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Comparative analysis of Conventional and Islamic Banks of Bangladesh

A thesis report that measures and compares the performance of conventional and Islamic banks
of Bangladesh for the year 2010-2013

Submitted by

Tanjid Ahmed Shovon

ID: 17053

17th batch

Department of Accounting & Information Systems

University of Dhaka




Comparative analysis of Conventional and Islamic Banks of Bangladesh

A thesis report that measures and compares the performance of conventional and Islamic banks
of Bangladesh for the year 2010-2013

By Tanjid Ahmed Shovon

ID- 17053

Has been approved by


Dr. Md. Sharif Hossain

Associate Professor

Department of Accounting & Information Systems

University of Dhaka

Defense Date: February 16, 2015.

Letter of Transmittal

9th February, 2015

Dr. Md. Sharif Hossain

Associate Professor

Department of Accounting & Information Systems

University of Dhaka

Subject: submission of thesis report.

Dear Sir,

I am submitting a thesis report titled for Comparative Performance Study of Conventional and
Islamic Banks of Bangladesh as a part of the requirement of BBA degree. Your guideline has
been followed in every respect of preparing this report. I have really enjoyed working on this
topic and I hope that my work would meet the level of your expectation.

Any query on this report is highly appreciated.

Thank You


Tanjid Ahmed Shovon


Batch- 17th


I would like to extend thanks to the many people who so generously contributed to the work
presented in this thesis.

Special mention goes to my enthusiastic supervisor, Dr. Md. Sharif Hossain , has been an
amazing experience and I thank sir wholeheartedly, not only for his tremendous academic
support, but also for giving me so many wonderful opportunities. The blessings, help and
guidance given by his time to time shall carry me a long way in the journey of my life on which I
am about to embark.

Special mention goes to Kazi Mohammad Shahin, Ashrafoul Maaj Babar, Abu Raian, Belal
hossain for their special support to collect information.

I am also thankful to the almighty creator who not only created me but also had given me such
kind of intelligence for which I was able to complete my thesis paper.

Finally, but by no means least, thanks go to my beloved mother, father for almost unbelievable
support. They are the most important people in my world and I dedicate this thesis to them.

The purpose of this empirical study is to compare and analyze the performance of conventional
and Islamic banks of Bangladesh and find out which of the banking stream is the better
performer than the other. For this study, a sample of 10 conventional banks namely, southeast
Bank, Premiere Bank, NCC Bank, AB bank, Brac Bank, Bank Asia, Eastern Bank, Mercantile
Bank, Prime Bank and The City Bank. 4Islamic banks namely Islami Bank Banhladesh, Social
Islami Bank, Exim Bankand Shahjalal Islami Bank were selected. The method of study that has
been used is the ratio analysis in terms of profitability, liquidity and credit risk. 8 financial ratios
were selected for the measurement of performance. Only the internal factors are selected for
performance analysis and all the data used for this study are collected from the published
financial statements of these banks. Findings suggest that in case of profitability there is no
significant difference between these two. But conventional banks are leading in terms of liquidity
and the credit risk performance but not with a significant margin.

Keywords: Performance evaluation, conventional banking, Islamic banking, profitability,

liquidity, credit risk, Bangladesh

Conventional banking:

The bank that is governed by made principles is known as conventional bank. It is interest based

Islamic banking:

The bank which is operated under rules of Islamic Shariah is known as Islamic banking. There is
no existence of interest in Islamic banking.

Table of Contents

1. Introduction

Strengthening the financial sector is a vital concern for an economy. Efficient banking or sound
financial system serves as an effective channel for mobilizing funds from savers to productive
sectors and thus helps to achieve economic growth. In Bangladesh, Banking sector plays a vital
role in the economic development. The banking sector of Bangladesh is comparatively larger
than many comparable economies with similar level of development and per capita income. The
total contribution of the service sector in the economy of Bangladesh is 54.04% and bank is the
biggest sector from all of them .Which is proportionately large for a country with a per capita
income of only about US$1015.

Currently, banking industry is comprised of two basic forms of banking- one is Conventional
Banking System and the other is Islamic Banking System. Beside these two basic forms of
banking system, there is a mixed banking system comprising sate owned, private and foreign
commercial banks.

After the independence, banking industry in Bangladesh started its journey with 6 nationalized
commercialized banks, 2 State owned specialized banks and 3 Foreign Banks. In the 1980s
banking industry achieved significant expansion with the entrance of private banks. At present
among the schedule banks, there are 5 State-owned Commercial Banks (SCBs), 3 Specialized
Banks (SBs), 39 private commercial banks PCBs, 31 conventional banks, 8 Islami Shariah based
PCBs,9 foreign commercial banks.

Commercial banking is based on a pure financial intermediation model, whereby banks mainly
borrow from savers and then lend to enterprises or individuals. They make their profit from the
margin between the borrowing and lending rates of interest. They also provide banking services,
like letters of credit and guarantees. A proportion of their profit comes from the low-cost funds
that they obtain through demand deposits. Commercial banks are prohibited from trading and
their shareholding is severely restricted to a small proportion of their net worth.

Islamic banking as a new paradigm started in Bangladesh in 1983 with the establishment of the
first Islamic bank Islami Bank Bangladesh Limited. The innovation of interest-free banking
systems proved its worth in the countrys money market and many new banks have been
established to operate in compliance with Shariah and many traditional banks have opened their
Islamic banking branches. "Islamic Banking Business" means such banking business, the goals,
objectives and activities of which is to conduct banking business or activities according to the
principles of Islamic Shariah and no part of the business either in form and substance has any
elements not approved by Islamic Shariah. Islamic Banks are now not only focusing on the
conventional Shariah products but also investing in the SMEs, Microfinance and Agriculture

Islamic banks are the newcomers in the banking sector as compared to the other conventional
banks. And it was mentioned earlier that the main purpose for establishing Islamic banks is
compliance with shariah. For doing so the Islamic banks have to sacrifice many investment
opportunities which may be very much profitable but are not permitted in the Islamic laws. So it

is expected that they will have less profit than the conventional banks. The main focus of this
paper is to look into whether the performance of the interest-free banks is different from that of
the interest-based conventional banks with respect to liquidity risk, credit risk and profitability
during the period 2010-2013. This study of comparison is useful in providing valuable
information to relevant parties: bank customers, bank management and bank regulators and also
the capital investors in predicting banks future performance..

