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FINANCIAL PERFORMANCE ANALYSIS OF ABANGLADESHI BANK

An Evaluation Based on CAMEL

Prepared by MD. MONIRUL ISLAM KHAN BBA, MBA Accounting & Information Systems University of Dhaka Bangladesh Email: monirais13@gmail.com

Abstract: Islamic Bank Bangladesh ltd. is conducting banking operation in Bangladesh for 28 years. This bank is growing day by day with high performance and increment in the number of customer. This bank does not guarantee to customers who deposit money with the bank rather it share risk with the customer by contracting to share loss with poor performance. This bank also share risk in lending of money to the borrower by sharing profit earned by him (her) or the business. Considering the rationale and importance of Islamic Bank Bangladesh Ltd.s principle of operation and its strong performance the author of the study has decided to analyze the performance and economic strength of Islamic Bank Bangladesh Ltd. The study intends to investigate the use of the CAMEL rating system in evaluating the IBBL performance. CAMEL is an international bank-rating system where bank supervisory authorities rate institutions according to five factors. The Five factors are represented by the acronym "CAMEL". The Five factors examined are Capital adequacy, Asset quality, Management quality, Earnings, Liquidity. The scope of this paper was to discuss and provide the CAMEL rating system in evaluating the financial performance of IBBL. The author of this paper analyzed the financial data for five years which is summarized as per the model of CAMEL and found that IBBL has scored the fair performance in 2006 and 2007 and satisfactory performance in 2007, 2008, and 2009. Fair performance indicates that performance is faulty if not corrected the problem will become severe in the future so supervisory action is essential and satisfactory performance indicates the sound and safe financial operation of the bank but few supervisory action is required to improve the performance more.

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Contents
ACKNOWLEDGEMENT .................................................................... Error! Bookmark not defined. 1 INTRODUCTION ..................................................................................................................... 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2 RATIONAL OF THE STUDY ........................................................................................... 3 RESEARCH AIM .............................................................................................................. 3 RESEARCH QUESTIONS ................................................................................................ 4 Research Hypothesis: ......................................................................................................... 4 SCOPE OF THE RESEARCH: .......................................................................................... 5 Limitation of study ............................................................................................................. 6 THESIS OUTLINE ............................................................................................................ 6

LITERATURE REVIEW: ......................................................................................................... 7 2.1 2.2 2.3 2.4 CAMEL rating system: ...................................................................................................... 7 Definition of Banking......................................................................................................... 7 Islamic Banking and Finance Defined ................................................................................ 8 Review of Previous Literature: ......................................................................................... 11

Research methodology ............................................................................................................. 17 3.1 3.2 Research methodology and approach ................................................................................ 17 Research method .............................................................................................................. 17 Research methodology and data accumulation .......................................................... 17 Reliability................................................................................................................. 18

3.2.1 3.2.2 3.3

CAMEL Ratios ................................................................................................................ 18 Capital Adequacy: .................................................................................................... 18 Asset Quality: ........................................................................................................... 19 Management efficiency ............................................................................................ 19 Earnings and Profitability: ........................................................................................ 20 Liquidity: ................................................................................................................. 20

3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.4 3.5 3.6 4

CAMEL NUMERICAL CLASSIFICATION: CLASSIFICATION DESCRIPTION......... 21 CAMELS AGGREGATE RATINGS ............................................................................... 21 Hypothesis Testing Procedure: ......................................................................................... 22

Analysis findings and conclusion ............................................................................................. 23 4.1 4.2 Capital Adequacy ............................................................................................................. 23 Asset Quality: .................................................................................................................. 25 iii

4.2.1 4.2.2 4.3 4.4

Non-performing Loan ratio (NPLR):......................................................................... 25 Productive assets ratio (PAR) ................................................................................... 27

Management efficiency .................................................................................................... 28 Earnings and Profitability ................................................................................................. 29 Return on Equity (ROE) ........................................................................................... 29 Return on Asset ........................................................................................................ 31 Net Interest Margin................................................................................................... 32

4.4.1 4.4.2 4.4.3 4.5

Liquidity .......................................................................................................................... 34 Cash to Total Assets (CTAR) ................................................................................... 34 Cash to total Deposit ratio: ....................................................................................... 35 Loan to Deposit Ratio: .............................................................................................. 36

4.5.1 4.5.2 4.5.3 4.6

Hypothesis Testing: .......................................................................................................... 38 Test 1 ....................................................................................................................... 38 Test 2 ....................................................................................................................... 40

4.6.1 4.6.2 5

Findings conclusion and recommendation ................................................................................ 41 5.1 5.2 Findings ........................................................................................................................... 41 Conclusion ....................................................................................................................... 44

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References ............................................................................................................................... 45 Appendices .............................................................................................................................. 49 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 Appendix: A .................................................................................................................... 49 Appendix B ...................................................................................................................... 52 Appendix C ...................................................................................................................... 53 Appendix D...................................................................................................................... 54 Appendix E ...................................................................................................................... 56 Appendix F ...................................................................................................................... 57 Appendix G...................................................................................................................... 58 Appendix H...................................................................................................................... 59 Appendix I ....................................................................................................................... 60 Appendix J ....................................................................................................................... 62

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INTRODUCTION

Banking industry influences financial and economic sector throughout the world. The fundamental activities of a bank is to take deposit from the people who have surplus amount of money and then allocate this deposit as loan to the people who are in need of money for the investment and this people are willing to pay certain amount of interest against this loan. Interest of widespread assortment of people depends on the banks process and performance. The day to day activities of banks for upholding the security of depositors is monitored by the regulators. Banks and financial institutions hold around 90% of different types of financial assets of Bangladesh, the growth of GDP of Bangladesh and employment are largely dependent on this sort of financial institutions. In general the economic performance is affected by the banking sector so it is very important to measure the routine of these financial institutions. When bank failure is enhanced throughout the world due to very poor performance then it is highly expected to measure the performance of banking activities. Many economic components have a strong affiliation with Banks where it results different sort of problems in the assessment of banks efficiency. Banks also involved in different sort of social wellbeing and with the help of this ensuring the proper economic growth. In addition, the bank has started to form worldwide which is quite sensitive as consequently extremely monitored, client motivated and mechanically complicated financial organization. In this sector the competition is getting higher and higher for that reason the different sort of financial institutions are going for the consolidation, decentralization, globalization and frequently enhancing the Islamic banking services simultaneously the interest rate is getting higher. Performance assessment of banks is significant for all whoever the parties are like investors, depositors, bank executives, or controllers. A highly competitive financial market can have the direction whether one should deposit or invest his money elsewhere except bank. Depositors are willing to get higher rate of return so they are ardently want to evaluate the performance of bank. Managers of the bank are very ardent to outweigh the preceding performance of managerial decision and to improve its finance they evaluate to improve the loan services. Bank regulators are required to evaluate the performance of banking institution which are in severe problem and take some initiatives to get out of this problem. importunate

performance monitoring is significant as current troubles may stay unobserved and can direct to financial breakdown in the prospect or else. In Bangladesh for 28 years, Islamic Bank Bangladesh ltd. is operating its banking activities. This bank is striving to get higher position in banking industries and thereupon it is enhancing its extraordinary services for the customers. In the government economy this bank has a very influential role. Islamic Bank Bangladesh Ltd. follows the Islamic banking systems where there is no conventional interest taking banking they focus on investment and a portion of the investment income is given to the depositors. This bank never give any sort of guarantee to their customers rather they invest the depositors fund to elsewhere where there is same level of risk and gain and those risk and profit is shared with the customers. This bank at the same time while lending the fund takes the same level of risk as borrowers are going to generate and profit as well. BACKGROUND OF THE STUDY Bangladeshi Banking system is diverse where the ownership of these institutions is like private owned, govt. owned, & foreign owned commercial banks. In Bangladesh, central bank is Bangladesh Bank. Bangladesh Bank is liable for the monetary policy of Bangladesh and it regulates and controls all the commercial bank of this country. After war of liberation, Bangladesh firstly nationalized the banking of domestic region and thenceforth now different banks are getting renamed. After nineteen eighties, the overall banking system modified with the help of Privatization assertion of commercial banks. Now in Bangladesh, there are four states owned banks, thirty private commercial banks, four specialized banks and nine foreign banks. Creditors, debtors, government, Regulators, depositors, investors, bank managers and owners are very much ardent to know about the financial performance of bank. For example with the help of this investors and the debtors can take the decision about should they invest their fund in bank or elsewhere.

PROBLEM STATEMENT In Bangladesh because of very small economy most of the people relies on the agricultural income. Here it is not that much familiar that people are willing to deposit their fund in bank for the investment purpose. In this country capital market is not that much efficient and is biased with some dominating person. Nevertheless banks of this country are acting well to overcome all the hindrances. Now in this study the matter of concern is depicting the financial performance of a bank. In order to make easy conclusion creation for creditors, investors, stakeholders and depositors, the paper looking forward to make out and elucidate the performance of IBBL. The stakeholders hang about dubiety about the viability of such a system because of unfinished and often indistinct knowledge about Islamic banking. Islamicbanking practices will grow further in many Muslim countries if the people are going to be convinced about their performance, activities and distinctiveness of the system.

1.1 RATIONAL OF THE STUDY To develop an economy banking system is vital factor because bank is acting like an intermediary who runs to collect the fund from the surplus units and give the loan to the deficit units and thereupon efficient allocation of resources can be made. To maximize the wealth of lender and borrower, Bank plays an important role. There are two types of banking system in Bangladesh which are Islamic banking another one is conventional banking system. In conventional banking system interest is the preliminary sources of bank income but in the Islamic banking system there are no interest income rather they have the major income from investment. Islamic Bank Bangladesh Ltd. is operating its banking activities very well without taking any help of interest based concept. For that reason this study is very much rational and relevant for the new dimension of the global economy. To examine the performance of IBBL the wide data based study has been demeanor.

1.2 RESEARCH AIM The main perspective of this research is to find out the financial performance of a bank in compare to conventional banking system simultaneously to identify the actual pros and cons of different sort of lack in Islamic banking activities especially in the developing clime with
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the help of different financial tools like efficiency of capital management, asset quality and credit risks and so on.

RESEARCH OBJECTIVE: The major purpose of this study is to examine the financial recital of Islamic Bank Bangladesh Ltd. which has been chosen for the evaluation of banking system in Bangladesh. Different sort of ratios will be calculated for the proper evaluation, so the tools which are going to be used here are earning ratio, management efficiency ratio, liquidity ratio, asset quality ratio, and capital adequacy ratio. The given objective will be the main concern: Identifying the efficient management of capital of IBBL. Asset quality measurement and credit risk management of IBBL. Management efficiency measurement of the bank. Evaluating the profitability of the bank. Position of liquidity of the bank. 1.3 RESEARCH QUESTIONS This planned study is going to be analyzed regarding the performance of the financial activities of Islamic Bank Bangladesh Ltd. So the study constitute of some questions which are given below: How is the capital been managed by IBBL? What about the assets quality and the credit risk? What about the extent of management efficiency of the bank? What about the banks profitability status? What about the banks liquidity position? Does the conventional banks performance outweigh the performance of Islamic banks? CAMEL analysis will be exercised gathering the fiscal data of the bank for last ten years to get the result of the affirmed problems.

1.4 Research Hypothesis:


Following hypotheses will be tested for the research: Hypothesis 1: There are no differences in ROE in Islamic bank and conventional banking system.

Hypothesis 2: Islamic bank generates a lower ROE in compare to a conventional bank.

1.5 SCOPE OF THE RESEARCH: To analyze the financial statements, from 2006 to 2010 financial statements of IBBL are collected. IBBL is interest free banking system. To determine the recital and competence of IBBL, CAMEL ratios are to be calculated. To have the glance of trends of the bank the method of trend analysis can be utilized. To get the exact indication this sort of ratios is used and to identify the precursory this calculation is very important. To the new prospect this trend analysis illustrates about effective bank resonance. Literature review helps to get some theoretical assistance relevant with the ongoing study. There are some tables and graphs which are given to show the aftermath of this study. With the help of these financial statements of the bank the performance can be measured. CAMEL is widely used in USA, with the help of this tool the analysis will be completed for the global acceptance. CAMEL stands for Capital adequacy, Asset Quality, Management efficiency, Earnings and Liquidity. Capital Adequacy Ratio helps to identify the Banks capital. Through analyzing the Capital adequacy ratios a bank can know its efficient capital management. When principal or payment of interest is past due for additional 90 days then it is known as the Non-performing loans. Efficiency of the bank in running loans will be denoted if the ratio expresses the lower, which also indicates the high assets quality. When the bank experience higher NPLR, it indicates higher degree of risks to the bank. There are given formula which is used for the calculation of NPLR Efficiency ratios which is used to efficiency in management and controlling assets. These sort of ratios helps to get the result about the overall competencies of the concern in using its assets for generating the revenues, assets quality and efficiency in liquidity management, the earlier imbursement to suppliers of the concern, efficiency in the inventory management performances, and also the effectiveness in monitoring and controlling the expenses of the bank. To evaluate the capability of the business the profitability ratios are considered, to produce income in contrast with its all operating costs and other applicable costs throughout a detailed time phase. The basic bank financial ratio is the Profitability ratios, which is used to get the knowledge about the profit based performance of the bank. A commercial bank is relies largely on Liquidity. Cash availability is main thing about Liquidity which expresses the ability of bank to make a conversion of its assets into cash while it is required to make clear the client demand or any sort of other liabilities. A

number of financial ratios will be considered for the evolution of banking performance with the help of CAMEL and the proper condition of IBBL would be elucidated.

