limited Average of Both Banks Liquidity Ratios* Current Ratio 16.55 8.84 12.69 17.38 29.33 23.35 Loan Deposit Ratio 5.44 3.99 4.71 7.48 14.76 11.12    Khan, et al. 228 Vol. 3, Issue 2   ISSN 2414-2336 (Print), ISSN 2523-2525 (Online)  Profitability Ratios* ROE 19.92 27.1 23.52 2.31 18.35 10.33 ROA 1.78 1.84 1.81 0.35 1.35 0.85 EPS 17.32 10.9 14.08 0.2 3.01 1.6 Solvency Ratios* Debt Equity Ratio 10.07 13.6 11.83 15.92 12.62 14.27 Debt to total Asset  4.56 7.9 6.23 2.22 4.96 3.59 Breakup value per Share 86.68 40 63.36 9.01 16.32 12.66 *All the findings are of three years average Note: All data are in percentage except EPS because there value is in Pakistan Rupees. Liquidity Ratio Current ratio is the first ratio of liquidity to find the liquidity of the bank. The average result or values of the current ratio are 12.69 and 23.35 for both conventional and Islamic banks respectively shown in Table 1. This result shows that current liabilities of the conventional banks are more than its current asset while Islamic banks have less current liabilities than the current assets. The second ratio of liquidity is the loan-deposit ratio, it shows that conventional banks have 4.71 and Islamic bank have 11.12, and it’s clear that conventional bank has enough liquidity to cover its fund's requirement as compared to the Islamic banks. The earning capacities of conventional banks are lower than Islamic banks.   Profitability Ratio Three ratios indicate the profitability of both banks (conventional and Islamic). The three ratios are ROA (return on asset), ROE (return on equity) and EPS (Earning per Share). These ratios (profitability) signify that how much profit formatted at a particular time period. The result in Table 1 clear that the shareholders of the conventional banks are provided more capital and the bank pay more dividends while Islamic banks have less contribution of the shareholders in the capital. It’s clear that conventional banks are more profitable than Islamic banks. Table 2 shows ROA, ROE of the conventional banks are 1.81 and 23.52, whereas Islamic banks have 0.85 and 10.33, the result indicates the  Sarhad Journal of Management Sciences (SJMS)  229 Vol. 3, Issue 2   ISSN 2414-2336 (Print), ISSN 2523-2525 (Online)  conventional banks have high ROA and ROE ratios than Islamic banks. The result shows that conventional banks formatted more profit than Islamic banks. The average EPS (Earning per Share) of conventional banks are 14.08 while Islamic banks are 1.60.  Table 2 indicates that conventional banks pay more dividends to the shareholders as compares to Islamic banks. Solvency Ratio Solvency ratio tells us the differentiation between liabilities and assets of the banks. Solvency ratio indicates that how much a bank financed by equity and how much by debt. If the assets of the bank are high / more than its liabilities, so they will definitely pay to their creditors otherwise not. The debts to equity ratio of conventional and Islamic banks are 11.83 and 14.27 respectively. The result clears that the debt of Islamic banks is lower than the conventional bank. The assets of conventional banks are lower than Islamic banks. The second ratio of solvency is “debt to asset ratio”, tells us how much company asset financed by debt. Lower the ratio/percentage indicates that the company financed asset by the low contribution of debt and vice versa. In table 1 this ratio of both conventional and Islamic banks are 6.23 & 3.59. The result shows that Islamic banks financed asset by the lower contribution of debt while conventional banks have high ratio/percentage so that’s why they financed asset by higher than Islamic banks means by more debt. Table 3    Average Increase in Number of Branches   Conventional Banks Islamic Banks Year  HBL   ABL Average Increase in Three Years Dubai Islamic Bank Meezan Bank Limited Average Increase in Three Years 2009 1494 779  35 166  2010 1501 806 1.33% 57 223 20.15% 2011 1506 837   75 275   Table 2 shows the total number of branches of both conventional and Islamic banks in Pakistan. The average increase results of both conventional and Islamic banks are 1.33% and 20.15%. The result indicates that the total number of conventional banks are more than Islamic banks but the growth of new branches opening of Islamic banks is high than conventional banks. As a whole, the Table 2 indicates that Islamic banks growth was faster than conventional banks in Pakistan during 2009 to 2011.   