2 Objectives of the study

The purpose of this study is to conduct comparative performance evaluation of Islamic &
Conventional banking sectors in Pakistan in order to document the results of each sector during
period under review. This study will help in channelizing resources in future including deposits,
finances, investments and other banking services. In summary following are research questions:

1. Which of the banking stream is relatively more profitable?

2. Which of the banking sector is relatively more liquid?

3. Which of the banking sector is exposed to relatively more credit risk?

4. The volatility of conventional and Islamic banks.

3 Structural Differences between Islamic and Conventional Banks

The financial transactions of commercial banks are based on interest and the concept of the
relationship between the debtor and the lender. Accordingly, the profit of a commercial bank is
the variance between the amount of interest that has been paid to the depositors and the interest
that has been charged to the borrowers. Furthermore, other financial transactions are provided by
commercial banks, including letters of credit and guarantees, and they also produce different
kinds of derivatives.
On the other hand, the Islamic banking system works according to the concept of the partnership
that emerges between the banks and the depositors. It is a relationship of profit and loss sharing
(PLS) which allows both parties to go forward in owning physical goods and undergoing trading
processes. The depositors in the Islamic banking system are recognized as entrepreneurs.
Therefore, Mudarabah, Musharaka, Murabaha, Ijarah, Bai Muajal, Istisna, Salam Bay- Salam
and prepaid purchase are considered the best substitutes for the Islamic banks to avoid interest,
which is clearly forbidden in Islam. Four main rules govern the investment behavior of Islamic
banking, namely:

1. The absence of interest-based (riba) transactions;

2. The avoidance of economic activities involving speculation (gharar).

3. The introduction of an Islamic tax, Zakat.

4. The discouragement of the production of goods and services which contradict the value
pattern of Islam (Haram).

i. Riba
The Quran explicitly prohibits riba but does permit trade (al-Quran, 2: 185). It does not clearly
mention whether riba is interest or usury. The lack of clarity led to a controversy among the
Muslim scholars in the past. However, there now seems to be a general consensus that the term
riba includes any amount charged over and above the principal. The payment of interest or
receiving of interest, which is the fundamental principle of conventional banking and financing,
is explicitly prohibited in Islamic banking and finance. Thus, the prohibition of interest, in
payment or receipt, is the nucleus of Islamic banking and its financial instruments, while the
charging of interest in all modes of transaction whether it is in loan, advances or leasing is the
core in the conventional banking. The Islamic banking is not simply interest-free banking. It
takes into account issues of gharar, haram, Zakat.

ii. Gharar
Gharar is speculation or gambling and is forbidden in Islam. Islam allows risk-taking in business
transactions, but it prohibits speculative activity and gambling. Any transaction involving the
element of speculation like buying shares at a low price and selling them at a higher price in the
future is considered illegal. Conventional banks, on the other hand, have no constraint in
financing investment involving speculation.

iii. Zakat
Zakat is a compulsory religious payment or tax on the wealth of the rich payable to the poor. It is
a built-in mechanism in Islam for ensuring the redistribution of wealth and the protection of a
fair standard of living for the poor. Zakat is one of the five pillars of Islam. Each Islamic bank
must establish a zakat fund and pay zakat on the profits earned. The payment of zakat is in
addition to any conventional tax imposed (if the government is non-Islamic). Thus, the Islamic
bank pays dual taxes zakat and corporate business tax. The interest-based conventional
banks, on the other hand, are subjected to only corporate business tax, and thus have special
advantage over the Islamic banks.

iv. Islamic ethics of investment

In Islam, investment in production and consumption is guided by strict ethical codes. Muslims
are not permitted to invest in production, distribution and consumption enterprises involved in
alcohol, pork, gambling, illegal drugs, etc., even though these enterprises may be profitable.
Providing financing for such activities is illegal in Islam. Hence, it is forbidden for an Islamic
bank to finance activities or items that are not permitted by the Shariah. The limitation of
investment and financing is extended to cover any activity or business which may be harmful to
the individual or the society. Thus, financing investment for the production or consumption of
tobacco, alcohol or pornography is also prohibited. This restriction provides limitation on the
profitability of the Islamic banks. On the other hand, conventional banks do not face any such
constraint in their financing investments.

3.1Elements of Islamic financing

The key element of Islamic banking is not just the interest free receipt and use of fund. One of
the most important elements of Islamic banking or financing is the profit- and loss- sharing.
Based on profit and loss sharing principles there are various types of Islamic financial
instruments available in the market. Some of the instruments are equity like contracts and some
of them are debt like contracts. They are explained shortly below.

a) Musharaka, where a bank may join another entity to set up a joint venture, both parties
participating in the various aspects of the project in varying degrees. Profits are divided on a pre-
determined basis, and any losses are shared in proportion to the capital contribution.

b) Mudarabah, where the bank contributes with the finance and the client provides the expertise,
management and labor. Profits are shared by both partners in a pre- arranged proportion, but
when a loss occurs the total loss is borne by the bank.

c) Murabaha was originally an exchange transaction in which a trader purchases items required
by an end user. The trader then sells those items to the end-user at a price that is calculated using
an agreed profit margin over the costs incurred by the trader. To be in consonance with the
principles of Islamic finance governing exchange transactions, every Murabaha transaction must
meet the following conditions: Murabaha transactions may be undertaken only where the client
of a bank wants to purchase a commodity. To make it a valid transaction, it is necessary that the
commodity is really purchased by the bank and comes into the ownership and possession
(physical or constructive) of the bank so that it may assume the risk of the commodity. After
acquiring the ownership and possession of the commodity it should be sold to the client through
a valid sale.

D) Ijarah, in the context of Islamic banking, can be defined as a process by which usufruct of a
particular property is transferred to another person in exchange for a rent claimed from him". In
many respects, Ijarah resembles leasing as it is practiced in today's commercial world. The
distinguishing feature of this mode is that the assets remain the property of the Islamic bank to
put them up for rent every time the lease period terminates so as not to remain unutilized for long


periods of time. Under Ijarah, the bank, or the leasing company, assumes the risk of recession or
diminishing demand for these assets.