1.6

Limitation of study

The paper is about to demonstrate the performance and efficiency of bank but there is a little space for the investors decision making as well as the decision making of creditors, depositors and stakeholders. There are some distortion about the Islamic financial system and lack of knowledge about the Islamic banking system. In many Muslim countries the practices of Islamic banking system would be enhanced if the people are being convinced. There are some draw backs in this study. Here the CAMEL methods are used for the ratio analysis because of evaluating the performance of Islamic Bank Bangladesh Ltd. To calculate the ratio some problems are obtained. Appropriate ratio is to be determined for the proper evaluation of the bank so there was some problem because there are some differences between conventional banking system and Islamic banking system. To eliminate the problem it is required to choose CAMEL ratios for the determination of the banking performance and this ratio is widely used in the UK. Here one major problem is the ratio is not expresses all the determinants, it is only concern about the five major types of ratio. To get the appropriate result the input data should not be manipulated there must be paid heed thereupon the information of the financial statement is authentic. Sometimes it was difficult to find out the exact calculation and comparison for the unavailable data. Eventually in this paper any comparison is made with the conventional bank and Islamic bank Bangladesh Ltd.

1.7 THESIS OUTLINE The study constitute of five chapters which are introduction, literature review, methodology, result and analysis, conclusion and recommendation, list of reference. Chapter 1 - Introduction: In the introduction general explanation is given and thesis questioners and objectives, limitations are elucidated. Chapter 2 - Literature Review: there are several articles regarding the thesis topic. From those articles some theoretical description about the topic of the report.

Chapter 3 Methodology: in this segment the data collection process, different model and formula of the report is briefly depicted. Chapter 4- Result and analysis: In this segment of the report the calculations are made and different graphical presentation is given, some comparisons are made, aftermath is elucidated. Chapter 5- Finding and Conclusion: in the final segment of the report the conclusion is made and some recommendations are given based on findings.

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LITERATURE REVIEW: CAMEL rating system:

In November 13 1979, the Federal Financial Institution Examination Council accepted the Uniform Financial Institution Rating system which is usually known as CAMEL rating, and then in October 1987, accepted by the National Credit Union Administration. It is known as the very effective and emphatic evaluation tool for the financial institutions. In Barr et al. (2002 p.19) here given that CAMEL rating is a very precious and important tool for the regulators of banking industry. With the help of this ratio one can easily derive what is about the bank financial conditions and side by side it can easily be compared with other relevant field. Here all the financial statements are needed for the calculations for instance profit and loss account, balance sheet and to determine the adequacy cash flow statement is also required. So it is actually can express a true picture of the concern so that this is widely accepted tools to the regulatory authority. There are five components of CAMEL which are given below-

Capital adequacy. Asset quality. Management quality. Earning ability. Liquidity. 2.2 Definition of Banking The Italian word banca is the ancient term of Bank which is meant bench. Bench means the table which is used for the money dealing by the dealer. Bank is the financial intermediaries which are concerned about the collection of fund and allocation of the fund to the different sort of investors. Banks impose high rate of interest in case of providing loan and lower rate of interest in case of deposits.
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Merriam-Websters online dictionary, elucidates bank as a institutions which are involved in some different sort of activities like transforming the fund, custody of money, loan, issue etc.

According to Oxford English Dictionary, Bank is such kind of institutions which provides different financial services to its customer and in exchange of it charges interest. In accordance with Banking Companies Ordinance (1962), bank is an institution which accepts fund from its client as deposit and then this deposit is used to give loan to other client who are in need of money in exchange of interest, and bank also issue cheque.

2.3 Islamic Banking and Finance Defined Islamic banking is a banking system which is concerned about the Islamic rules and regulations in banking activities. Here in financial statement no interest is considered because where every conventional bank gets their major income from the interest in Islamic bank their major income comes from the investment income. Islamic banking system not only avoids the interest but also they deny practicing all other unethical activities in banking industries. The Islamic rules and regulation guide the Islamic baking. Islamic economics focus on the efficient allocation of existing resources where each and every people can have the chance to be prosperous. Efficient allocation of return is the main motto of Islamic bank. Islamic financial system can be established with the help of Islamic banking. Islamic bank cannot provide interest but what they can do is profit sharing. Two basic principles are exists in the Islamic banking system. First one is about the system of profit and loss sharing and second one is about proscribe of any transaction about interest. For instance: in Sura An-Nisa (4:161) it is clearly said that one should not take any extra advantages like as interest if anyone is involved in such types of evil does then he will be punished. There are no differences in the purpose of Islamic banking and the conventional banking system. To generate more funds a bank should lend its fund to the outsides. But the

differences is created through the impose of profit sharing tactics that means Islamic bank can lend the fund to the outsiders but in exchange of it the can have the profit on the other hand if the bank or borrower experiences loss then that would also be allocated with the relative parties.

In an Islamic mortgage deal, as an alternative of loaning the purchaser funds to buy the piece, a bank can purchase the piece from the vendor, and also can re-sell it to the purchaser at a yield, while the buyer is permitted to disburse the bank in partly. Nevertheless, there are no additional late payment penalties because the profit of the bank cannot be overt. For avoiding the default risk the bank asked for the collateral. Collateral means something which has the good market value and which is easy to convert into cash and this assets could be given to the bank or the ownership of this assets can be hold by the bank to sanction the loan for the safety. Some Islamic banks used an innovative approach for home loans, named Musharaka alMutanaqisa, where a floating rate is used that takes rental form. In this system, a partnership entity is formed by the bank and the borrower where both the party supplies capital at a fixed percentage for buying the property. Then the property is rented to the borrower by the partnership entity which charges rent for the property. This rent is distributed between the borrower and the bank based on their equity share provided earlier. Besides paying the rent, the borrower also makes an agreement with the bank for purchasing the share of the bank in the property. The payments are made at agreed installments at fixed intervals and after paying the full price for banks portion the ownership is transferred to the borrower and the partnership is ended. If the borrower makes any default in payment of installments, the property is sold to a third party and both the bank and the borrower will receive the sale proceeds based on their earlier equity portion. By following this method the floating rates can be used in Islamic banking system where this rate is based on base lending rate. This method is useful in the countries using dual-banking system like Malaysia. Besides above there are some other methods used by Islamic banks in business transactions. One such method is called Musharaka, where floating rates are used by Islamic banks by pegging this rate to the rate of return of the borrowing entity. So, the return on the loan is same as a certain percent of borrowing entitys profit. When the borrower pays the principal amount, the bank concludes the profit sharing arrangement. There is another method which is called Mudaraba, where a venture capital funding system is used for making investment by the bank. In Mudaraba method a business or venture is funded by the bank where the entrepreneur gives only labor. In this method both profit and risks are shared by both parties. This system of participating both risk and profit is supported by the Islamic view of balanced distribution of income where the lender also take the risk of failure which prevents the lender from monopolizing the economy.
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There is another method which is called Mudaraba, where a venture capital funding system is used for making investment by the bank. In Mudaraba method a business or venture is funded by the bank where the entrepreneur gives only labor. In this method both profit and risks are shared by both parties. This system of participating both risk and profit is supported by the Islamic view of balanced distribution of income where the lender also take the risk of failure which prevents the lender from monopolizing the economy.

Islamic banks can only invest in Islamically approved ventures and cannot invest in the ventures including the alcohol, pork, gambling etc. This promotes the islamic principle of moral purchasing and ethical investing. Although Islamic banks have grown rapidly in the Muslim world, still they have a very tiny portion of global banking system. Micro-lending institutions like Grameen Bank are founded by Muslims. These institutions practice conventional banking systems and are also well accepted in some Muslim countries like Bangladesh. Although it is argued that due to lack of collateral and mild interest in micro-lending is compatible with the Islamic rule of prohibiting usury, it is not truly Islamic banking system.

Islamic Banking in Bangladesh: The Origin


Interest based banking system is inherited by Bangladesh from its very origin. This system was introduced in the British Colonial age when this country was a part of British Colony. After the inception of Bangladesh as an independent country it saw a new trend in world economy: the origin and development of Islamic banking system in the world. Islamic banking system was initiated at first in Egypt. After the successful initiation in Egypt, a number of Islamic banks have been established in different countries and Islamic Development Bank was established during 1970s. In Bangladesh, several Islamic groups were working for establishing Islam in the society as the complete code of life. The idea of establishing Islamic banks became as a great opportunity to them. Two organizations Islamic Economics Research Bureau (IERB) and Bangladesh Islamic Bankers Association (BIBA) were the leading bodies who had taken some real steps for disseminating Islamic banking knowledge among the several groups of bankers in Bangladesh by arranging some national and international seminars. These seminars were arranged for mobilizing foreign and home people and domestic and international investment to establish an Islamic bank in Bangladesh. This effort was
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accelerated by the organization of muslim business persons named Muslim Businessman Society (MBS). This body helped mobilize equity capital for establishing an Islamic bank. As a result of the relentless hard working by these groups and the support of government an Islamic bank was established in Bangladesh in early 1980s. Islamic banks have been conducting its activities in Bangladesh for about 20 years besides the traditional banks. There are only six full Islamic banks in Bangladesh where there are 42 conventional banks are operating there. Besides this some traditional banks have Islamic banking branches. These banks conduct their operations like traditional banks but these branches are operated based on Islamic Shariah. Islamic banks takes deposits and provides loans like traditional commercial banks but they operate in islamic system that is different from conventional banks. Following six banks are operating at present as fully fledged islamic banks in Bangladesh: Islami Bank Bangladesh Limited (IBBL); Al-Arafah Islami Bank Limited; Shahjalal Islami Bank Limited; Social Islami Bank Limited; Exim Bank Limited and First Security Islami Bank Limited. 2.4 Review of Previous Literature:

Many researches have been conducted on European and American banking sector over past years. These works have been conducted to analyze the performance and efficiency of conventional banks. Few researchers worked on the Islamic banks performances in Bangladesh. The work on this topic is in its infancy in Bangladesh. But several works have been conducted in Pakistan on performance and efficiency of Islamic banks and differences between Islamic and conventional banking.

The characteristics of Islamic banks and conventional banks were studied by Metwally, (1997), who tested economic features of these banks based on liquidity, profitability, leverage and credit risk. He used two year data (1992-1994) for his research. He used statistical

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techniques for analyzing data and concluded that there are no significant differences between Islamic banks and conventional banks.

Sarker (1999) also worked on the efficiency of Islamic banks. For measuring the performance fo Islamic banks he used banking efficiency model. He said that Islamic banks are also efficient like conventional banks and they can sustain besides conventional banks. He also found that Islamic banks follow the joint venture profit sharing model of conventional banks in financing. He argued that the financing of Islamic banks are less regulated but regulation is necessary due to the inherent risk of the financial products of Islamic banks.