Khan, et al. 230 Vol. 3, Issue 2   ISSN 2414-2336 (Print), ISSN 2523-2525 (Online)  Conclusion Researches on the financial performance of both banking system (conventional & Islamic) were conducted in every country of the world. The histories of Islamic bank are longer than conventional banks. Islamic bank branches are limited but nowadays they started the expansion. So that’s why they generate less profit as compared to the conventional bank during 2009-2011. Liquidity ratio of Islamic banks is better; its means that the liquidity process is quick and good. The conventional bank generated more profit during 2009-2011 due to high ROA, ROE and EPS result. The solvency ratio of conventional banks is better than Islamic banks because the debt to equity and debt to asset were lower in 2009-2011. The chance of leverage of conventional banks is low. The development of the new business of Islamic banks is quicker than conventional banks. Overall result shows that the Islamic banks of Pakistan are good in liquidity ratio and generate good profit in short period of time. The peoples of Pakistan are motivated towards Islamic banks as compared to conventional banks, because they offer that products and services which were declared by Islam “Halal” mean interest-free. These findings of this research supported the previous researches on the comparative analysis of conventional & Islamic banks (Erol, Baklaci, Aydog and Tune, 2014) conducted in Turkey. References Akkas, A. (1996). Relative Efficiency of the Conventional and Islamic Banking System in Financing Investment. Unpublished Ph.D. Dissertation, Dhaka University. Akhtar, D.S. (2007). Islamic Banking: Past, Present and Future Outlook. Karachi, State Bank of Pakistan. Awan, A. G. (2009). Comparison of Islamic and conventional banking in Pakistan. Proceedings of the 2nd CBRC, Lahore, Pakistan, 1-36. Bader, M. K., Muhammad, S., Ariff, M., & Hassan, T. (2008). Cost, revenue and profit efficiency of Islamic versus conventional banks: International evidence using data envelopment analysis. Islamic Economic Studies, 15(2), 24-76. Erol, C., Baklaci, H. F., Aydogan, B., & Tunç, G. (2014). Performance comparison of islamic (participation) banks and commercial banks in Turkish banking sector. EuroMed Journal of Business, 9(2), 114-128. Iqbal, M. (2001). Islamic and conventional banking in the nineties: A comparative study. Islamic Economic Studies, 8(2), 1-27. Hassan, M. K., & Bashir, A. H. M. (2003). Determinants of Islamic banking profitability. 10th ERF Annual Conference, Morocco (pp. 16-18).  Sarhad Journal of Management Sciences (SJMS)  231 Vol. 3, Issue 2   ISSN 2414-2336 (Print), ISSN 2523-2525 (Online)  Khattak, N. A. (2010). Customer satisfaction and awareness of Islamic banking system in Pakistan. African Journal of Business Management, 4(5), 662-674. Samad, A. (2004). Performance of interest-free Islamic banks vis-à-vis interest-based conventional banks of Bahrain. International Journal of Economics, Management and Accounting, 12(2), 32-46. Schmith, S. (2005). Islamic banking experiencing rapid growth. Global Finance, 351-482. 

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COMPARATIVE ANALYSIS OF FINANCIAL PERFORMANCE AND GROWTH OF CONVENTIONAL AND ISLAMIC BANKS IN PAKISTAN

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COMPARATIVE ANALYSIS OF FINANCIAL PERFORMANCE AND GROWTH OF CONVENTIONAL AND ISLAMIC BANKS IN PAKISTAN

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