E) Istisna is a second kind of sale where a commodity is transacted before it comes into
existence. However, it is necessary for the validity of Istisna that the price is fixed with the
consent of the parties. Also, the necessary specifications of the commodity are fully settled
between them.

F) Salam or Bay-Salaam, as its also called, is a sale whereby the seller undertakes to supply
some specific goods to the buyer at a future date in exchange for an advanced price fully paid on
the spot. Salam sale is suitable for the finance of agriculture operations, where the bank renders
great services to the farmers in their way to achieve their production targets. Salam sale is also
used to finance commercial and industrial activities, especially phases prior to production and
export of commodities. That is, by purchasing them on Salam and marketing them for lucrative

4 Literature Review
Banks performance can be measured both by using qualitative and quantitative methods and
techniques. Different variables and statistical techniques have been used for analysis by different
studies and results are drawn from them aiming at performance evaluation. Banks performance
can be measured in terms of profitability, growth, efficiency, liquidity, credit risk performance,
and solvency. There is a general agreement in literature that Islamic banks are superior to
conventional or mainstream banks in terms of their performance (Samad, 2004; awan,2009;
Rosly and AbuBakar, 2003; Safiullah, 2010). Keeping in view the importance of banking sector,
different studies have been carried out for evaluating performance of banks.

Hanif, et al. (2012) analyzed and compared the performance of Islamic and conventional banking
in Pakistan. For this study, a sample of 22 conventional banks and 5 Islamic banks were selected.
Key performance indicators were divided into external and internal bank factors. The external
factor analysis included studying the customer behavior and perception about both Islamic and
conventional banking. Internal factor analysis included measures of differences in performance
of Islamic and conventional banks in terms of profitability, liquidity, credit risk and solvency.
Nine financial ratios were used to assess profitability, liquidity and credit risk; and a model
known as Bank-o-meter was used to assess solvency. In terms of profitability and liquidity,
conventional banking leads. However, in credit risk management and solvency maintenance
Islamic banking dominates. Motivating factors for customers of Islamic banking were the
location and Sharah compliance, while in case of conventional banking it was the wide range of
products and services.

Samad (2004) examined the performance of Bahrains interest free Islamic banks and interest
based conventional banks during the post Gulf War period. He examined banks performance in
three dimensions (a) profitability (b) liquidity (c) credit risk. Nine financial ratios were used in


this study. He applied students t-test in measuring the performance of Bahrains banks from
period 1991- 2001 and concluded that there is no difference in the profitability and liquidity of
Islamic and conventional banks of Bahrain. However, the study found that there is significant
difference in credit performance.

Jaffar and Manarvi (2011) examined and compared the performance of Islamic and conventional
banks operating inside Pakistan during 2005 to 2009 by applying CAMEL test. A sample of 5
Islamic banks and 5 Conventional banks were selected to measure and compare their
performance. CAMEL test is a standard test to check the health of financial institutions and to
determine the performance of banks. Different ratios were used to evaluate each element of
CAMEL. The study found that Islamic banks performed better in possessing adequate capital and
better liquidity position while conventional banks pioneered in management quality and earning
ability. Asset quality for both streams of banking was almost the same; conventional banks
recorded slightly smaller loan loss ratio showing improved loan recovery policy whereas,
UNCOL ratio analysis showed a nominal better performance for Islamic banks.

Sujan, et al. (2013) studied the performance of 5 conventional and 5 Islamic banks of
Bangladesh from period 2008-2012 on banks profitability and liquidity. T-test and F-test have
been used in determining the significance of the differential performance of the two groups of
bank. The study found difference on the profitability. Along with ROA, ROE, EPS, P/E ratio
they also studied profit per employees and profit per branch of the selected banks. But they
found no significant difference in the liquidity position of the banks.

Safiullah (2010) emphasized on the financial performance analysis of both streams of banks to
measure superiority. The study indicated that financial performance (business developments,
profitability, liquidity and solvency, commitment to economy and community, efficiency and
productivity) of both streams of banks is notable. Study results, based on commitment to
economy & community, productivity and efficiency, signified that interest-based conventional
banks were doing better than interest-free Islamic banks. But performance of interest-free
Islamic banks in business development, profitability, liquidity and solvency was superior to that
of interest-based conventional banks. That is, comparatively Islamic banks were superior in
financial performance to that of interest-based conventional banks.

Fayed (2013) analyzed the performance of Islamic and conventional banks of Egypt. He selected
3 Islamic banks and 6 conventional banks. Data were analyzed from period 2008-2010 and data
were collected from banks published statements. He used seven ratios two profitability two
liquidity and two credit risk ratios. And a model known as Bank-o-meter was used to gauge
solvency. Findings indicate the superiority of conventional banks over Islamic ones in
profitability, liquidity, credit risk management as well as solvency.

Rosly and Abu Bakar (2003) [23] found that Islamic banking scheme (IBS) banks in Malaysia
have recorded higher return on assets (ROA) as they were able to utilize existing overheads
carried by mainstream banks. As this lowers their overhead expenses, it was found that the
higher ROA ratio for IBS banks did not imply efficiency. It was also inconsistent with their
relatively low asset utilization and investment margin ratios. This finding confirmed the
contention that Islamic banking that thrives on interest-like products (credit finance) was less


likely to outshine mainstream banks on efficiency terms. Although Islamic credit finance
products may have complied with Shariah rules, their lack of ethical content was not expected to
motivate IBS banks to strive for efficiency through scale and scope economies.

Bader et, al., (2008), documented that there is no difference between the overall efficiency of
conventional and Islamic banks which includes cost, revenue and profit efficiency, after studying
performance of 43 Islamic and 33 conventional banks for the period 1990-2005 in 21 countries
using Data Envelopment Analysis. This study assessed the average and overtime efficiency of
banks based on their size, age, and region using static and dynamic panels.

Awan (2009) [19] analyzed the vertical growth of Islamic banking and compared it with its
counterpart conventional banking. Six newly formed Islamic banks in Pakistan and six
conventional banks of the same size were selected for the purpose of comparison. Data relating
to their performance and profitability were collected from primary and secondary sources from
2006 to 2008. The ratio analysis technique was applied to measure the performance of key
indicators of both Islamic and conventional banks. The results of the study were very
encouraging. Islamic banks outperformed conventional banks in assets, deposits, financing,
investments, efficiency, and quality of services and recovery of loans. It predicted the bright
future of Islamic banking in Pakistan.