Ahmad and Hassan (2007) conducted a study on the performance and regulations of Islamic banks. They found that Islamic banks are lacking of regulatory framework for conducting their operation based on Shariah. Islamic banks are also suffering from lack of interbank money market that has impact on the performance of these banks. The reserve requirement for Islamic banks are lower than conventional banks. It is suggested that an independent banking act should be constituted for Islamic banks to guide, supervise and control the operations of them for providing legal supports to the stake holders of Islamic banks. As it is said that only change is constant, it is needed to make some innovations in conventional banking system. Conventional banking practices have been followed in every corner of the world, so innovation is necessary in this banking system. For meeting the need of innovation many conventional banks have initiated islamic banking and many Islamic banks have been established all around the world. Since Islamic banking sector has not been developed too much it is facing some challenges (Ahmad & Hassan, 2007). One researcher conducted a study on the opportunities and problems faced by Islamic banks. This study has been conducted in the United Kingdom. Senior bank officials provided the data. The main problem faced by the islamic banking activities are heterogeneous clients. Besides this islamic banking sector in UK is suffering from lack of expert employees and heavy competition. The researchers concluded that for the success of Islamic banking ebanking can play vital role. For the development of Islamic banking in UK it is required that Islamic banking representatives and UK officials sit together. Professional individuals need to be recruited to develop this sector. The problems in Islamic banking sector can resolve by following such strategies.
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In Islamic banking Malaysia played a very important role. It also concerned about both of the method which is conventional and pure Islamic banking, sometimes there are dual method as well. With the help of the policy makers Islamic banking is required to be changed to become more effective and efficacious, Even though the Islamic banking system is going good. A strong legal framework is essential for the further progress of the Islamic banking system. New innovations are required as an alternative of prohibition. The probability and knowledge of Shariah is needed to be explored. With the help of Shariah scholars, academicians, researchers, the outstanding and distinctive banking support based on Islamic view can be incorporated. The government of each and every Muslim country can take a pace to establish a new era for the Islamic banking in this competitive conventional banking arena. It is very important to focus that the doubt about Islamic hire acquire should be removed by the government (El-Din, S, Abdullah N.I, 2007). Economically, financially and politically, we are affected through the Globalization. There are two different aspects in the globalization. According to positive aspects, throughout the world the new technology, new innovation, new tradition, culture, customs are introduced which will help in further expansion of business in outside the home country. In case of negative aspects we can say that the government is in complex situation to make an arrangement of flow of capital. The price of oil influences the investment in GCC countries and also optimistic about the Islamic finance (Garas, N.S, 2007). It undoubtedly true that some problems are being experienced by the Islamic financial institutions nevertheless they will go long way because they have the potentiality and strong growth. There are only two sorts of challenges which are interior and exterior. The customers still depended on the usual banking system and it is not enough to convene the necessities to global dealings interior challenges what the current IFIs is. In addition the transaction system is not well furnished to capture the customer demand. The product are seems to be different in different country for that reason it is another lack which is considered as the external factor. To decrease breach and reinforce the procedure to go into in the global marketplace the IFIs is supposed to set up the effectual message scheme. In global market Islamic banking system is getting very popular because of its some very attractive offerings and based on its services its growth is getting faster and faster. Nowadays In all over the world the practices of Islamic banking are intense especially in the Muslim country. Nevertheless it is required to have the institutional pact to take part in the worldwide
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financial system. The compatibility of Shariah be supposed to be evaluated by the skilled Shariah researchers due to in any checkup trouble the human being will check with the therapeutic expert to have the optimum result. For that reason in case of shariah, any sort of difficulties or ambiguity will be diminished by the experts of shariah. (Khan, F.M 2007). With the help of this a important institutional arrangement can be made. (Khan, F.M 2007). By evaluating the fiscal evidence of seven banks an additional study has been introduced in Malaysia and Bahrain. The main objective of this article is to elucidate the Islamic product in financial institutions and the variability of this product. Here it explains that Zakat is paid by the Islamic banks and they finance it through the activities relative to Shariah. Nonetheless it is very much important to focus on the legal framework for the financial product of Islamic institution. (Samad, A. Gardner, D. & Cook, J.B. 2008) In this rapidly growing world, Islamic banking is required to be thoughtful about the distinctive competencies. The arrangement for achievement in prospect is also needed to be redefined. usual banking respected the Islamic banking system and to develop into main stream banking it also looking for new path. To adapt with new venture the Islamic banks are supposed to improve their competencies. For the continued existence in this epoch amalgamation is obligatory for the Islamic banks (Kahf, M 2002). Classification of the determinant of the productivity is more significant for the researches. Many researches have been conducted on the productivity of banks but those studies were on the productivity of conventional banks. It has taken time to start research on the productivity of Islamic banks. Kahf (2002) conducted such research. Haron (2004) also conducted research on the determinants of productivity of Islamic banks. Haron found that money supply also acts a significant character for the productivity of the Islamic banks With the fast growth of Islamic banks the necessities of measuring the performance of Islamic banks have been flourished rapidly. Hassan & Zubair (2007) told that social and legal factors should also be considered while measuring performance. Islamic banks have also fault like the conventional banks. In their researchers calculated some ratios to measure the performance of the Islamic banks. With the ratios of present Islamic banking the traditional banking has also been compared (Zubair & Hassan 2007). An experiential study has been conducted by using experiential data on Islamic Banking in 1990-1998. In this study it is found that Islamic banks have slower growth than conventional
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banks but at the starting phases of any industry the growth remains low. So, it needs not to be worried about the growth of Islamic banks because the industry will have higher growth when the maturity of the industry increases. It is found that mobilization of funds in the muslim society was very difficult in the earlier period of banking system, because in Islamic Shariah interest is not permitted. Muslims preferred keeping their savings in lockers rather than putting them in banking system (Iqbal, M. 2001). But in later period conventional banks successfully attracted some savings of Muslims. But when Islamic banks were introduced they became successful to draw the savings of Muslims from private lockers to Banks. By observing such success of Islamic banks in Muslim world many conventional banks started offering Islamic banking products (Iqbal, M. 2001). The Islamic mutual finances were also established in nineties and few deposits also changed to that side. Islamic banks found good capitalize, stable and profitable when their presentation judged much good. (Iqbal, M. 2001). Global standards have been followed by researchers to find the productivity ratio of banks. But at present the productivity of conventional banks has become lower day by day. The productivity of Islamic banks has been increasing gradually (Iqbal, M. 2001). Another study conducted by Abdus, S (2004) on liquidity and productivity of Islamic banks found that there is no significant difference between the productivity of conventional and Islamic banks. Another document concludes that there is no difference between Islamic & conventional banks with respect to productivity and liquidity. However the studies find major variation in credit performance. For surviving in the long run it requires innovation and Islamic banking is an innovation in the banking sector. In the primary stages Islamic banks faced many problems. The problems primarily faced by Islamic banks were the narrow border and unavailability of interbank money market. Islamic banks face same type of risks like conventional banks. So, It is recommended by Basel II that Islamic banks should calculate the risk capital like interest based banks. How the efficiency of Islamic banks can be raised it needs to rethink. In this study it is tried to find out how IBBL is conducting its operations and what its performance is. A study was conducted by Bashir (2003) on the determinants of performance of 18 islamic banks of 8 Middle Eastern countries. These countries include Bahrain, Kuwait, Jordan, Qatar, United Arab Emirates, Turkey, Sudan and Egypt. The study was conducted based on the data from 1993 to 1998. Four performance indexes were used by the study e.g. profit before tax to total assets, non-interest margin, ROA and ROE. The study used several other internal and
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external characteristics for finding the determinants of performance. Through regression analysis the study found positive relationship between loan to assets and capital to assets ratio and the performance of Islamic banks. The researcher found that domestic banks are less profitable than foreign banks. Good macroeconomic condition has positive impact and taxes have negative impact on the profitability of Islamic banks. A complementary relationship between banks performance and stock market has been found in the study Bashir (2003). The efficiency of Islamic banks has been measured in the study of Brown (2003), where the performance of Islamic banks has been measured over the period 1998-2001. The writer used Data Envelopment Analysis method and ratio analysis for the study. The study was conducted on the 19 countries chosen from North Africa, Asia and Middle East. The study showed that Iran, Kuwait and Saudi Arabia have the largest asset size in Islamic banking sector. Iran is the most cost efficient country while having lower equity and Saudi Arabia has the largest equity banks. The profitability varied across the countries in year by year. The most liquid market was found in Bahamas. It is found that cost efficiency scores are not highly correlated with standard cost efficiency measurements (Brown, 2003). Another study was conducted Alkassim (2005) on the profitability of Islamic banks. In his study the researcher used 18 conventional banks and 16 Islamic banks situated in Gulf counties. The data use over the period 1997 to 2004. A multiple regression analysis was used for measuring the determinants of profitability. Nine variables including profitability measures and bank characteristics were used for measuring the performance. It was found that the size of the banks have negative impact on the performance of conventional banks while having positive impact on Islamic banks performance. Non Islamic banks have more operating expenses than Islamic banks. The operating expense have negative correlation with Conventional banks performance while having positive correlation with Islamic banks performance (Alkassim 2005). Kuppusamy et.al (2010) conducted a study on four Islamic banks from Bahrain, Jordan, Malaysia and Kuwait for measuring the performance of these Islamic banks using a Shariah conformity model. The performance is measured for the period 2001-2004. The researchers developed a shariah conformity and Profitability (SCnP) model which included the conventional profitability and performance measures with Shariah compliance measures for measuring the socio-economic condition of the banks. The performance measurement ratios such as return on equity, return on assets and profit margin indicators were used in the study. It was found that the most of the banks in the sample had good shariah compliance and high profitability. The bank which had low profitability also had low shariah compliance. This indicates Islamic banks have high profitability and good shariah compliance (Kuppusamy et.al 2010)

It is establish from the argument of above text that many studies have been conducted on the performance analysis and the differences between islamic banks and conventional banks. Previous researchers used ratio analyses and other statistical techniques to show the
16

differences. But I have found no work to differentiate the act and growth of Islamic banks with the conventional complement based on CAMEL ratio in the viewpoint of Bangladesh. CAMEL ratio is used in several studies in India, Pakistan and Middle East countries. I have realized that besides computing the performance of IBBL using CAMEL framework it is also necessary to find out the differences between the performances of Islamic banks and conventional banks in Bangladesh. Thats why I have chosen three Islamic banks and three conventional banks from Bangladesh and become interested to evaluate the performance of IBBL and conduct an analysis that will show the differences between the performance of Islamic banks and conventional banks.

Research methodology

3.1 Research methodology and approach The main objective o f this case study is to evaluate CAMEL rating procedure in IBBL achievement evaluation. At the starting point, the way of deductive theory is followed by the study that states the commonest view of the nature of the relationship between theory and research; or in other words, theory guides the research (by Allan and Emma, in the year 2003). Collecting theory germane to the historical research is firstly started by the research paper, and then synopsis from the derivation by tagging them back to the literature displayed before is drawn. With a view to identifying the research queries and answering the research purposes in a germane procedure this research paper is designed. The significance and ability of the research paper in answering to the investigation query similar to why, how, and what is highlighted by the activities of Saunders, Lewis, and Thornhill (2009, p. 146). Bell (2005) on the other hand says that individual researchers can be benefited by using case study approach of research that facilitates the study of one aspect of a problem within a short time period. Alan and Emma (2003) also state that the whole and comprehensive research of one case that may be one institution, a sole place, a single man, and a sole affair is contained by the research paper. The research conducted here is IBBL since this is a sole institution. In the slight way, to fulfill the purpose of this case study as it maintains the speculativesubtractive sense by first selecting the speculations and then trying to assess those analysis methodologies as subtractive research paper has been taken (Lee 1989.) 3.2 Research method

3.2.1 Research methodology and data accumulation Analysis methodology is nothing but normally procedures for gathering information that may be assisted with several types of analysis model defined by Alan and Emma (2003). In the purpose of this analysis, in order to dealing with several parts of analysis difficulties the
17

research paper implies the characterized information accumulation procedures and data research systems. This is characterized analysis though this research is established on gathered information as mathematical numbers. Inventory motives (speculation-gathering), combining with the non-mathematical information is goaled for the characterized methodology. This is mainly accepted not for designed and synchronized in computer software system but for normally aiding analyst to improve the idea from his or her information (Saunders, Lewis, and Thornhill, 2009, p. 414 and 480). Especially in the historical analysis Preliminary information accumulated by the analyst is provided. Since preliminary this is gathered by the provider to adjust the analysts purpose the most the preliminary information is better than second level information. the comprehensive mathematical information gathered from institutions yearly publications, financing ways, plans and fund flow, indicated by the preliminary information that hold institution-wise changing figures in the contemporary four-year time(2005-2010).Counting data and pictures, the alternative information is mainly displayed in the qualitative revision of the analysis, Opposite to the preliminary information. From several point of books, editorials, workings, market analysis, and other online point the accumulation of those information comes. like as the preliminary information this kind of information works to help answer to analysis query.

3.2.2 Reliability Easterby-Smith et al. (2008, p. 109) says that specified dependability is what weather other analysis methodologies produce the effect to that is same to what has been completed previously. In this fact from the clearance and reliability of the financial figures this may derive mathematical dependability since they are probably duplicated based on the aim of the analyst to generate the effects. Prior to submitting to the highest managerial level the main statements of the bank research must be kept and signed by the portfolio manager. 3.3 CAMEL Ratios Bank maintenance bodies classified banks following 5 variables which are called worldwide bank-rating procedure CAMEL. The abbreviation "CAMEL" shows five factors. These 5 variables assessed are as bellow: C - Capital availability A - Asset standard M Managements performance E - Earnings L - Liquidity 3.3.1 Capital Adequacy: For each bank for realizing any damage adequate fund is necessary. Fund Availability Ratio is used to justify Banks fund. How strongly banks sustain its fund is measured by Capital
18

adequacy. Fund availability ratio also justifies how much capital separated for each part of Risk weighted asset. The volume of capital is justified by this. Banks customers get pleasure from a better capital base. Capital-adequacy ratios cover most financial risks by assigning risk weightings to the institutions assets. Weather a bank has capacity to pay financial obligations and to take risk is also determined by this ratio. This ratio is shown bellow:

( 1 & )

3.3.2 Asset Quality: In 2007 Grier said that, poor asset quality is the major cause of most bank failures. The common necessary asset type of asset for the bank is the loan; the risk of loan default occurred from the defaulter loans are the most risk handling of the bank. After completing the credit risk determination and analyzing the standard of loan by utilizing trend analysis and peer comparison the credit manager ought to run the asset standard test. Since asset standard is mainly derivative of the researchers functionality it is difficult to measure. One of the most common risks for banks is Credit risk. By ensuring the best standard of asset Credit risk can be minimized. Generally good standard is indicated by becoming marketable, and better productive. The prime point of banking trouble that diminishes the profit generating capacity of banks is the devaluation of assets written-off price matching to capital. The major evaluator of assets standard can be nonfunctioning loans to progress, recaptures to bad loan ratios and bad loan to complete progress. The lower liquidity of the bank is mainly indicated by poor assets standard moreover this appears as a risk for the earnings of bank customer. To conduct this research for determining asset standard 2 ratios are mainly used. One is Non-functioning loan ratio and another is productive asset ratio. () = () =
3.3.3 Management efficiency

According to Grier (2007) in the CAMEL rating procedure manager level is taken as a core major component since a major effect in a banks success is played by them; moreover, this is noted to determine the asset standard. Manager level performance is mainly determined by using efficacy ratios. Whole firms performance in terms of efficiency and effectiveness in minimizing expenses and maximizing assets is measured by this ratio. Daily activities efficiency ratio is used not only to determine the effectiveness of manager level of Islamic banks but also for conventional banks as well. Operating expenses is divided by the Operating revenue to determine Operating efficiency ratio. To create $1 of operating
19

revenues how much operating expenses occurred is mainly indicated by this ratio. The fewer the ratio the greater the efficiency is. Determining procedure of operating efficiency is shown here:

Several items such as interest income, service fees, and income from investment are needed to determine Operating revenue. Expenses those occurred for running office operations are called operating expenses. 3.3.4 Earnings and Profitability: In 2007 Grier also said that, growing customers credibility in bank, absorbing default loan and providing adequate balance is built by a systematic earnings. For helping give shareholder profit and for an even financial system continuous profit is important. For this to sustain a bank continuous earnings is necessary. The performance of a bank to create earnings from income and assets is mainly determined by Profitability ratios. A bank can strengthen its capital base by increasing the Earnings and profitability. Earnings and profitability also helps next years operating capacity of an institution. To determine earnings capacity of a bank several types of variables may be used. Most common three areReturn on Equity (ROE), Return on Assets (ROA) and Net Interest Margins (NIM). = = ()

Gross interest income minus interest expense to customers is called Net interest. Gross investment income minus profit to customers is called Net investment income In case of Islamic banks. If interest rate is higher the income and profit of the bank will be higher. 3.3.5 Liquidity:
Liquidity is the heart of a bank. We mean by liquidity that how quick a bank can convert its assets into cash without losing value. In case of commercial banks the main risk to the solvency rises

from the threat of Liquidity. According to Baral, in 2005, two main sources of liquidity threats, the first Liquidity threat of banks are when customers wish to take money from their own accounts and when commitment holders remove fixed amount from the institution.

