A Study on Performance Analysis of DSE Blue Chip

Listed Islamic and Conventional Banks of Bangladesh

Course title: Financial Institutions and Markets
Course no: FNB 209





Submitted to:
Dr. Sheikh Abu Taher
Lecturer & Course Instructor



Submitted by:

No Name Student ID
1 Urmi Das 589
2 Mahadi Mushrur Ahmed 609
3 Md.Sadiq-Ul-Haque 618
4 Md.Kaysher Hamid 619
5 Md. Shahruk Kabir 1258
6 Farah Mahbuba Nasiri 1327

BBA Program, Batch-02








Savar, Dhaka-1342 Department of Finance & Banking
August 28, 2012 Jahangirnagar University

Abstract
The objective of this research is to analyze and compare the performance of Islamic and Conventional
bank listed in DSE 20 through several financial ratios. For this purpose one Islamic bank i.e. Islamic
Bank Bangladesh Ltd and three conventional banks i.e. Dhaka Bank Ltd, National Bank Ltd, and Prime
Bank Ltd, are considered. The performances of Islamic and Conventional banks are scrutinized by using
accounting data from audited financial statement of 2002-2011. For this analysis 10 financial ratios have
been used i.e. Return on net assets (ROA), Return on equity (ROE), Cost to income ratio (C/I), Net profit
margin ratio, Operating profit margin ratio, Net loans to total asset ratio (NLTA), Equity to assets ratio,
Equity to net loan ratio, Fixed assets turnover ratio, Net assets turnover ratio. The research finds that
though liquidity condition of Islamic banks is better than conventional Bank but overall banking
performance of Islamic banks is less effective relative to the conventional banks. Further this paper
recommends ensuring efficiency in operational activities of Islamic banks for performance enhancement
and stability.

Introduction
Financial intermediaries those play a crucial role in ensuring efficiency in resource utilization of an economy are
commercial banks. From operational viewpoint these commercial banks can be classified mainly in two sections i.e.
one is Islamic Perspective Banking which focuses on Islamic Shariah based operations and allows all transactions or
investments on profit and loss sharing basis where fixed return on capital is totally prohibited. And another is
Conventional Perspective Banking which conducts its operation based on interest that is a fixed amount charged
over principal amount of loan or debt. It focuses on debtor-creditor relationship between the depositors and the bank
or between the borrowers and the bank where interest is considered as the price of credit. According to the
information of Bangladesh Bank there are 47 scheduled banks operating in Bangladesh where 4 are State Owned
Commercial Banks (SOCBs), 4 are Specialized Banks (SDBs), 23 are Conventional Private Commercial Banks, 7
are Islami Shariah based PCB and rest 4 are Foreign Commercial Banks (FCBs). In this paper to analyze and
compare the performance of Islamic and Conventional banks four banks listed in DSE 20 index i.e. Islamic Bank
Bangladesh Ltd, Dhaka Bank Ltd, National Bank Ltd and Prime Bank Ltd are selected and their annual report of
2002-2011collected from DSE library are used as the main source of financial data. Tools used in this analysis are
financial ratios and trend analysis techniques. In addition to that in summing up the results several tables, graphs are
also used.

Research Questions and Objectives of the Research
The major research question of this research paper is
How much effectively and successfully DSE Blue Chip Listed Islamic Banks are performing relative to
the Conventional Banks in Bangladesh?
So in terms of research questions the objective of this research paper is to make a comparative analysis of
performance among DSE blue chip listed Islamic and Conventional Banks. And for this several financial ratios are
used.

Research Methodology
This research is descriptive one which focuses on analyzing the performance of Islamic and Conventional Bank and
makes a comparison among these banks performance. For this purpose secondary data have been used. Annual
reports of these banks from the year 2002 to 2011which have been collected from Dhaka Stock Exchange Library
are the major source of secondary data. And accounting data of these annual reports specifically data from audited
financial statements have been used to calculate several financial ratios. Financial ratios used in this research to
measure performances are Return on net assets (ROA), Return on equity (ROE), Cost to income ratio (C/I), Net
profit margin ratio, Operating profit margin ratio, Net loans to total asset ratio (NLTA), Equity to assets ratio, Equity
to net loan ratio, Fixed assets turnover ratio, Net assets turnover ratio.






