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Performance of Islamic and Convent a Ion Banks in Pkaistan

Performance of Islamic and Convent a Ion Banks in Pkaistan

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Published by: ✬ SHANZA MALIK ✬ on Nov 10, 2011
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06/05/2013

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 1School of Technology and Society
 
   M   A   S   T   E   R   D   E   G   R   E   E   P   R   O   J   E   C   T
Performance of IslamicBanking and ConventionalBanking in Pakistan:
 A Comparative Study
 
 
Master Degree Project in Finance Advance Level/15p ECTSSpring Term 2008Muhammad Shehzad MoinSupervisor: Yinghong Chen, Ph. DExaminer: Max Zamanian, Ph. D
 
 
 1
ACKNOWLEDGEMENT
First of all I would like to thank my ALLAH Almighty Who gave me the courage, health,and energy to accomplish my thesis in due time and without Whose help this study whichrequired untiring efforts would have not been possible to complete within the time limits.Motivation, encouragement, guidance, corrections, advices, and overall support are thekey elements required from the supervisor(s) to write and complete a thesis of a goodstandard and a quality within deadlines. It is a matter of utmost pleasure for me to extendmy gratitude and give due credit to my supervisor Yinghong Chen whose support hasalways been there in need of time and who provided me with all these key elements tocomplete my dissertation within the time frame.Acknowledgement would be incomplete without extending my gratitude to one of myfriends in Pakistan Mr. Muhammad Mahmood Shah, Assistant professor and Unit Headof Institute of Islamic Economics at University of Management & Technology, whosemammoth help in data collection made this study possible. Moreover, he has beensupporting me enthusiastically throughout my work to make my thesis ready in due time.My thanks is also due to my examiner Max Zamanian whose valuable comments andsuggestions made colossal contribution in improving my dissertation.Last but not least, I extend my thanks to my entire family for moral support and prays for my health and successful completion of my dissertation within time limits.
August 2008Muhammad Shehzad Moin
 
 2
ABSTRACT
 
Islamic banking and finance in Pakistan started in 1977-78 with the elimination of 
interest 
 in compliance with the Principles of Islamic Shari’ah in Islamic banking practices. Since then, amendments infinancial system to allow the issuance of newinterest-free instrument of corporate financing, promulgation of ordinance to permit theestablishment of Mudaraba companies and floatation of Mudaraba Certificates,constitution of Commission for Transformation of Financial System (CTFS), and theestablishments of Islamic Banking Department by the State Bank of Pakistan are some of the key steps taken place by the governments.The aim of this study is to examine and to evaluate the performance of the first Islamic bank in Pakistan, i.e. Meezan Bank Limited (MBL) in comparison with that of a group of 5 Pakistani conventional banks. The study evaluates performance of the Islamic bank (MBL) in profitability, liquidity, risk, and efficiency for the period of 2003-2007.Financial ratios (12 in total) such as Return on Asset (ROA), Return on Equity (ROE),Loan to Deposit ratio (LDR), Loan to Assets ratio (LAR), Debt to Equity ratio (DER),Asset Utilization (AU), and Income to Expense ratio (IER) are used to assess banking performances. T-test and F-test are used in determining the significance of the differential performance of the two groups of banks. The study found that MBL is less profitable,more solvent (less risky), and also less efficient comparing to the average of the 5conventional banks. However, there was no significant difference in liquidity between thetwo sets of banks. The reasons are due to the facts that conventional banks in Pakistanhave longer history and experience in doing banking business and hold dominating position in the financial sector with its large share in the overall financial assets of Pakistan, as compared to Islamic banks, which in true sense, started only a few years back with all letter and spirit.Albeit, the study found that MBL is less profitable, more solvent (less risky), and lessefficient during 2003-2007, however, it is improving considerably over time indicatingconvergence with the performance of the conventional banks.

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