Iqbal (2001) [20] used data for the 1990-98 period. For this study, a sample of twelve Islamic
banks was chosen. These banks together account for more than 75 percent of total capital as well
as total assets of "private" Islamic banks and thus form a very large sample from a statistical
point of view. Therefore, it can be safely assumed that the results derived from this sample were
representative of the "Islamic banking industry". For comparative purposes, another sample of
twelve conventional banks was chosen. These banks were chosen from exactly the same
countries from where Islamic banks were chosen. An attempt was also made to choose banks
roughly of the same size as the Islamic banks. Several hypotheses and common perceptions
about the practice of Islamic banking have been tested. The performance of Islamic banks has
been evaluated using both trend and ratio analyses. For this purpose, some objective
benchmarks for various ratios have been developed for the first time. The performance of
Islamic banks has also been compared with a control group of conventional banks. It was found
that, in general, Islamic banks have done fairly well during the period under study.

Islamic banking is interest free banking; making it compulsory to take active part in business
profit and loss sharing. Islamic banks prefer to take less risk. Sheikh & Ali (2009) in their paper
analyzed the risk management procedures of Islamic banking by giving differential analysis of
risk management based on unique characteristics. This paper has used ROE as a bench mark. A
sample of two Islamic banks and two conventional banks was taken.


5 Limitations

Despite the effort that has been engaged to derive a report as pragmatic and dependable as
possible but due to some imperfection in analysis method or human mistake there may be some

1. Only last 4 years information is used for the measurement and comparison purpose.

2. Quantitative information is given emphasis for the analytical purpose but there may be some
other influential issues.

3. Internal factors are used to measure and compare the performance of banks but there may be
significant external factors that affect that the performance of banks.

4. Political stability and political philosophy are some important factors of this thesis, but those
are ignored.

5. A sample of 10 conventional and 4 Islamic banks were chosen for the study. So the results
may not show absolute data.

6 Methodology of the study

In evaluating banks performance, this study uses ratio measures. The use of ratio method has
many advantages. The most important benefit is that it compensates bank disparities. Banking
firms are not equal with respect to sizes. The use of ratio removes the disparities in sizes and
brings them at par. The ratios are divided into three heads: profitability, liquidity and credit risk.
The ratios that I have selected to gauge profitability, liquidity and credit risk have been used in a
different study by Samad (2004).

The study evaluates inter- bank performance of Islamic and conventional banks in terms of
profitability, liquidity and credit risk. Banks performance is measured on set critical factors that
are thought to be specific to performance of any bank. The required ratios are calculated and
necessary arithmetical and statistical working workings are done to see the performance year
wise. Then I have taken the performance ratios every bank and calculated arithmetical mean. So
I found arithmetic mean for every bank and for every ratio. Then combined arithmetical mean of
every separate bank mean gave me the sector wise performance for each ratio. CV is calculated
by standard deviation divided by arithmetic mean.


Table 1 Sample of Conventional and Islamic Banks

Conventional Banks Islamic Banks

Southeast Bank Ltd. Islami Bank Bangladesh Ltd.

Premier Bank Ltd.
NCC bank Ltd. Social Islami Bank Ltd.
Bank Asia Ltd.
Brac bank Ltd. EXIM bank Ltd
Mercantile Bank Ltd.
Prime bank Ltd. Shahjalal Islami Bank Ltd.
Eastern bank Ltd.
The City Bank Ltd.
AB Bank Limited Ltd.

6.1 Data source

The data is being collected from published annual reports of the 10 selected conventional banks
and 4 Islamic banks for period of four years from the year 2010 to 2013, necessary data have
been collected to calculate all the profitability, liquidity, and credit risk ratios.

6.2 Performance measures

This study uses internal factors, those related to items of balance sheet and income statement of
banks and well within the control of the bank management. After examining the income
statement and balance sheet of Islamic banks and conventional commercial banks of Bangladesh,
this study utilizes eight financial ratios for evaluating the financial performance of Islamic vis--
vis conventional banks of Bangladesh. These financial measures of performance are placed under
three categories as given below:

a. Profitability Performance
b. Liquidity Performance
c. Credit (loan) Risk Performance
These ratios which I have selected to measure to gauge profitability, liquidity and credit risk
have been used in a study by Samad (2004).


6.2.1 Profitability Performance

There are several financial measures for evaluating profitability performance of a firm. This
study uses the following basic three. They are:

Return on Assets (ROA) = net profit/total assets. . (1)

ROA is a good indicator of a banks financial performance and managerial efficiency. It shows
how competent the management is in allocating asset into net profit. The higher the ROA, the
higher is the financial performance or profitability of the banks. (Samad,2004).

Return on Equity (ROE) = net profits/equity. (2)

It shows a rate return on base capital, i.e., equity capital. The higher the ROE, the more efficient
is the performance. [(Gul, Irshad and Zaman (2011)

Cost to Income Ratio (COSR) = total cost/total income. (3)

Cost incurred per dollar generation of income or in other words, income generated per dollar
cost. It is indeed considered to be one of the best indices for measuring economic efficiency or
profit performance. The lower the COSR ratio, the better is the profitability performance of a
bank. According to Tripe (..) Cost to income ratio is defined as non interest costs excluding
bad debts and doubtful expenses, divided by total of interest income and non-interest income.

6.2.2 Liquidity Performance

Liquidity is the life of a commercial bank. Liquidity means cash availability: how quickly a bank
can convert its assets into cash at face value to meet the cash demands of the depositors and
borrowers. The higher the amount of liquid asset for a bank, the greater is the liquidity of the
bank. Among the various liquidity measures, this study uses the following:

Net Loans to Asset Ratio (NetLTA) = net loans/total assets. (4)

NetLTA measures the percentage of assets that are tied up in loans. The higher the ratio, the less
liquid the bank will be. (Samad, 2004)

Net Loans to Deposit and Borrowing (NetLD&B) = net loans/total deposit and borrowings.