20

According to Rudolf (2009) the liquidity expresses the degree to which a bank is capable of fulfilling its respective obligations. It is dangerous for banks to mismatch their lending interest percentage since Banks earn profit by decentralizing short-term deposits at low interest percentage, and providing this money for long-period at more percentage. Liquidity ratios can be written as: () =

Cash to total Deposit ratio() = Loan to Deposit Ratio() =

3.4

CAMEL NUMERICAL CLASSIFICATION: CLASSIFICATION DESCRIPTION

STRONG: STRONG means most top classification and also the performance that is significantly higher than normal. SATISFACTORY: satisfactory level means general or higher than general; the banks which operate safely and soundly can achieve this rating. FAIR: fair means somewhat problematic performance. That is not good or not so bad but it is determined by activities of under normal quality. MARGINAL: this type of classification indicates activities that are mainly lower than standard; if it continues, this type of performance creates problem or this situation might make hazardous the reliability of bank. DISSATISFACTORY: this is the lowest classification of activities which is already in worse situation and without current help impossible to run. This type of situation is clearly destructive for the institution. 3.5 CAMELS AGGREGATE RATINGS After critically analyzing the common activities of the bank, each bank is given upon an aggregate classification. This aggregate rating system is based upon a numerical scale of 1 to 5 in upward manner of supervisors attention. The monetary committee usually sees 10 CAMELS classification elements that contain weights which are: capital availability 20%, asset standard 20%, managing board 25%, profit 15%, solvency 10% and response to market risk 10%. The subjective and based depending on committees historical judgment and somewhat rationality these weightings are determined. The principles of numerical classification are: Rating Rating evaluation Description of Rating evaluuation
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Scale 1 2

Strong Satisfactory

Fair

Marginal (some risk of failure)

Unsatisfactory (high degree of failure evident)

Good in each sidde, no need to authority comment Basically can be said well in response to taking measures to remove weakness, limited authority comment may be applicable. Weather corrective measures are not taken to remove current weak factors these factor may create severe problem. More supervisory attention is required. Some of the severe problems if not removed immediately that may hamper future sustainability of the bank. A comprehensive supervisory look is needed to rescue this bank. High risk of failure in the near term. Under constant supervision/cease and desist order.

Since financial markets of around the world becoming closer indicating familiar structure is mostly needed. Super indications of situations and activities are made by the CAMEL model over past many years moreover this also enlighten the on- site and off site assessment to display best manner to the bank. Supplying an actual and germane analysis of banks financial situation and activities in the sectors such as fund, asset standard, managerial committee, earning capacity and solvency is the objective of CAMEL. Each component of CAMEL and their quality shows the internal strength of the analysis and the extent to which they can measure market risk and provide cushion against the risk. Every components quality moreover indicates the inner advantage and at what degree it is eligible to tackle the market risk

3.6 Hypothesis Testing Procedure:


I will test two hypotheses on the performance of Islamic Banks in Bangladesh. The two hypotheses will be tested using t-test.

According to Zikmund et.al (2010), hypotheses are formal statements given in testable forms. For hypothesis testing I will collect the sample of data of performance of Islamic banks and conventional banks. ROE of Islamic banks and conventional banks will be collected. As the sample size is less than 30 (16 for Islamic and 16 for conventional banks) we will use t-test for hypothesis testing.

T-test:
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According to SocialResearchMethod.net (2006), in t-test it is assessed that whether the means of two groups are statistically different from each other. T-distribution is normally distributed. Following figure shows a t-distribution, Where the green bell shaped figure shows the control group or the group with which the comparison is made and blue figure shows the treatment group or group on which the hypothesis is tested.

Figure: t-distributions (Source: SocialResearchMethod.net, 2006)

Formula for T-test:

Here, XT = mean of treatment group XC = mean of control group nT = number of observations in treatment in group nC = number of observations in control group

Analysis findings and conclusion

4.1

Capital Adequacy

Capital adequacy ratio is a primary ratio of CAMEL frame work. This ratio measures the level of capital kept for each pound of risk weighted assets of Financial Institutions. The

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higher the capital adequacy ratio the higher the strength of the bank and the higher the confidence of stakeholders on the bank.
0.1 0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 2006 2007 2008 2009 2010 CONVENTIONAL ISLAMIC IBBL

The above graph shows the capital adequacy of 6.66 percent for the year 2006 which decreased in 2007 and stood at 5.86 percent but after 2007 capital adequacy ratio increased. This is observed that in 2008 capital adequacy ratio has increased by .23 percent compared to the previous year and stood at 6.09 percent. In 2009 capital adequacy ratio was increased significantly by 1.13 percent and stood at 7.22 percent but in the year 2010 capital adequacy ratio has declined slightly compared to the previous year and stood at 7.10 percent. Average capital adequacy ratio of four Islamic bank was 5.66 percent in 2006 which was higher than 5.14 percent of conventional bank, 7.43 percent in 2007 that was higher than 5.95 percent of conventional bank, 7.52 percent in 2008 which was higher than 7.24 percent of conventional bank, 7.47 percent in 2009 which was lower than 8.48 percent of conventional bank, 7.62 percent in 2010 which was lower than 8.98 percent of conventional bank.

Capital adequacy 2006 2007 2008 2009 2010 CONVENTIONAL 0.051463 0.059577 0.072438 0.084814 0.089862 ISLAMIC 0.056614 0.074339 0.075294 0.074728 0.076209 IBBL 0.066603 0.05863 0.0609 0.072243 0.071068 Rating of IBBL 4 5 4 3 3 Capital adequacy ratio 9% and above is ranked as 1 and indicates the sound financial condition. IBBL could not able to score capital adequacy ratio of 9 percent or more from 2005 to 2010 and did not scored rating of 1. Capital adequacy ratio of 8% to 8.99% is ranked as 2 and indicates satisfactory financial performance. IBBL could not able to score capital adequacy ratio of 8% to 8.99% and did not attain the ranking of 2 in regard to capital adequacy ratio. Capital adequacy ratio of 7% to 7.99% reveals the fair financial performance
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and this is scored as 3. The banks capital adequacy ratio was ranked as 3 for the year 2009 and 2010. Capital adequacy ratio of 6% to 6.99% means marginal financial performance which is ranked as 4. IBBLs capital adequacy ratio was ranked as 4 for the year 2006 and 2008. Finally, capital adequacy ratio of 5.99% and lower indicate the dissatisfactory financial performance which is ranked as 5. IBBL scored the rating of 5 for the year 2007.

Rating Applicable for Capital Adequacy Ratio Range 9% and above 8% to 8.99% 7% to 7.99% 6% to 6.99% 5.99% and lower Condition Strong Satisfactory Fair Marginal Dissatisfactory 1 2 3 4 5 Rating

4.2

Asset Quality:

4.2.1 Non-performing Loan ratio (NPLR): NPLR is popularly used for measuring the quality of assets. The non performing loans of a bank is divided by its net loans to find Non Performing Loan Ratio. The loans of which principal and interests are overdue for more than 90 days are called non performing loans. The lower the ration the better the performance of the bank in managing its loan and the better is the performance of the bank.

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0.016 0.014 0.012 0.01 0.008 0.006 0.004 0.002 0 2006 2007 2008 2009 2010 CONVENTIONAL ISLAMIC IBBL

The above graph indicate that .358 percent loan was overdue for the year 2006 which has increased .595 percent in the year 2007 and stood at .953 percent. After 2007 there was a declining trend in the non-performing loan ratio. In 2008 overdue loan percentage was .628 and .589 for the year 2009. Non-performing loan ratio for the year 2010 was .424 percent. Average Non performing Loans ratio of four Islamic bank was .90 percent in 2006 that was lower compared to 1.36 percent of conventional bank, .59 percent in 2007 which was lower than 1.21 percent of conventional bank, .57 percent in 2008 which was lower than 1.37 percent of conventional bank, .42 percent in 2009 which was lower than .97 percent of conventional bank, .37 percent in 2010 which is less than .98 percent of conventional bank.

Non performing Loans 2006 2007 2008 2009 2010 CONVENTIONAL 0.013695 0.012159 0.013783 0.009723 0.009834 ISLAMIC 0.009092 0.005975 0.005734 0.004246 0.003745 IBBL 0.00358 0.009533 0.006279 0.005886 0.004236 Rating 2 3 2 2 2 Non-performing loan less than 0.25 indicate the strong financial performance which is ranked as 1 in CAMEL. The bank could not able to score the ranking of 1 from the year 2006 to 2010. Non-performing loan of 0.26-0.80 percent reveals the satisfactory financial performance which is ranked as 2 in CAMEL rating. The bank has scored the rating of 2 for the year 2006, 2008, 2009 and 2010 that means the banks financial performance was satisfactory in those years. Overdue loan of 0.81-1.4 indicates the fair performance which is ranked as 3 in CAMEL rating. IBBL scored the ranking of 3 for the year 2007 because its overdue loan was .953 percent in that year which is highest from 2006 to 2010. Nonperforming loan of 1.4-2.0 indicates the marginal performance which is ranked as 4. IBBL did not scored marginal performance in any year. Overdue loan of greater than 2.0 means the
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unsatisfactory performance which is ranked as 5 but the bank did not made any unsatisfactory score from 2006 to 2010 in case of non-performing loan. Rating Applicable for Non-Performing Loan Ratio Range (%) less than 0.25 0.26-0.80 0.81-1.4 1.4-2.0 Greater than 2.0 Condition Strong Satisfactory Fair Marginal Unsatisfactory 1 2 3 4 5 Rating

4.2.2 Productive assets ratio (PAR) Productive assets ratio measures the readiness of assets available for investment. The higher the productive assets ratio the higher is the quality of assets. It is calculated as follows:

0.995 0.99 0.985 0.98 0.975 0.97 0.965 2006 2007 2008 2009 2010 CONVENTIONAL ISLAMIC IBBL

The above figure indicates the trend of productive asset ratio from 2006 to 2010. Productive asset ratio of IBBL was highest in the year 2008 and lowest in the year 2006. Productive asset ratio for the year 2006 was 97.52 percent and there is a increasing trend in the productive asset ratio from the year 2006 to 2008. The productive asset ratio of 2007 was 97.91 percent and it was 98.09 percent for the year 2008. After 2008 the non productive asset ratio decreased and stood at 97.66 percent in 2009 which has declined .43 percent compared to 2008. This ratio increased by .29 percent in the year 2010 compared to the previous year and stood at 97.95 percent. Average Productive asset ratio ratios of four Islamic bank was 99.04
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percent in 2006 that was higher than 97.99 percent of conventional bank, 99.13 percent in 2007 which was higher than 98.01 percent of conventional bank, 99 percent in 2008 which was higher than 97.74 percent of conventional bank, 98.69 percent in 2009 which was higher than 97.96 percent of conventional bank, 98.35 percent in 2010 which was higher than 97.9 percent of conventional bank.

Productive asset ratio 2006 2007 2008 2009 2010 CONVENTIONAL 0.979922 0.980173 0.977499 0.979655 0.979078 ISLAMIC 0.990474 0.991346 0.99002 0.986921 0.983585 IBBL 0.97521 0.979164 0.980911 0.9766 0.979586

4.3 Management efficiency Management efficiency is measured by the ratio of operating expenses to operating revenues. The lower ratio indicates higher efficiency vice versa.