Measures of Performance
To measure the performance of financial institutions several financial ratios are widely used because of their ability
in providing better understanding of the institutions performance. In this paper to analyze and compare the
performance of Islamic and Conventional Bank 10 ratios are used. Brief descriptions of these ratios are given in
following section:
Return on Assets (ROA): It indicates how much net profit is generated per Tk of assets. The formula is
ROA= Net profit/Total assets
Return on Equity (ROE): It is the rate of return to shareholders or the percentage return on each Tk of
equity invested in the bank. The formula is
ROE = Net profit/ Total equity
Cost to Income Ratio (C/I): It measures the income generated per Tk cost. C/I assess the banks efficiency
in producing income. The formula is
C/I=Total cost x 100/Total operating income
Net Profit Margin Ratio: It assesses the financial position and efficiency of the bank. The formula is
Net profit margin ratio = NPAPT x 100/ Total operating income
Operating Profit Margin Ratio: It determines the profit created by the operations of bank. The formula is
Operating profit margin ratio = NPBPT*100 / Total operating income
Net Loans to Total Asset Ratio (NLTA): It measures the portion of assets that is tied up in loans. The
formula is
NLTA = Net loans/Total assets
Equity to Assets Ratio: It measures the balance between the owners total equity and the size of the total
assets. The formula is
Equity to assets ratio formula = Total Equity / Total Assets
Equity to Net Loan Ratio: It measures the balance between owners total equity and its total loans. The
formula is
Equity to net loan ratio formula = Total Equity / Net Loans
Fixed Assets Turnover Ratio: It measures the efficiency of the bank and how the bank makes use of its total
fixed assets to produce income. The formula is
Fixed assets turnover ratio formula = Total operating income / Net fixed assets
Net assets Turnover Ratio: It also measures the efficiency of the bank, and how the bank makes use of its
total net assets to produce income. The formula is
Net assets turnover ratio formula = Total operating income / Net assets

Data Analysis and Findings
Financial ratios regarding the four banks calculated from their financial statements i.e. Consolidated Balance Sheet,
Profit and Loss Account, Statement of Cash Flows and Statements of Change in Equity from the year 2002 to 2012
are summarized in the following table
Table: Financial Ratios of Islamic Bank, Dhaka Bank, National Bank and Prime Bank
Serial Financial Ratio Islami Bank Dhaka Bank National Bank Prime Bank
1
Return on Net Assets (ROA)
0.034 0.030 0.036 0.033
2
Return on Equity (ROE)
0.1468 0.2283 0.1785 0.2282
3
Cost to Income Ratio (C/I)
52.68% 37.34% 48.225% 36.156%
4
Net Profit Margin Ratio
0.3791 0.27147 0.2379 0.2944
5
Operating Profit Margin Ratio
74.86% 59.89% 51.799% 52.784%
6
Net Loans to Total Asset Ratio (NLTA)
0.6214 0.67067 0.6726 0.6567
7
Equity to Assets Ratio
0.1166 0.06186 0.0817 0.07767
8
Equity to Net Loan Ratio
0.22774 0.09103 0.110556 0.119
9
Fixed Assets Turnover Ratio
1.5184 9.21223 3.149 6.4739
10
Net Assets Turnover Ratio
0.0448 0.05126 0.0679 0.0598

From these ratios the findings can be made that
In ROA performance of Islamic and conventional bank is more or less similar i.e. National Bank> Islami
Bank>Prime Bank> Dhaka Bank
In ROE Dhaka Bank is showing good indication where Islamic Bank is the lowest
As the lowest C/I ratio is preferable here Prime Bank is showing the highest efficiency in producing income
where Islamic Bank is showing the lowest efficiency
Islamic Bank is showing maximum net profit margin and Operating profit margin ratio among four banks
which indicates its profitable financial condition relative to others
In NLTA the four banks are showing more or less same indication where the position of Islamic Bank is
little bit better than the others
Equity of Islamic Bank with respect to its assets and net loan is showing much higher than the others
conventional bank
Fixed assets turnover ratio of Dhaka bank is showing much higher value than the others
Higher net assets turnover ratio of National Bank is showing its efficiency in utilization of its assets where
Islamic Bank is showing a relatively poor performance

Conclusion and Recommendations:
From this analysis it is seen that performance of Islamic Bank in maintaining profitable position is praiseworthy
relative to DSE blue chip listed conventional banks. It is also showing better liquidity position than the others. But in
case of shareholders equity return Islamic Bank is not showing a good performance. Moreover its performance in
efficiency in income is also poor comparative to the conventional banks. As a result the performance of Islamic
Bank in fixed assets or net assets turnover is also poor. So it can be recommended that Islamic Bank should be more
concern about its efficiency in utilization of assets because efficiency in operation can reduce various operating and
non-operating expenses which ultimately will lead the bank in achieving strong financial position.


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APPENDIX
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