It indicates the percentage of the total deposit locked into non-liquid asset. The higher the
LDBR, the higher is the liquidity risk. (Samad, 2004)


6.2.3 Credit Risk performance

Credit risk is the risk that a bank is unable to collect the loans and advances it makes to a person
or organization. It arises either from the borrowers inability or the indifference to repay his debt.
Three financial ratios are used for measuring loan/credit risk performance of a bank. These are:

Equity to Asset ratio (EQTA) = common equity/assets. (6)

It measures equity capital as a percentage of total assets. EQTA provides percentage protection
afforded by banks to its investment in asset. It measures the overall shock absorbing capacity of
a bank for potential loan asset losses. The higher the ratio of EQTA, the greater is the capacity
for a bank to sustain the assets losses. (Samad, 2004)

Equity to Net Loan ratio (EQL) = total equity/net loans. (7)

It measures equity capital as a percentage of total net loans. EQL provides equity as a cushion
(protection) available to absorb loan losses. The higher the ratio of EQL, the higher is the
capacity for a bank in absorbing loan losses.

Total Impaired Loans to Gross Loan ratio (IMLGL) = impaired (non-performing loans)
loans/gross loans. .. (8)

This is one of the most important criteria to assess the quality of loans or asset of a commercial
bank. It measures the percentage of gross loans which are doubtful in banks portfolio. The lower
the ratio of IMLGL, the better is the asset/credit performance for the commercial banks. (Samad,

7. Empirical Results and Analysis


7. A. Year to year performance for each ratio

7. A.1 Profitability Performance
I. Return on asset (ROA)

ROA is calculated using the equation1 based on the data [see appendix 1].The calculated results
are given below in table [1]

Table [1] ROA of conventional and Islamic banks


Return on Asset 2010 2011 2012 2013 Mean CV

Conventional banks 2.280% 1.730% 0.881% 0.990% 1.470% 51.754%

Islamic banks 2.004% 1.346% 1.275% 0.999% 1.406% 32.481%

[Own calculation]
Also the calculated results are shown in graph in the following:




2010 2011 2012 2013

Figure 1 ROA of conventional and Islamic banks

The Mean ROA shows a better result for the conventional banks. But the coefficient of
variation (CV) shows the greater riskiness of conventional banks. Both show a decreasing
pattern in their ROA.


ROE is calculated using the equation3 based on the data [see appendix 2].The calculated results
are given below in table [2]

Table [2] ROE of conventional and Islamic banks

Return on 2010 2011 2012 2013 Mean CV

Conventional banks 21.430% 16.620% 9.211% 9.910% 14.293% 47.367%

Islamic banks 23.202% 14.505% 11.623% 8.370% 14.425% 53.417%

[Own calculation]

Also the calculated results are shown in graph in the following:





2010 2011 2012 2013

Figure 2 ROE of conventional and Islamic banks

The mean ROE of Conventional and Islamic banks are almost equal. But CV shows the higher volatility
for the Islamic banks than the conventional banks. The ROE shows a decreasing pattern for both
conventional and Islamic banks.

III. Cost to Income ratio (COSR)

COSR is calculated using the equation3 based on the data [see appendix 3].The calculated results
are given below in table [3]

Table [3] COSR of conventional and Islamic banks

Cost to Income ratio 2010 2011 2012 2013 Mean CV

Conventional banks 36.130% 41.280% 44.116% 44.290% 41.454% 12.117%

Islamic banks 28.512% 40.842% 33.261% 45.037% 36.913% 22.243%

[Own calculation]

Also the calculated results are shown in graph in the following:


25.00% Conventionalbanks
2010 2011 2012 2013

Figure 3 COSR of conventional and Islamic banks

From the above calculations we can say the performance of conventional banks is much better than the
Islamic banks with the mean CV of 12.117%. But the mean value does not show a great difference. For
both of them COSR shows an increasing pattern.

7. A.2. Liquidity Performance

I. Net Loans to Asset ratio (NetLTA)

NetLTA is calculated using the equation4 based on the data [see appendix 4].The calculated
results are given below in table [4]

Table [4] NetLTA of conventional and Islamic banks

Net Loan to Asset 2010 2011 2012 2013 Mean CV

ratio (NetLTA)
Conventional banks 69.920% 65.810% 60.904% 59.380% 64.004% 8.128%

Islamic banks 74.280% 72.398% 66.311% 65.999% 69.747% 5.452%

[Own calculation]


Also the calculated results are shown in graph in the following:

40.00% onventionalbanks
2010 2011 2012 2013

Figure 4 NetLTA of conventional and Islamic banks


II. Net Loans to Deposits & Borrowing ratio (NetLD&B)

NetLD&B is calculated using the equation5 based on the data [see appendix 5].The calculated
results are given below in table [5]

Table [5] NetLD&B of conventional and Islamic banks

Net Loans to Deposit 2010 2011 2012 2013 Mean CV

& Borrowing
Conventional banks 84.410% 80.210% 73.501% 73.360% 77.870% 8.605%

Islamic banks 90.051% 81.251% 78.016% 78.595% 81.978% 7.554%

[Own calculation]


Also the calculated results are shown in graph in the following:

50.00% Conventionalbanks
2010 2011 2012 2013

Figure 5 NetLD&B of conventional and Islamic banks

NetLD&B shows almost the same result as NetLTA. The conventional banks are more liquid than the
Islamic banks. But the volatility of Islamic banks is less than the conventional banks with a mean of
7.554% over 8.605%.

7. A. 3. Credit risk performance

I. Equity to Asset ratio (EQTA)

EQTA is calculated using the equation6 based on the data [see appendix 6].The calculated results
are given below in table [6]

Table [6] EQTAof conventional and Islamic banks

Equity to Asset ratio 2010 2011 2012 2013 Mean CV

Conventional banks 10.870% 10.580% 9.637% 9.590% 10.169% 10.766%

Islamic banks 8.328% 9.500% 8.54% 9.01% 8.938% 12.952%


Also the calculated results are shown in graph in the following:

6.00% Conventionalbanks
4.00% Islamicbanks

2010 2011 2012 2013

Figure 6 EQTA of conventional and Islamic banks

EQTA of conventional banks is higher meaning that they are more able to absorb credit risk. The CV also
in favor of conventional banks (10.766%) dominating over Islamic banks (12.952%).