0.6 0.5 0.4 0.3 0.2 0.1 0 2006 2007 2008 2009 2010 CONVENTIONAL ISLAMIC

IBBL

The above figure indicates the management efficiency from the year 2006 to 2010. This is observed that the management efficiency was lowest in the year 2006 because in that year the efficiency ratio was highest of 44.91 percent. Management ratio decreased by 7.19 percent in 2007 compared to the previous year and stood at 37.72 percent this indicates that management efficiency improved compared to the previous year. This is also observed that efficiency ratio has decreased in 2008 by 2.23 percent compared to the previous year and stood at 35.49 percent that means management is performing well compared to the previous year. There is an increasing trend in the efficiency ratio in 2009 and 2010. In 2009 efficiency ratio has increased by 1.38 percent compared to the previous year and stood at 36.87 which
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indicate that management efficiency is declining. In 2010 efficiency ratio has also increased and by 2 percent and stood at 38.87 percent which indicates the declining management performance. Average Efficiency ratio of four Islamic bank was 34.86 percent in 2006 that was lower compared to 53.65 percent of conventional bank, 36.62 percent in 2007 which was lower than 45.28 percent of conventional bank, 36.92 percent in 2008 which was lower than 45.28 percent of conventional bank, 35.18 percent in 2009 which was lower than 39.30 percent of conventional bank, 33.15 percent in 2010 which is less than 39.81 percent of conventional bank. Efficiency 2006 2007 2008 2009 2010 CONVENTIONAL 0.536559 0.452837 0.452135 0.393054 0.398187 ISLAMIC 0.348636 0.366233 0.369222 0.35181 0.331511 IBBL 0.449192 0.377199 0.354987 0.368786 0.388792 Rating 3 2 2 2 2 Efficiency ratio of less than 30 indicates the strong financial performance which is ranked as 1. IBBL did not scored the CAMEL rating of 1 from the year 2006 to the year 2010. The efficiency ratio of 30-40 percent reveals the satisfactory financial performance which is ranked as 2. The bank has scored the CAMEL rating of 2 in case of efficiency ratio in the year 2007, 2008, 2009 and 2010. The efficiency ratio of 40-50 percent indicates the fair financial performance which is ranked as 3. The bank scored the rating of 3 in efficiency ratio in the year 2006. Efficiency ratio of 50-70 percent indicates the marginal performance and it is scored as 4 in CAMEL rating. IBBL did not scored the rating of 4 in any year. Efficiency ratio of greater than 70 indicates the unsatisfactory performance which is rated as 5 in CAMEL rating.
Rating Applicable for Efficiency Ratio Range (%) Condition less than 30 Strong 30-40 Satisfactory 40-50 Fair 50-70 Marginal Greater than 70 Unsatisfactory Rating 1 2 3 4 5

4.4

Earnings and Profitability

4.4.1 Return on Equity (ROE) Return on Equity (ROE) measures the profits earned by the business for each pound investment in the company. Income statement provides the net income item and from the balance sheet we get the Equity item. By dividing the net income by the stockholders equity we get the ROE. It is a complete indicator of firm performance.

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0.25 0.2 0.15 0.1 0.05 0 2006 2007 2008 2009 2010 CONVENTIONAL ISLAMIC IBBL

The above figure shows the return of equity ratio of 2006 to 2010. This is observed that return on equity ratio was 13.99 for the year 2006 which decreased by 1.27 in 2007 compared to the previous year and stood at 12.72 percent. After 2007 there is an increasing trend in return on equity ratio. ROE has increased significantly by 6.3 percent in 2008 and stood at 19.02 percent. In 2009 the return of equity ratio has decreased slightly by 2.1 percent compared with the previous year and stood at 16.92 percent. In 2010 the return on equity ratio has increased by 2.07 percent compared to 2009 and stood at 18.98 percent. Average Return on equity ratio of four Islamic bank was 20.44 percent in 2006 that was higher compared to 11.03 percent of conventional bank, 15.58 percent in 2007 which was lower than 20.85 percent of conventional bank, 16.56 percent in 2008 which was lower than 16.59 percent of conventional bank, 10.78 percent in 2009 which was lower than 20.62 percent of conventional bank, 15.99 percent in 2010 which is less than 19.07 percent of conventional bank. Return on equity (ROE) 2006 2007 2008 2009 2010 CONVENTIONAL 0.110344 0.208506 0.165947 0.206262 0.190741 ISLAMIC 0.204446 0.155817 0.165635 0.107885 0.159965 IBBL 0.139958 0.12722 0.190235 0.169284 0.189981 Rating 4 4 2 3 2 The return on equity ratio of greater than 25 indicates the strong financial performance which is ranked as 1 in CAMEL rating. The bank could not be able to score the rating of 1 in case of return on equity in any year. The return on equity ratio of 18 to 25 indicate the satisfactory performance which is rated as 2 as per CAMEL rating. The bank has achieved the satisfactory performance in the year 2008 and 2010. ROE ratio of 15-18 percent indicates the fair financial performance which is rated as 3 under CAMEL rating. IBBL has scored the rating of 3 in the year 2009 which indicate the banks fair performance. The ROE of 12-15
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indicate the marginal financial performance of the bank which is rated as 4. IBBL scored the rating of 4 in the year 2006 and 2007. ROE ratio of less than 12 indicate the unsatisfactory financial performance which is scored as 5 under CAMEL rating but IBBL did not scored any unsatisfactory performance.
Rating Applicable for Return on Equity Ratio Range (%) Greater than 25 18-25 15-18 12-15 less than 12 Condition Strong Satisfactory Fair Marginal Unsatisfactory Rating 1 2 3 4 5

4.4.2 Return on Asset Another measurement of profitability is Return on Assets. The Return on Asset (ROA) measures the efficiency with which total assets are employed within the firm. Net income is can be obtained from income statement and Total Asset is found from the balance sheet.
0.02 0.018 0.016 0.014 0.012 0.01 0.008 0.006 0.004 0.002 0 2006 2007 2008 2009 2010 CONVENTIONAL ISLAMIC IBBL

This is observed that return on asset ratio in 2006 was .93 percent. The ROE ratio decreased in 2007 by .19 percent compared to the previous year and stood at .74 percent. An increasing trend is observed in ROA ratio after the year 2007. The ROA ratio increased in 2008 by .41 percent compared to the previous year and stood at 1.15 percent. In 2009 the ROA ratio has increased by .07 percent compared to the previous year and stood at 1.22 percent. In 2010 the ROA ratio increased .13 percent compared to the previous year and stood at 1.35 percent. Average Return on Assets ratio of four Islamic bank was 1.18 percent in 2006 that was higher compared to .67 percent of conventional bank, 1.36 percent in 2007 which was lower than 1.39 percent of conventional bank, 1.23 percent in 2008 which was higher than 1.2 percent of

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conventional bank, .78 percent in 2009 which was lower than 1.87 percent of conventional bank, 1.22 percent in 2010 which is less than 1.81 percent of conventional bank.

Return on Assets (ROA) 2006 2007 2008 2009 2010 CONVENTIONAL 0.006702 0.013933 0.012001 0.018744 0.018102 ISLAMIC 0.011893 0.013677 0.012304 0.007853 0.0122 IBBL 0.009322 0.007459 0.011585 0.01223 0.013502 Rating of IBBL 1 2 1 1 1

The return on asset ratio of .85 and above indicates the strong financial performance which is ranked as 1 in CAMEL rating. IBBL scored the rating of 1 in 2006, 2008, 2009 and 2010. The return on asset ratio of .65 to .84 indicate the satisfactory performance which is rated as 2 as per CAMEL rating. The bank has achieved the satisfactory performance in the year 2007 which is rated as 2. ROA ratio of .65 to .84percent indicates the fair financial performance which is rated as 3 under CAMEL rating. IBBL did not scored the rating of 3 in any year. The ROA of .35 to .44 indicates the marginal financial performance of the bank which is rated as 4. IBBL did not scored the rating of 4 in any year. ROA ratio of Net Loss to .34 indicates the unsatisfactory financial performance which is scored as 5 under CAMEL rating but IBBL did not scored any unsatisfactory performance.

Rating Applicable for Return on Asset Range(%) .85 and above .65 to .84 .45 to .64 .35 to .44 Net Loss to .34 Condition Strong Satisfactory Fair Marginal Dissatisfactory 1 2 3 4 5 Rating

4.4.3 Net Interest Margin Net Interest margin is equivalent to the gross profit of a production company. Net interest is the difference between total interest earnings and interest payment to depositors. In case of

32

Islamic banks this is the difference between investment earnings and deposit profit payment. The higher the interest margin the higher the earnings and profitability of the bank.

0.045 0.04 0.035 0.03 0.025 0.02 0.015 0.01 CONVENTIONAL

ISLAMIC
IBBL

0.005
0 2006 2007 2008 2009 2010

The above figure shows the net interest margin ratios of 2006 to 2010. This is observed that net interest margin ratio was 2.76 for the year 2006 which increased by .8 percent in 2007 compared to the previous year and stood at 3.56 percent. There is an increasing trend in net interest margin ratio from the year 2006 to the year 2008 but there is declining trend in the net interest margin ratio in 2009 and 2010. Net interest margin ratio has increased by .54 percent in 2008 compared to the previous year and stood at 4.1 percent. In 2009 the net interest margin ratio decreased significantly by .24 percent compared with the previous year and stood at 3.86 percent. In 2010 the net interest margin ratio increased slightly by .05 percent compared to 2009 and stood at 3.91 percent. Average Net Interest Margin ratio of four Islamic bank was 3.32 percent in 2006 that was higher compared to 2.42 percent of conventional bank, 3.69 percent in 2007 which was higher than 2.65 percent of conventional bank, 3.44 percent in 2008 which was higher than 2.82 percent of conventional bank, 2.35 percent in 2009 which was lower than 3.54 percent of conventional bank, 2.61 percent in 2010 which is less than 3.94 percent of conventional bank.

Net Interest Margin 2006 2007 2008 2009 2010 CONVENTIONAL 0.024251 0.026561 0.028263 0.035487 0.03947 ISLAMIC 0.033215 0.036929 0.034468 0.02353 0.02617 IBBL 0.027636 0.035617 0.040997 0.038644 0.039109

33

4.5

Liquidity

4.5.1 Cash to Total Assets (CTAR) The cash to total assets ratio indicates the portion of a banks total assets held in cash. This cash includes cash held both in the banks vault and in the central bank
0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2006 2007 2008 2009 2010 CONVENTIONAL ISLAMIC

IBBL

The figure shows the liquidity ratio of 2006 to 2010. This is observed that liquidity ratio was 15.82 percent for the year 2006 which decreased significantly by 6.9 percent in 2007 compared to the previous year and stood at 8.92 percent. After 2007 there is a sound trend in liquidity ratio. In 2008 ROE has increased significantly by 4.65 percent compared to the previous year and stood at 13.57 percent. In 2009 the liquidity ratio has decreased slightly by .11 percent compared with the previous year and stood at 13.46 percent. In 2010 the liquidity ratio decreased by 1.76 percent compared to 2009 and stood at 11.81 percent. Average Liquidity ratio of four Islamic bank was 7.65 percent in 2006 that was higher compared to 5.56 percent of conventional bank, 6.18 percent in 2007 which was higher than 5.67 percent of conventional bank, 7.55 percent in 2008 which was higher than 4.67 percent of conventional bank, 8.95 percent in 2009 which was higher than 7.42 percent of conventional bank, 8.68 percent in 2010 which is higher than 5.88 percent of conventional bank.

Liquidity 2006 2007 2008 2009 2010 CONVENTIONAL 0.055658 0.056741 0.046794 0.074201 0.05883 ISLAMIC 0.076527 0.061884 0.07554 0.089561 0.086801 IBBL 0.158201 0.089236 0.1357 0.134694 0.118134

34

4.5.2 Cash to total Deposit ratio: Cash to total deposit ratio is the ideal measurement of liquidity. This indicates the percentage of liquid fund available to meet the short term withdrawal obligations of depositors. The higher the ratio is the higher the liquidity of the bank.

0.2 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2006 2007 2008 2009 2010

CONVENTIONAL ISLAMIC IBBL

The figure shows the cash to deposit ratio of 2006 to 2010 and indicate the liquidity of the IBBL. This is observed that cash to deposit ratio was 17.95 percent in the year 2006 which decreased significantly by 7.7 percent in 2007 compared to the previous year and stood at 10.26 percent. After 2007 there is a balanced and sound trend in cash to deposit ratio. In 2008 ROE has increased significantly by 5.24 percent compared to the previous year and stood at 15.5 percent. In 2009 the cash to deposit ratio has decreased slightly by .16 percent compared with the previous year and stood at 15.34 percent. In 2010 the cash to deposit ratio decreased by 1.97 percent compared to 2009 and stood at 13.37 percent. Average Cash to Deposit ratio of four Islamic bank was 8.84 percent in 2006 that was higher compared to 6.52 percent of conventional bank, 7.42 percent in 2007 which was higher than 6.63 percent of conventional bank, 9 percent in 2008 which was higher than 6 percent of conventional bank, 10.49 percent in 2009 which was higher than 8.51 percent of conventional bank, 10.2 percent in 2010 which is higher than 7.1 percent of conventional bank. Cash to Deposit Ratio 2006 2007 2008 2009 2010 CONVENTIONAL 0.065265 0.06631 0.060131 0.08517 0.071029 ISLAMIC 0.088419 0.074252 0.090084 0.104923 0.102048 IBBL 0.179506 0.102669 0.155012 0.153446 0.133774 Rating of IBBL 1 1 1 1 1 The cash to deposit ratio of Greater than 10 percent indicates the strong financial performance which is ranked as 1 in CAMEL rating. IBBL scored the rating of 1 in 2006, 2007, 2008, 2009 and 2010. The cash to deposit ratio of 8 to 10 percent indicate the
35

satisfactory performance which is rated as 2 as per CAMEL rating. The bank did not achieve the satisfactory performance in any year which is rated as 2. ROA ratio of 6 to 8 percent indicates the fair financial performance which is rated as 3 under CAMEL rating. IBBL did not scored the rating of 3 in any year. The ROA of 5 to 6 percent indicates the marginal financial performance of the bank which is rated as 4. IBBL did not scored the rating of 4 in any year. Cash to deposit ratio of less than 5 percent indicates the unsatisfactory financial performance which is scored as 5 under CAMEL rating but IBBL did not scored any unsatisfactory performance.

