Performance analysis of Islamic Banking and Conventional Banking

8/12/2019 Performance analysis of Islamic Banking and Conventional Banking

1/5

A Study on Performance Analysis of DSE Blue Chip

Listed Islamic and Conventional Banks of Bangladesh

Course title: Financial Institutions and MarketsCourse 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 6195 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


2/5

AbstractThe 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 profitmargin 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.

IntroductionFinancial 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 chargedover 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 ResearchThe 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 MethodologyThis 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.


3/5

Measures of PerformanceTo 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 isROA= Net profit/Total assets

Return on Equity (ROE): It is the rate of return to shareholders or the percentage return on each Tk ofequity 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 efficiencyin 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 isNet 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 isOperating 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. Theformula 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. Theformula 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 totalfixed 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 itstotal net assets to produce income. The formula is

Net assets turnover ratio formula = Total operating income / Net assets

Data Analysis and FindingsFinancial 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


4/5

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> IslamiBank>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 bankswhich 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 othersconventional 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 inefficiency 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.

..


5/5

APPENDIX

Documents

Performance analysis of Islamic Banking and Conventional Banking