II. Equity to Loan ratio (EQL)

EQL is calculated using the equation7 based on the data [see appendix 7].The calculated results
are given below in table [7]

Table [7] EQL of conventional and Islamic banks

Equity to Loan ratio 2010 2011 2012 2013 Mean CV

Conventional banks 15.630% 16.070% 15.769% 16.190% 15.915% 9.508%

Islamic banks 11.218% 13.382% 12.470% 13.320% 12.598% 15.858%

[Own calculation]


Also the calculated results are shown in graph in the following:

8.00% Conventionalbanks
6.00% Islamicbanks
2010 2011 2012 2013

Figure 7 EQL of conventional and Islamic banks

The conventional bank EQL is higher than the Islamic banks. Also the Conventional banks are less
volatile than the Islamic banks. The mean EQL of conventional banks is 15.915% whereas for the Islamic
banks is 12.519%. The CV of conventional banks 9.508% and Islamic banks is 15.858%.

III. Impaired loans to gross loans (IMLGL)

IMLGL is calculated using the equation8 based on the data [see appendix 8].The calculated
results are given below in table [8]

Table [8] EQL of conventional and Islamic banks

Impaired loans to 2010 2011 2012 2013 Mean CV

gross loans (IMLGL)

Conventional banks 3.160% 3.120% 4.955% 5.220% 4.114% 31.612%

Islamic banks 2.855% 2.313% 3.503% 5.218% 3.472% 40.404%

[Own calculation]





3.00% Conventionalbanks
2.00% Islamicbanks


2010 2011 2012 2013

Figure 8 IMLGL of Conventional and Islamic banks

Islamic banks IMLGL mean is better than the conventional banks but their volatility is higher that is
because their IMLGL increased more than double from 2010 to 2013. But the conventional banks loans
are not much of a high quality but their volatility is less than the Islamic banks.


7. B Overall performance

This section provides the sector wise performance for three core areas of profitability, liquidity,
credit risk by simple sector wise averages for both streams of banking.

Table 9 Financial Performance of Islamic Vs Conventional Banking

Performance Conventional Banks Islamic Banks Comments

Mean CV Mean CV Conventional banks are
ROA 1.470% 51.754% 1.406% 32.481% dominating on ROA and
ROE 14.293% 47.367% 14.425% 53.417% ROE and Islamic banks are
COSR 41.454% 12.117% 36.913% 22.243% dominating in COSR

Mean CV Mean CV
NetLTA 64.004% 8.128% 69.747% 5.452%
NetLD&B 8.605% 7.554% Conventional banks are
77.870% 81.978%
Credit Risk
Mean CV Mean CV
EQTA 10.169% 10.766% 8.938% 12.952%
Conventional banks are
EQL 15.915% 9.508% 15.915% 15.858%
31.612% 40.404% dominating in credit risk
IMLGL 4.114% 3.472% management.

Data Analysis:

ROA, ROE and COSR are the financial measures that depict the profitability of Islamic banks
and conventional banks. ROA of conventional banking sector is 1.470% which is higher than
Islamic banking sector that is 1.406% and this indicates that assets of conventional banks are
capable of yielding more return than Islamic banks. Similarly ROE also shows that conventional
banks are more profitable than Islamic banks which depicts that conventional banks are more
efficient in generating profits from every unit of shareholders equity/bank capital. But in case of
COSR Islamic banks are leading with an industry average of 36.913% that is much better than
the conventional banks whose average is 41.454%.So it is very difficult to conclude which bank
is dominating in profitability.


Two different indicators (NetLTA, NetLD&B) are used to measure the liquidity risk of portfolios
of Islamic and conventional banking. NetLTA(net loans to asset ratio) of Islamic banking sector
is 69.747% while NetLTA of conventional banking sector is 64.004% .Higher ratio of Islamic
banking sector shows that this sector is tied up in loans and has lower liquidity as compared to
conventional banks. So, conventional banks are more liquid as compared to Islamic banks.
NetLD&B (Net Loans to Deposits and Borrowing ratio) of Islamic banking sector is 81.978%
while that of conventional banking sector is 77.870%. Higher NetLD&B of Islamic banking
sector shows that Islamic banks face more liquidity risk than conventional banking sector.
Overall liquidity management of conventional banking is better than Islamic banking.

Credit risk of both banking sectors is depicted by EQTA, EQL and IMLGL. It depicts from
table-2 that EQTA (Common Equity to Total Assets ratio) of Islamic banking sector is 8.938%
while EQTA of conventional banking sector is 10.169% showing that there is not much
difference in conventional and Islamic banks. This ratio also shows that conventional banks have
more capacity to absorb potential expected or unexpected loan asset losses as compared to
conventional banks. But there is much more difference in EQL of conventional banks and
Islamic banks. The EQL of conventional banks are 15.915% when the EQL of Islamic banks are
15.915% which means that conventional banks are better able absorbing loan losses than Islamic
banks. IMLGL (Impaired Loans to Gross Loans) of Islamic banking sector (3.472%) is lower
than conventional banking sector (4.114%). This clearly shows that the quality of assets or loans
of Islamic banks is better than conventional banks.

Again in the credit risk performance of both of conventional and Islamic banks are almost
same. But we can conclude that when the conventional banks are better able in absorbing loan
losses, Islamic banks are better able in controlling loan losses.


Graphical presentation



Figure 9



Figure 10


Credit risk


Figure 11

Individual Bank Performance

Table 10 Conventional Banks


SOUHEAST 1.425% 12.433% 26.644% 63.843% 77.835% 11.384% 17.785% 4.044%
PREMIRE 1.220% 13.540% 66.440% 61.920% 73.800% 8.930% 14.500% 5.020%
NCC 1.408% 13.263% 33.725% 64.918% 79.683% 10.498% 16.166% 4.549%
AB 1.898% 16.415% 37.374% 69.835% 76.101% 10.788% 15.383% 3.154%
BRAC 0.986% 12.657% 49.140% 57.060% 73.650% 7.467% 13.104% 6.651%
BANK ASI 1.243% 15.554% 36.621% 66.449% 80.896% 8.451% 12.894% 3.314%
EASTERN 2.112% 16.384% 35.794% 66.004% 81.413% 12.682% 19.177% 2.667%
MERCA 1.331% 16.502% 42.817% 63.446% 75.924% 7.996% 12.681% 3.384%
PRIME 1.54% 15.43% 37.26% 64.64% 77.82% 9.79% 15.19% 2.87%
CITY 1.557% 15.967% 38.123% 65.135% 79.013% 9.730% 14.985% 3.059%
Mean 1.463% 14.686% 40.646% 64.235% 77.458% 9.776% 15.209% 3.961%