Rating Applicable for Cash to Deposit Ratio Range(%) Greater than 10 8-10 6-8 5-6 less than 5% Condition Strong Satisfactory Fair Marginal Unsatisfactory Rating 1 2 3 4 5

4.5.3 Loan to Deposit Ratio: Loan to Deposit Ratio (LTDR) shows the percentage of deposit collected by a bank lent to the borrowers of it. This is most important liquidty ratio because high loan to deposit ratio may lead the bank to liquidity crisis.

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2006 2007 2008 2009 2010 CONVENTIONAL

ISLAMIC
IBBL

36

The above figure indicates the trend of loan to deposit ratio from 2006 to 2010. Loan to deposit ratio of IBBL was highest in the year 2010 and lowest in the year 2006. Loan to deposit ratio for the year 2006 was 85.76 percent and there is an increasing trend in the loan to deposit ratio from the year 2006 to 2008 but the ratio declined in 2008 and increased again in 2010. The loan to deposit ratio of 2007 was 87.13 percent and it was 89.08 percent for the year 2008. After 2008 the loan to deposit ratio decreased and stood at 87.85 percent in 2009 which has declined 1.23 percent compared to 2008. This ratio increased by 2.31 percent in the year 2010 compared to the previous year and stood at 90.16 percent. Average Loan to Deposit Ratio of four Islamic bank was 79.7 percent in 2006 that was higher compared to 73.8 percent of conventional bank, 83.4 percent in 2007 which was higher than 75.9 percent of conventional bank, 86.4 percent in 2008 which was higher than 85.8 percent of conventional bank, 87.2 percent in 2009 which was higher than 82.9 percent of conventional bank, 89.3 percent in 2010 which is higher than 88.6 percent of conventional bank.

Loan to Deposit Ratio 2006 2007 2008 2009 2010 CONVENTIONAL 0.738747 0.759364 0.858573 0.829327 0.886293 ISLAMIC 0.79788 0.834651 0.864089 0.872347 0.893432 IBBL 0.857692 0.871308 0.890847 0.878521 0.901658 Rating of IBBL 4 4 4 4 4 Loan to deposit ratio of 60 or bellow is ranked as 1 and indicates the sound financial condition. IBBL could not able to score loan to deposit ratio of 60 percent or bellow from 2005 to 2010 and did not get rating of 1. Loan to deposit ratio of 61% to 80% is ranked as 2 and indicates satisfactory financial performance. IBBL could not able to score loan to deposit ratio of 60% to 80% and did not attain the ranking of 2 in regard to loan to deposit ratio. Loan to deposit ratio of 81 to 85 % reveals the fair financial performance and this is scored as 3. The bank could not able to have the loan to deposit ratio of 81% to 85% and did not attain the ranking of 3 in regard to loan to deposit ratio in any year. Loan to deposit ratio of 86% to 90% indicates marginal financial performance which is ranked as 4. IBBLs loan to deposit ratio was ranked as 4 for the year 2006 to 2010. Finally, loan to deposit ratio of above 91 percent indicates the dissatisfactory financial performance which is ranked as 5. IBBL din not scored the loan to deposit ratio rating of 5 in any year. Rating Applicable for Loan to Deposit Ratio Range(%) Upto - 60 61 to 80 Condition Strong Satisfactory 1 2 Rating

37

81 to 85 86-90 91 & Above

Fair Marginal Unsatisfactory

3 4 5

4.6 Hypothesis Testing:


We have made two hypotheses about the profitability and performance of Islamic Bank Bangladesh Limited. Now those hypotheses will be tested using t-test.

4.6.1 Test 1
Hypothesis: The ROE of Islamic banks over time is the same as the ROE of Conventional (non- Islamic) banks. I am using t Distribution for testing the hypothesis as it is a small sample. x = Mean of Islamic Banks ROE = 0.157147333. y = Mean of Non Islamic Banks ROE = 0.205721467

Null Hypothesis Alternative Hypothesis

H0 : H1 :

x = y x y

We shall use t distribution to test the Hypothesis. The statistic is the difference between the mean ROEs. The degrees of freedom = 16+16-2 = 30. Statistics:

X-Y SP 1/n + 1/m


~

tm+n-2

Sx2 =

(x x 2 i )

n-1
38

0.068646941/16-1

= 0.004576463

Sy2 =

(y y 2 i )

m-1

= 0.193566036/16-1 = 0.0129044024

Sp2 = ( n-1 ) Sx2 + ( m - 1) Sy2 n+m-2

= 0.068646941 + 0.193566036 / 16+16-2 = 0.008740433

SP 1/n + 1/m = SP x 1/16 + 1/16 = 0.003090209569

Test Statistics is

XY SP 1/n + 1/m

= 0.157147333-0.205721467 / 0.003090209569

= - 15.7187184

39

t0.025, 38 =2.042

As the mod value of the statistics is higher than t 0.025, 38, we reject the null hypothesis and accept the alternate hypothesis.

Conclusion : Therefore the ROE of Islamic Banks over time is not equal to the ROE of conventional non-Islamic banks.

4.6.2

Test 2

Testing the hypothesis that Conventional Banks earn higher ROE than the Islamic Banks.

Ho H1

Null Hypothesis

y = x y > x

Alternative Hypothesis :

We shall use t distribution to test the Hypothesis. Statistics:

Y-X SP 1/n + 1/m


~

t 0.05, n+m-2

Statistics Value t0.05, 38 =

= 1.697

15.7103057

(calculated before)

The statistics is greater than t0.05, 38 value. Hence we reject the null hypothesis. We accept the alternative hypothesis that y > x . Conclusion : Conventional Banks earn higher ROE than Islamic Banks over time.

40

5 5.1

Findings conclusion and recommendation Findings 1. There is an improving trend in the capital adequacy ratio though it has declined significantly in 2007 but after 2007 the capital adequacy became stabled. Capital adequacy improved significantly in the year 2009 by 1.13 percent and stood at 7.22 percent but in the year 2010 capital adequacy ratio has declined slightly compared to the previous year and stood at 7.10 percent. Capital adequacy ratio of 7% to 7.99% reveals the fair financial performance and this is scored as 3. The banks capital adequacy ratio was ranked as 3 for the year 2009 and 2010. Capital adequacy ratio of 6% to 6.99% means marginal financial performance which is ranked as 4. IBBLs capital adequacy ratio was ranked as 4 for the year 2006 and 2008. Finally, capital adequacy ratio of 5.99% and lower indicate the dissatisfactory financial performance which is ranked as 5. IBBL scored the rating of 5 for the year 2007. The capital adequacy ratio of IBBL is stronger than the average capital adequacy ratio of four Islamic banks but now it is not in better condition compared to conventional bank though the ratio of IBBL was stronger in 2006, 2007 and 2008 compared to the conventional banks.

2. The overdue loan has increased significantly by.595 percent in the year 2007 and stood at .953 percent. After 2007 the non-performing loan ratio has stabled and for the year 2010 the ratio was .424 percent. Non-performing loan of 0.26-0.80 percent reveals the satisfactory financial performance which is ranked as 2 in CAMEL rating. The bank has scored the rating of 2 for the year 2006, 2008, 2009 and 2010 that means the banks financial performance was satisfactory in those years. Overdue loan of 0.81-1.4 indicates the fair performance which is ranked as 3 in CAMEL rating. IBBL scored the ranking of 3 for the year 2007 because its overdue loan was .953 percent in that year which is highest from 2006 to 2010. Higher non performing loan ratio indicates higher risks to the banks. IBBL has lower rate of non-performing loan compare to average Islamic banks rate and Islamic banks has lower NPL ratio compared to the conventional bank. This indicates that IBBL and Islamic banks are doing well in the scale of NPR ratio.

3. This is found that the management was inefficiency in the year 2006 because in that year the efficiency ratio was the highest of 44.91 percent. Management ratio decreased by 7.19 percent in 2007 compared to the previous year indicating the improved management efficiency compared to the previous year. This is also
41

observed that efficiency ratio has decreased in 2008 by 2.23 percent compared to the previous year indicating the managements well performance compared to the previous year. There is an increasing trend in the efficiency ratio in 2009 and 2010. In 2009 efficiency ratio has increased by 1.38 percent compared to the previous year which indicate that management efficiency is declining in that year. In 2010 efficiency ratio has also increased and by 2 percent indicating the declining management performance in that year. The efficiency ratio of 30-40 percent reveals the satisfactory financial performance which is ranked as 2. The bank has scored the CAMEL rating of 2 in case of efficiency ratio in the year 2007, 2008, 2009 and 2010. The efficiency ratio of 40-50 percent indicates the fair financial performance which is ranked as 3. The bank scored the rating of 3 in efficiency ratio in the year 2006. Efficiency ratio of IBBL is lower than conventional bank which indicates that management of IBBL is performing well compared to the conventional bank.

4. This is found that return on equity ratio decreased by 1.27 in 2007 compared to the previous year and stood at 12.72 percent. After 2007 there is an increasing trend in return on equity ratio. ROE has increased significantly by 6.3 percent in 2008 and in 2009 the return of equity ratio has decreased slightly by 2.1 percent compared with the previous year. In 2010 the return on equity ratio has increased by 2.07 percent compared to 2009. The return on equity ratio of 18 to 25 indicate the satisfactory performance which is rated as 2 as per CAMEL rating. The bank has achieved the satisfactory performance in the year 2008 and 2010. ROE ratio of 15-18 percent indicates the fair financial performance which is rated as 3 under CAMEL rating. IBBL has scored the rating of 3 in the year 2009 which indicate the banks fair performance. The ROE of 12-15 indicate the marginal financial performance of the bank which is rated as 4. IBBL scored the rating of 4 in the year 2006 and 2007. IBBL has gained higher ROE in 2006 and 2008 and lower ROE in 2007, 2009 and 2010. This is found that ROA ratio decreased by .19 percent in 2007 compared to the previous year and an increasing trend is observed in ROA ratio after the year 2007. The ROA ratio increased by .41 percent in 2008 compared to the previous year. In 2009 the ROA ratio has increased by .07 percent and in 2010 the ROA ratio increased .13 percent. The return on asset ratio of .85 and above indicates the strong financial performance which is ranked as 1 in CAMEL rating. IBBL scored the rating of 1 in 2006, 2008, 2009 and 2010. The return on asset ratio of .65 to .84 indicates the satisfactory performance which is rated as 2 as per CAMEL rating. The bank has achieved the satisfactory performance in the year 2007 which is rated as 2.

5. This is found that cash to deposit ratio decreased significantly by 7.7 percent in 2007 compared to the previous year and stood at 10.26 percent. After 2007 there is a balanced and sound trend in cash to deposit ratio. In 2008 ROE has increased significantly by 5.24 percent, in 2009 the ratio decreased slightly by .16 percent and
42

in 2010 the ratio decreased by 1.97 percent compared to 2009 and stood at 13.37 percent. The cash to deposit ratio of Greater than 10 percent indicates the strong financial performance which is ranked as 1 in CAMEL rating. IBBL scored the rating of 1 in 2006, 2007, 2008, 2009 and 2010. This is found there is an increasing trend in the loan to deposit ratio from the year 2006 to 2008 but the ratio declined in 2008 and increased again in 2010. The ratio increased by 2.31 percent in the year 2010 compared to the previous year and stood at 90.16 percent. Loan to deposit ratio of 86% to 90% indicates marginal financial performance which is ranked as 4. IBBLs loan to deposit ratio was ranked as 4 for the year 2006 to 2010. Finally, loan to deposit ratio of above 91 percent indicates the dissatisfactory financial performance which is ranked as 5. IBBL din not scored the loan to deposit ratio rating of 5 in any year. Cash to deposit ratio of Islamic bank and IBBL is higher than conventional bank which indicates that IBBL and other Islamic banks holds more liquid money as cash.

CAMEL Rating of IBBL


3
2 2.8 1 0 2006 2007 2008 2009 2010 3 2.2 2.2 2 CAMEL Rating of

IBBL achieved fair performance in the year 2006 which means financial performance is defective to some extent. This is not satisfactory or unsatisfactory but this is faulty if not corrected the problem will become severe in the future so supervisory action is essential. The bank also scored the fair performance in 2007 which also indicate the defective performance corrective action is required. The bank scored satisfactory performance in the year 2008, 2009 and 2010 which indicate that bank is fundamentally sound and fair. Satisfactory performance indicates the sound and safe operation of the bank though few supervisory actions are required.