Table 4 Islamic Banks

1.149% 15.263% 38.672% 75.038% 87.004% 7.644% 10.206% 2.991%
1.170% 13.000% 39.840% 63.100% 75.160% 9.110% 14.470% 4.380%
1.706% 15.874% 34.274% 73.782% 86.942% 10.640% 14.446% 2.891%
1.547% 19.247% 34.506% 71.385% 83.080% 7.990% 11.263% 3.305%
1.393% 15.846% 36.823% 70.826% 83.046% 8.846% 12.596% 3.392%


7. Conclusion

Financial system of Bangladesh consists of central bank, commercial banks, NBFIs, capital
market, microfinance institutions, co-operatives and so on. Among contributory organizations in
financial system commercial banks both conventional & Islamic banks are making significant
contribution in the economic development of Bangladesh. To figure out sustained growth and
development performance evaluation study of banks is very important.
This study covers four year period (2010-13) and includes a sample of 10 conventional and 4
Islamic banks to study the comparative performance of both streams of banking. For
performance study I constructed a portfolio of two streams of banking to perform analysis and
document findings in the form of sector wise averages. On the basis of the results I can conclude
that there is no significant difference in the profitability. But conventional banks are leading in
terms of liquidity and the credit risk performance but not with a significant margin.

Islamic banks in Bangladesh have less market share than the conventional banks with
approximately 18%. This little market share than the conventional banks may be the reason for
the lesser profitability and liquidity of Islamic banking than the conventional banks. Shariah
compliance is the only difference of the Islamic banking with the conventional banking which
must be ensured by the practitioners of Islamic banks. This shariah compliance is the unique
selling proposition for this industry and can bring a competitive advantage for the Islamic
banking. Any weakness on this front can jeopardize its very existence. It is recommended to the
uses of this study that size of the both streams of banking must be kept in view while interpreting
results and making decisions on their basis.



Appendix 1 ROA

Conventional banks

2010 2011 2012 2013

SBL 2.10% 1.21% 0.862% 2.10%
PBL 2.60% 0.68% 0.738% 0.87%
NCCBL - 2.16% 1.150% 0.92%
BAL 3.19% 2.98% 0.900% 0.52%
BBL 1.69% 1.29% 0.300% 0.67%
MBL 1.83% 1.73% 0.602% 0.81%
Prime 3.05% 2.17% 1.627% 1.60%
EBL 1.64% 1.51% 0.889% 1.30%
CBL 2.35% 1.85% 1.134% 0.83%
ABBL 2.06% 1.77% 0.610% 0.33%
average 2.28% 1.73% 0.881% 0.99%

Islamic banks

2010 2011 2012 2013

IBBL 1.152% 1.398% 1.276% 0.991%
SIBL 1.171% 1.230% 1.247% 0.964%
EXIM 3.057% 1.556% 1.301% 1.050%
Shahjalal 2.637% 1.198% 1.276% 0.991%
average 2.004% 1.346% 1.275% 0.999%


Appendix 2 ROE

Conventional banks

2010 2011 2012 2013

SBL 16.12% 9.87% 8.334% 15.41%
PBL 28.23% 7.66% 8.441% 9.84%
NCCBL 19.25% 11.940% 8.60%
BAL 24.16% 26.57% 8.581% 6.35%
BBL 19.65% 17.29% 4.709% 8.98%
MBL 27.33% 19.27% 6.481% 9.14%
Prime 20.51% 17.49% 13.871% 13.66%
EBL 19.84% 18.04% 12.471% 15.66%
CBL 20.85% 19.25% 12.883% 8.73%
ABBL 16.21% 11.48% 4.401% 2.69%
average 21.43% 16.62% 9.211% 9.91%

Islamic Banks

2010 2011 2012 2013

IBBL 19.074% 16.747% 1.400% 1.086%
SIBL 15.256% 11.033% 12.586% 9.198%
EXIM 27.767% 13.945% 18.074% 11.907%
Shahjalal 30.709% 16.296% 14.431% 11.288%
average 23.202% 14.505% 11.623% 8.370%


Appendix 3 COSR

Conventional banks

2010 2011 2012 2013

SBL 20.43% 25.50% 29.833% 30.82%
PBL 40.12% 81.10% 78.866% 65.65%
NCCBL 28.90% 35.355% 36.92%
BAL 29.91% 31.42% 42.948% 45.22%
BBL 46.93% 51.84% 50.212% 47.57%
MBL 36.60% 35.67% 36.459% 37.75%
Prime 31.95% 34.52% 37.517% 39.18%
EBL 40.38% 42.75% 46.100% 42.04%
CBL 34.93% 34.84% 36.867% 42.39%
ABBL 43.88% 46.24% 46.999% 55.32%
average 36.13% 41.28% 44.116% 44.29%

Islamic Banks

2010 2011 2012 2013

IBBL 38.870% 36.235% 34.357% 46.681%
SIBL 24.055% 54.249% 34.777% 40.215%
EXIM 23.865% 38.237% 29.552% 46.569%
Shahjalal 27.258% 34.646% 34.357% 46.681%
average 28.512% 40.842% 33.261% 45.037%


Appendix 4 NetLTA

Conventional banks

2010 2011 2012 2013

SBL 67.17% 65.65% 63.562% 59.00%
PBL 68.00% 64.00% 60.437% 55.25%
NCCBL 67.97% 59.951% 66.83%
BAL 78.20% 67.71% 66.622% 66.80%
BBL 62.99% 60.49% 53.519% 51.23%
MBL 74.22% 68.45% 62.475% 60.65%
Prime 69.60% 67.62% 63.806% 62.99%
EBL 73.24% 65.41% 56.475% 58.66%
CBL 72.27% 66.89% 63.030% 56.38%
ABBL 63.58% 63.87% 59.166% 56.00%
average 69.92% 65.81% 60.904% 59.38%

Islamic Banks

2010 2011 2012 2013

IBBL 76.417% 78.168% 63.961% 64.328%
SIBL 63.116% 61.007% 67.766% 70.863%
EXIM 80.888% 75.610% 69.557% 64.475%
Shahjalal 76.700% 74.806% 63.961% 64.328%
average 74.280% 72.398% 66.311% 65.999%