2006 Capital adequacy (CAPAD) Asset quality(NPLR) Management efficiency Earning(ROE) Liquidity(CTDR) Composite Rating 4 2 3 4 1 14/5

2007 5 3 2 4 1 15/5

2008 4 2 2 2 1 11/5

2009 3 2 2 3 1 11/5

2010 3 2 2 2 1 10/5
43

CAMEL Rating of IBBL

2.8 Fair

3 Fair

2.2 2.2 2 Satisfactory Satisfactory Satisfactory

5.2 Conclusion
In the findings of this thesis it is educed that the CAMEL rating is important for the banking sector. Throughout the world this tactics of the calculation is used. The aftermath of these methods is very much effective and very rational to make any sort of decision. On the other hand with the help of this method one country can make any comparison with the other countries company. CAMEL rating helps the investors to take emphatic decision regarding their investment simultaneously they can have the fewer chance to make mistakes. This method is not only less time consuming but also it is very pragmatic. The author of this paper analyzed the financial data for five years which is summarized as per the model of CAMEL and found that IBBL has scored the fair performance in 2006 and 2007 and satisfactory performance in 2007, 2008, and 2009. Fair performance indicates that performance is faulty if not corrected the problem will become severe in the future so supervisory action is essential and satisfactory performance indicates the sound and safe financial operation of the bank but few supervisory action is required to improve the performance more. As Islam prohibited interest the activities of Islamic banks are different from those of conventional banks. The basic differences found in the financial analysis are capital adequacy of Islamic banks are better than that of Conventional banks. Non-performing loans Islamic banks and IBBL are better than that of Conventional banks. The management of Islamic banks and IBBL are more efficient than the management of conventional banks. Productive asset ratio of IBBL is better than conventional bank and other Islamic Bank. Both the earnings and efficiency of Islamic banks are growing rapidly. There is no problem in liquidity of IBBL, Islamic bank and conventional banks. At last in hypothesis testing at first I have tested whether the ROE of Islamic banks over time is the same as the ROE of Conventional (non- Islamic) banks. From the t-test it is found that the t-value is insignificant. So, the null hypothesis is rejected. Therefore the ROE of Islamic Banks over time is not equal to the ROE of conventional non-Islamic banks. In the second hypothesis testing I have tested the hypothesis that Conventional Banks earn higher ROE than the Islamic Banks. Here, the t-value is found to be insignificant. So we rejected null hypothesis and concluded that Conventional Banks earn higher ROE than Islamic Banks over time. Primary and fundamental concern of an Islamic bank is to diminish the concept of interest and simultaneously it ensures the higher return on ones deposit with the help of proper investment. In this case the bank has to experience with different sort of circumstances like business failure, political uncertainty, rules regulations of central bank or other economical changes. Nevertheless there are some situations when the bank can give more incremental benefit than the client want. In fact most of the customers who have strong belief in Islam
44

want to go for the Islamic banking system. Moreover most of the cases there are no big differences between Islamic banking and conventional banking. For that reason the customer who carries a strong religious view will always be with the Islamic bank. Behind this lack of proper advertisement and promotion of Islamic banking system and its products is responsible. With suitable promotion activities Islamic banks may clarify the points of misconceptions about Islamic banks.

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7 7.1

Appendices Appendix: A 2006 2007 2008 2009 2010 11,158,057,192 14,572,185,149 19,543,835,472 21,370,531,603 24,766,264,960 8,019,336,141 9,410,587,581 12,162,098,921 13,076,994,556 14,471,890,918 3,138,721,051 5,161,597,568 7,381,736,551 8,293,537,047 10,294,374,042 2,880,246,018 6,018,967,069 2,703,669,981 406,632,084 2,908,665,004 1,508,073,413 1,400,591,591 3,127,337,862 4,212,497,545 4,033,325,433 5,362,639,984 8,288,935,430 11,594,234,096 12,326,862,480 15,657,014,026 3,126,575,311 4,115,805,498 4,545,974,409 6,087,318,956 1,381,535,652 1,130,595,229 1,263,229,818 1,114,989,130 3,780,824,467 6,347,833,369 6,517,658,253 8,454,705,940 2,353,462,053 3,673,036,601 3,114,106,379 3,991,234,031 1,427,362,414 2,674,796,768 3,403,551,874 4,463,471,909

Profit and Loss statement of IBBL Interest receivable (on loans given) Interest payable (on deposits received) Net Interest income other income (insurance commissions etc) Net Revenue Operating expenses Provisions Profit before taxation Taxation Profit after taxation

Balance sheet of IBBL

2006

2007

2008

2009

2010

Assets Cash and balances at Central Banks 23,770,135,609 17,076,460,562 31,330,319,841 37,485,668,446 39,053,404,674 Balance with other Banks and FIs 1,077,941,616 4,012,323,080 5,623,181,755 7,678,373,370 6,679,891,477 Money at Call and Short Notice 0 short term investments (tbills etc) 3,534,000,000 20,341,950,000 7,508,000,000 11,112,000,000 11,668,666,620 other Investments (equity, bond investments) 23,760,399 23,760,399 24,610,399 24,610,399 600,144,000 Loans and advances to 113,575,071,129 144,920,609,595 180,053,935,732 214,615,801,272 263,225,131,026
49

customers Fixed assets (tangible and intangible) other assets Total assets Total Deposits Liabilities Borrowing From Other Banks and FIs Mudaraba Perpetual Bond Deposits by customers Deferred Taxes other liabilities (taxes, pension provisions) Total Liabilities Sharecapital Statutory Reserves other reserves Profit and Loss account Total Equity (=Share capital + reserves) Total Liabilities & Equity

3,724,694,303 4,547,217,745

3,987,232,675 1,000,013,406

4,407,218,653 1,931,868,964

6,512,363,381 874,022,838

6,748,441,001 2,610,439,478

150,252,820,801 191,362,349,717 230,879,135,344 278,302,839,706 330,586,118,276

3,000,000,000 3,000,000,000 3,000,000,000 3,000,000,000 132,419,403,524 166,325,286,292 202,115,445,098 244,292,144,333 291,934,602,270 138,259,677 7,826,184,480 10,817,418,214 11,564,938,590 165,959,677 10,739,191,843 162,930,992 11,994,329,252

140,245,588,004 180,142,704,506 216,818,643,365 258,197,295,853 307,091,862,514 3,456,000,000 3,801,600,000 4,752,000,000 6,177,600,000 7,413,120,000 2,270,333,255 3,416,899,542 864,000,000 3,670,924,229 2,796,720,982 950,400,000 4,940,490,903 2,942,401,076 1,425,600,000 6,244,022,554 5,830,641,299 1,853,280,000 7,934,963,742 5,551,580,020 2,594,592,000

10,007,232,797 11,219,645,211 14,060,491,979 20,105,543,853 23,494,255,762 150,252,820,801 191,362,349,717 230,879,135,344 278,302,839,706 330,586,118,276

50

a b c d e f g h i j k

2006 2007 2008 2009 2010 Essential data IBBL for ratios Profit after tax 1,400,591,591 1,427,362,414 2,674,796,768 3,403,551,874 4,463,471,909 Share Capital and Reserves 10,007,232,797 11,219,645,211 14,060,491,979 20,105,543,853 23,494,255,762 Loans and advances 113,575,071,129 144,920,609,595 180,053,935,732 214,615,801,272 263,225,131,026 Cash and balances at Central Bank 23,770,135,609 17,076,460,562 31,330,319,841 37,485,668,446 39,053,404,674 Total Assets 150,252,820,801 191,362,349,717 230,879,135,344 278,302,839,706 330,586,118,276 Net Interest Income 3,138,721,051 5,161,597,568 7,381,736,551 8,293,537,047 10,294,374,042 Net Revenue (this is net interest income+other income) 6,018,967,069 8,288,935,430 11,594,234,096 12,326,862,480 15,657,014,026 Operating expenses 2,703,669,981 3,126,575,311 4,115,805,498 4,545,974,409 6,087,318,956 Loan impairment provision (provision for bad debts) 406,632,084 1,381,535,652 1,130,595,229 1,263,229,818 1,114,989,130 Fixed assets (tangible+intangible) 3,724,694,303 3,987,232,675 4,407,218,653 6,512,363,381 6,748,441,001 Total Deposits 132,419,403,524 166,325,286,292 202,115,445,098 244,292,144,333 291,934,602,270

Calculated ratios of IBBL Return on equity 1 (ROE) 2 Liquidity 3 Capital adequacy 4 Efficiency Non performing 5 Loans 6 Net Interest Margin

2006 ROE LIQ CAPAD EFF NPLR NIM a/b d/e b/e h/g i/c f/c 0.13996 0.15820 0.06660 0.44919 0.00358 0.02764

2007 0.12722 0.08924 0.05863 0.37720 0.00953 0.03562

2008 0.19023 0.13570 0.06090 0.35499 0.00628 0.04100

2009 0.16928 0.13469 0.07224 0.36879 0.00589 0.03864

2010 0.18998 0.11813 0.07107 0.38879 0.00424 0.03911


51

7 8 9 10 11

Productive asset ratio Size Loan to Deposit Ratio Return on Assets (ROA) Cash to Deposit Ratio

PAR LNTA LTDR ROA CTDR

(e-j)/e

0.97521 25.73559 0.85769 0.00932 0.17951

0.97916 25.97743 0.87131 0.00746 0.10267

0.98091 26.16516 0.89085 0.01159 0.15501

0.97660 26.35198 0.87852 0.01223 0.15345

0.97959 26.52413 0.90166 0.01350 0.13377

c/k a/e d/k

7.2

a b c d e f g h i

Appendix B Essential data for ratios of First Security Islamic Bank Profit after tax Share Capital and Reserves Loans and advances Cash and balances at Central Bank Total Assets Net Interest Income Net Revenue (this is net interest income+other income) Operating expenses Loan impairment provision (provision for bad debts) Fixed assets

2006 -117,224,177

2007 30,630,728

2008 104,282,064 2,538,573,006 25,094,658,07 7 1,394,671,407 31,239,393,41 8 202,643,691 572,782,959 383,179,206 0

2009 326,837,749 2,865,410,755 38,725,874,77 4 5,033,532,439 47,978,552,95 2 1,014,874,186 1,327,633,708 576,795,959 104,000,000

2010 548,600,731 3,920,011,486 52,123,903,16 4 4,857,542,203 63,619,797,79 9 1,421,221,295 2,085,207,938 881,607,207 220,000,000

1,003,660,214 1,134,290,942 13,646,387,22 5 18,616,225,315 1,009,628,800 1,186,903,866 20,448,667,97 1 26,941,780,871 142,060,701 49,980,624 421,954,517 219,330,994 334,847,700 414,531,487 286,000,759 70,000,000

91,191,570

135,223,386

184,368,432

376,477,387

573,610,332
52

(tangible+intangible) k Total Deposits 17,591,996,45 2 23,504,045,031 25,854,541,50 0 42,423,092,72 2 56,344,959,16 7

Calculated ratios 2006 1 2 3 4 5 6 7 8 9 10 11 Return on equity (ROE) Liquidity (C&E/TA) Capital adequacy Efficiency Non performing Loans Net Interest Margin Productive asset ratio Size Loan to Deposit Ratio Return on Assets (ROA) Cash to Deposit Ratio a/b d/e b/e h/g i/c f/c (e-j)/e c/k a/e d/k -0.116797 0.049374 0.049082 0.519798 0.024537 0.010410 0.995540 23.741184 0.775716 -0.005733 0.057391 2007 0.027004 0.044054 0.042102 0.689937 0.003760 0.002685 0.994981 24.016944 0.792043 0.001137 0.050498 2008 0.041079 0.044645 0.081262 0.668978 0.000000 0.008075 0.994098 24.164946 0.970609 0.003338 0.053943 2009 0.114063 0.104912 0.059723 0.434454 0.002686 0.026207 0.992153 24.594020 0.912849 0.006812 0.118651 2010 0.139949 0.076353 0.061616 0.422791 0.004221 0.027266 0.990984 24.876191 0.925085 0.008623 0.086211

7.3 Appendix C Essential data for ratios Shajalal Islami Bank

2006 2006

2007 2007 646,992,691 2,787,731,141

2008 2008 817,709,533 3,605,440,674

2009 2009 361,303,806 4,926,633,268

2010 2010 894,212,351 5,820,845,619


53

Profit after tax Share Capital and Reserves

463,216,712 1,204,913,450

Loans and advances Cash and balances at Central Bank Total Assets Net Interest Income Net Revenue Operating expenses Loan impairment provision (provision for bad debts) Fixed assets (tangible+intangible) Total Deposits

14,207,244,676 19,028,608,508 29,197,016,442 40,369,639,045 48,020,056,711 1,026,778,924 1,641,085,037 2,773,858,394 3,515,663,193 5,169,398,340 21,342,554,938 28,346,996,395 45,216,968,653 58,920,895,401 67,543,759,367 654,129,704 1,013,419,936 1,273,775,380 588,441,893 904,962,939 1,072,273,849 227,205,558 57,500,000 1,628,824,523 313,816,132 98,700,000 2,322,991,357 513,191,258 244,000,000 1,161,279,456 345,663,721 168,200,000 2,179,166,245 559,129,441 160,000,000

92,738,456 127,055,567 338,806,004 620,466,461 1,264,800,227 18,090,647,354 22,618,187,323 36,484,239,974 47,459,231,231 54,446,967,342

Calculated ratios 1 2 3 4 5 6 7 8 9 10 11 7.4 Return on equity (ROE) Liquidity Capital adequacy Efficiency Non performing Loans Net Interest Margin Productive asset ratio Size Loan to Deposit Ratio Return on Assets (ROA) Cash to Deposit Ratio Appendix D 2006 2007 2008 2009 2010
54

a/b d/e b/e h/g i/c f/c (e-j)/e c/k a/e d/k

2006 0.384440 0.048109 0.056456 0.211891 0.004047 0.046042 0.995655 23.783969 0.785336 0.021704 0.056757