Appendix 5 NetLD&B

Conventional banks

2010 2011 2012 2013

SBL 82.81% 80.56% 76.949% 71.02%
PBL 82.84% 76.67% 70.937% 64.75%
NCCBL 82.97% 72.311% 83.77%
BAL 77.80% 72.43% 72.158% 82.01%
BBL 82.35% 77.40% 67.992% 66.85%
MBL 86.15% 84.81% 78.122% 74.50%
Prime 89.35% 82.77% 77.077% 76.45%
EBL 86.62% 77.14% 65.828% 74.12%
CBL 88.15% 80.13% 75.175% 67.85%
ABBL 83.58% 87.18% 78.456% 72.24%
average 84.41% 80.21% 73.501% 73.36%

Islamic Banks

2010 2011 2012 2013

IBBL 101.922% 75.637% 76.101% 77.273%
SIBL 73.389% 73.865% 79.289% 83.456%
EXIM 95.897% 89.126% 80.572% 76.378%
Shahjalal 88.995% 86.376% 76.101% 77.273%
average 90.051% 81.251% 78.016% 78.595%


Appendix 6 EQTA

Conventional banks

2010 2011 2012 2013

SBL 13.01% 12.26% 10.343% 9.93%
PBL 9.20% 8.90% 8.746% 8.88%
NCCBL 11.21% 9.633% 10.65%
BAL 13.21% 11.21% 10.493% 8.25%
BBL 8.59% 7.44% 6.361% 7.48%
MBL 6.71% 8.99% 9.285% 8.82%
Prime 14.85% 12.41% 11.731% 11.73%
EBL 8.25% 8.34% 7.126% 8.27%
CBL 11.25% 9.61% 8.801% 9.51%
ABBL 12.73% 15.43% 13.853% 12.33%
average 10.87% 10.58% 9.637% 9.59%

Islamic Banks

2010 2011 2012 2013

IBBL 6.039% 8.348% 8.225% 7.962%
SIBL 7.675% 11.146% 9.910% 10.483%
EXIM 11.010% 11.155% 7.200% 8.821%
Shahjalal 8.588% 7.349% 8.842% 8.775%
average 8.328% 9.500% 29.278% 29.826%


Appendix 7 EQL

Conventional banks

2010 2011 2012 2013

SBL 19.37% 18.67% 16.273% 16.273%
PBL 13.53% 13.91% 14.471% 14.471%
NCCBL 16.49% 16.068% 16.068%
BAL 16.89% 16.55% 15.751% 15.751%
BBL 13.64% 12.30% 11.885% 11.885%
MBL 9.04% 13.13% 14.862% 14.862%
Prime 21.34% 18.36% 18.385% 18.385%
EBL 11.26% 12.75% 12.617% 12.617%
CBL 15.57% 14.36% 13.964% 13.964%
ABBL 20.02% 24.16% 23.413% 23.413%
average 15.63% 16.07% 15.769% 15.769%

Islamic Banks

2010 2011 2012 2013

IBBL 7.903% 10.679% 11.068% 11.174%
SIBL 12.161% 18.270% 14.624% 14.794%
EXIM 13.612% 14.754% 10.351% 13.681%
Shahjalal 11.197% 9.824% 13.824% 13.642%
average 11.218% 13.382% 45.330% 45.982%


Appendix 8 IMLGL

Conventional banks

2010 2011 2012 2013

SBL 4.26% 3.51% 4.469% 3.94%
PBL 4.66% 4.28% 5.388% 5.73%
NCCBL 2.67% 5.465% 5.52%
BAL 2.16% 2.86% 4.119% 3.47%
BBL 6.19% 6.14% 6.830% 7.45%
MBL 1.80% 2.45% 4.432% 4.58%
Prime 1.99% 1.93% 3.169% 3.58%
EBL 1.79% 2.61% 4.370% 4.77%
CBL 1.18% 1.37% 3.834% 5.09%
ABBL 4.42% 3.44% 7.477% 8.07%
average 3.16% 3.12% 4.955% 5.22%

Islamic Banks)

2010 2011 2012 2013

IBBL 2.711% 1.769% 3.392% 5.367%
SIBL 4.812% 3.964% 4.273% 3.671%
EXIM 1.989% 1.631% 2.955% 6.467%
Shahjalal 1.909% 1.889% 3.392% 5.367%
average 2.855% 2.313% 3.503% 5.218%


Appendix 9 CV

Conventional banks


SBL 36.839% 31.436% 17.810% 5.566% 6.611% 13.047% 8.283% 10.376%
PBL 75.216% 72.622% 28.328% 8.744% 10.501% 2.134% 7.744% 13.211%
NCCBL 46.850% 41.060% 12.615% 6.684% 8.027% 7.612% 1.789% 35.870%
BAL 72.748% 63.473% 20.942% 8.014% 6.200% 18.993% 13.544% 26.516%
BBL 62.852% 55.308% 4.672% 9.783% 10.162% 12.202% 9.501% 9.281%
MBL 50.654% 61.658% 2.342% 9.270% 6.827% 13.911% 20.753% 42.289%
Prime 32.009% 19.934% 8.956% 4.743% 7.381% 11.682% 7.547% 31.263%
EBL 24.541% 19.306% 5.610% 11.912% 11.306% 7.272% 9.149% 41.937%
CBL 44.570% 36.550% 9.524% 10.342% 10.960% 10.584% 8.642% 66.676%
ABBL 71.261% 72.317% 10.370% 6.227% 8.080% 10.219% 8.128% 38.703%
average 51.754% 47.367% 12.117% 8.128% 8.605% 10.766% 9.508% 31.612%

Islamic banks


IBBL 17.076% 21.740% 9.244% 3.966% 12.635% 14.152% 15.187% 31.777%
SIBL 10.707% 98.495% 33.481% 2.356% 2.449% 93.910% 93.198% 20.011%
EXIM 54.663% 51.506% 21.281% 7.768% 8.286% 5.316% 3.881% 44.295%
Shahjalal 47.479% 41.926% 24.964% 7.717% 6.846% 10.430% 15.166% 65.532%
average 32.481% 53.417% 22.243% 5.452% 7.554% 30.952% 31.858% 40.404%



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