2007 0.232086 0.057893 0.098343 0.192664 0.005187 0.053258 0.995518 24.067787 0.841297 0.022824 0.072556

2008 0.226799 0.061346 0.079736 0.220918 0.008357 0.043627 0.992507 24.534738 0.800264 0.018084 0.076029

2009 0.073337 0.059668 0.083614 0.297658 0.004166 0.014576 0.989470 24.799462 0.850617 0.006132 0.074078

2010 0.153622 0.076534 0.086179 0.256580 0.003332 0.018846 0.981274 24.936042 0.881960 0.013239 0.094944

Essential data for ratios

Social Islamic Bank Profit after tax Share Capital and Reserves Loans and advances Cash and balances at Central Bank Total Assets Net Interest Income Net Revenue Operating expenses Loan impairment provision Fixed assets (tangible+intangible) Total Deposits 2006 2007 2008 2009 2010 453,215,712 636,882,591 716,609,533 361,303,806 894,212,351 1,104,913,450 2,687,731,141 3,505,440,674 4,826,633,268 5,720,845,519 13,207,244,676 18,028,608,508 28,197,016,442 39,369,639,045 47,020,056,711 1,025,778,924 1,541,085,037 2,673,858,394 3,415,663,193 5,069,398,340 20,342,554,938 27,346,996,395 44,216,968,653 57,920,895,401 66,543,759,367 644,129,704 1,012,419,936 1,273,775,830 578,441,893 914,962,939 1,063,373,849 1,529,824,523 2,211,991,357 1,152,279,456 2,168,166,245 227,205,662 313,816,445 513,191,456 3,456,638,765 559,129,345 55,500,000 97,700,000 234,000,000 167,200,000 150,000,000 91,738,456 117,055,567 328,806,004 610,466,461 1,164,800,227 17,090,647,378 21,618,187,303 35,484,239,993 46,459,231,493 54,356,967,955

Calculated Ratios 1 Return on equity (ROE) 2 Liquidity 3 Capital adequacy 4 Efficiency 5 Non performing Loans Net Interest 6 Margin 7 Productive asset ratio 8 Size 9 Loan to Deposit Ratio 10 Return on Assets (ROA) 11 Cash to Deposit Ratio

ROE LIQ CAPAD EFF NPLR NIM PAR LNTA LTDR ROA CTDR

a/b d/e b/e h/g i/c f/c (e-j)/e c/k a/e d/k

2006 0.410182 0.050425 0.054315 0.213665 0.004202 0.048771 0.995490 23.735981 0.772776 0.022279 0.060020

2007 0.236959 0.056353 0.098282 0.205132 0.005419 0.056156 0.995720 24.031873 0.833956 0.023289 0.071287

2008 0.204428 0.060471 0.079278 0.232004 0.008299 0.045174 0.992564 24.512374 0.794635 0.016207 0.075353

2009 0.074856 0.058971 0.083331 2.999827 0.004247 0.014693 0.989460 24.782344 0.847402 0.006238 0.073520

2010 0.156308 0.076181 0.085971 0.257881 0.003190 0.019459 0.982496 24.921126 0.865024 0.013438 0.093261

55

7.5

a b c d e f

g h i j k

Appendix E Essential data of AB BANK for ratios Profit after tax Share Capital and Reserves Loans and advances Cash and balances at Central Bank Total Assets Net Interest Income Net Revenue(this is net interest income+other income) Operating expenses Loan impairment provision (provision for bad debts) Fixed assets (tangible+intangible) Total Deposits

2006 2007 2008 532,186,350 1,903,493,845 2,332,340,348 2,582,762,912 4,511,589,265 6,817,305,592 31,289,251,217 40,915,352,218 57,661,463,707

2009 3,417,185,111 10,291,900,607 72,063,263,258

2010 3,989,519,974 14,146,877,357 96,730,292,593

3,247,071,614 4,299,269,940 4,096,044,155 5,354,881,576 6,615,787,687 47,989,337,222 63,549,864,403 84,190,890,928 107,093,007,184 134,003,878,314 615,504,605 1,439,281,171 2,020,610,153 2,964,367,189 4,084,937,222

2,650,166,074 1,939,479,724 178,500,000

4,656,581,245 1,331,287,400 507,300,000

6,217,589,423 1,887,482,560 697,766,515

8,374,277,040 2,504,651,426 599,019,861 2,441,036,589 83,082,628,680

12,004,676,277 3,771,864,400 1,123,695,702 4,087,964,621 94,780,200,605

1,148,462,590 2,381,004,409 2,444,761,466 42,076,995,417 53,375,348,391 68,558,989,354

Calculated ratios of AB Bank 1 2 3 4 5 6 Return on equity (ROE) Liquidity Capital adequacy Efficiency Non performing Loans Net Interest Margin a/b d/e b/e h/g i/c f/c 2006 0.20605 0.06766 0.05382 0.73183 0.00570 0.01967 2007 0.42191 0.06765 0.07099 0.28589 0.01240 0.03518 2008 0.34212 0.04865 0.08097 0.30357 0.01210 0.03504 2009 0.33203 0.05000 0.09610 0.29909 0.00831 0.04114 2010 0.28201 0.04937 0.10557 0.31420 0.01162 0.04223
56

7 8 9 10 11 7.6 a b c d e f g h i j k

Productive asset ratio Size Loan to Deposit Ratio Return on Assets (ROA) Cash to Deposit Ratio Appendix F

(e-j)/e c/k a/e d/k

0.97607 24.59424 0.74362 0.01109 0.07717

0.96253 24.87509 0.76656 0.02995 0.08055

0.97096 25.15635 0.84105 0.02770 0.05974

0.97721 25.39696 0.86737 0.03191 0.06445

0.96949 25.62113 1.02057 0.02977 0.06980

Essential data for ratios for City Bank Profit after tax Share Capital and Reserves Loans and advances Cash and balances at Central Bank Total Assets Net Interest Income Net Revenue (this is net interest income+other income) Operating expenses Loan impairment provision (provision for bad debts) Fixed assets (tangible+intangible) Total Deposits

2006 154,896,372 1,945,876,234

2007 343,463,026 2,874,366,986

2008 398,110,184 4,217,476,529

2009 818,719,600 5,864,234,278

2010 923,768,453 6,974,563,400

21,873,564,987 26,788,466,138 34,420,944,980 43,486,765,342 51,546,398,650 2,125,209,870 2,705,998,489 2,415,553,674 4,396,026,055 4,899,563,249 39,347,983,459 48,755,403,018 57,114,576,058 76,466,801,564 87,224,987,563 734,675,324 947,898,057 1,506,485,004 2,070,831,986 2,539,652,459 1,782,435,863 987,345,632 347,231,553 2,572,192,720 1,316,315,576 447,414,118 3,510,266,937 1,755,346,344 740,785,296 4,367,880,343 2,112,244,711 874,756,234 5,289,675,403 2,679,098,453 972,345,098

990,674,234 1,390,732,198 2,514,383,969 2,788,065,869 2,874,563,098 35,673,584,135 40,539,634,035 45,034,334,502 62,384,280,002 79,634,987,234

Calculated ratios 1 Return on equity (ROE) 2 Liquidity 3 Capital adequacy ROE a/b LIQ d/e CAPAD b/e 2006 0.079602376 0.054010643 0.04945301 2007 2008 2009 0.11949171 0.094395353 0.139612362 0.05550151 0.042293121 0.057489341 0.05895484 0.073842385 0.076689938 2010 0.132448212 0.056171556 0.079960612
57

4 5 6 7 8 9 10 11

Efficiency Non performing Loans Net Interest Margin Productive asset ratio Size Loan to Deposit Ratio Return on Assets (ROA) Cash to Deposit Ratio

EFF NPLR NIM PAR LNTA LTDR ROA CTDR

h/g i/c f/c (e-j)/e c/k a/e d/k

0.553930524 0.015874484 0.033587361 0.974822744 24.39571056 0.613158602 0.003936577 0.059573769

0.511748426 0.016701745 0.035384559 0.971475321 24.61008186 0.66079694 0.007044615 0.066749455

0.500060644 0.021521353 0.043766521 0.955976492 24.76832519 0.764326716 0.006970378 0.053638045

0.483585754 0.020115459 0.047619821 0.963538872 25.06012252 0.697078901 0.010706863 0.070466888

0.50647691 0.018863492 0.049269251 0.96704427 25.19175668 0.647283317 0.01059064 0.061525259

7.7 a b c d e f g h i j k

Appendix G Essential data for ratios for Prime Bank Profit after tax Share Capital and Reserves Loans and advances Cash and balances at Central Bank Total Assets Net Interest Income Net Revenue Operating expenses Loan impairment provision (provision for bad debts) Fixed assets (tangible+intangible) Total Deposits 2006 1,051,890,526 3,859,888,724 2007 1,400,664,725 5,273,277,362 2008 1,249,015,183 6,708,227,542 2009 2,823,473,302 11,796,677,214

201 3,642,840,42 17,466,599,36

45,010,218,048 57,683,021,512 75,602,502,241 89,945,986,804 118,837,290,00 3,662,426,602 4,755,788,872 6,447,553,847 9,327,459,373 8,309,148,37 60,899,475,79 79,588,430,798 124,984,702,326 110,516,618,171 155,532,789,52 1,500,349,332 1,903,507,052 1,978,280,243 2,427,415,627 4,648,274,52 3,232,036,163 4,816,210,375 5,819,245,747 8,262,859,422 10,792,606,13 1,101,072,827 1,559,345,650 1,954,852,082 2,934,051,448 3,769,667,41 390,000,000 910,000,000 1,383,500,000 699,500,000 551,047,55 412,107,309 660,490,066 54,724,080,584 70,512,374,925

1,380,119,330 1,577,863,034 1,743,653,37 88,083,119,854 107,077,274,228 124,799,314,77

Calculated ratios
58

1 2 3 4 5 6 7 8 9 10 11

Return on equity (ROE) Liquidity Capital adequacy Efficiency Non performing Loans Net Interest Margin Productive asset ratio Size Loan to Deposit Ratio Return on Assets (ROA) Cash to Deposit Ratio

ROE LIQ CAPAD EFF NPLR NIM PAR LNTA LTDR ROA CTDR

a/b d/e b/e h/g i/c f/c (e-j)/e c/k a/e d/k

2006 0.272518355 0.051586744 0.053495769 0.340674662 0.008664699 0.033333527 0.973256724 25.81747346 0.822493819 0.017516087 0.06692532

2007 0.265615599 0.059754776 0.066256833 0.323770253 0.015775873 0.032999434 0.99170118 25.10013458 0.818055293 0.017598848 0.067446159

2008 0.186191535 0.051586744 0.053672389 0.335928773 0.018299659 0.026166862 0.988957694 25.55145719 0.858308634 0.009993344 0.073198518

2009 0.239344796 0.084398704 0.106741207 0.355089116 0.007776889 0.026987481 0.985722844 25.42843174 0.840010053 0.025547952 0.087109608

2010 0.20856037 0.053423773 0.112301717 0.349282404 0.004636992 0.039114612 0.988789159 25.77012241 0.952227103 0.023421688 0.06658008

7.8

Appendix H

a b c d e f g h i

Essential data for ratios for Standard Bank Profit after tax Share Capital and Reserves Loans and advances Cash and balances at Central Bank Total Assets Net Interest Income Net Revenue Operating expenses Loan impairment provision (provision for bad debts)

2006 -117224177 983660214

2007 28630728 1024290942

2008 98282064 2238573006

2009 306837749 2675410755

2010 518600731 3450011486

12446387225 15416225315 24594658077 37525874774 52323903164 989628800 1086903866 1294671407 4933532439 4757542203 20348667971 25941780871 30239393418 46978552952 62619797799 132060701 48980624 192643691 914874186 1321221295 411954517 404531487 562782959 1227633708 1985207938 209330994 276000759 373179206 566795959 811607207 334847700 70000000 9800000 104000000 220000000

59

j k

Fixed assets (tangible+intangible) Total Deposits

90191570 125223386 174368432 366477387 553610332 16791996452 23604045031 25754541500 42323092722 56244959167

Calculated ratios 1 Return on equity (ROE) Liquidity 2 (C&E/TA) 3 Capital adequacy 4 Efficiency 5 Non performing Loans Net Interest 6 Margin 7 Productive asset ratio 8 Size 9 Loan to Deposit Ratio 10 Return on Assets (ROA) 11 Cash to Deposit Ratio a/b d/e b/e h/g i/c f/c (e-j)/e c/k a/e d/k 2006 -0.11680 0.04937 0.04908 0.51980 0.02454 0.01041 0.99554 23.74118 0.77572 -0.00573 0.05739 2007 0.02700 0.04405 0.04210 0.68994 0.00376 0.00268 0.99498 24.01694 0.79204 0.00114 0.05050 2008 0.04108 0.04464 0.08126 0.66898 0.00321 0.00808 0.99410 24.16495 0.97061 0.00334 0.05394 2009 0.11406 0.10491 0.05972 0.43445 0.00269 0.02621 0.99215 24.59402 0.91285 0.00681 0.11865 2010 0.13995 0.07635 0.06162 0.42279 0.00422 0.02727 0.99098 24.87619 0.92509 0.00862 0.08621

7.9 Appendix I Average Ratios of ISLAMIC BANKS Return on equity (ROE) 2006 2007 2008 0.139958 0.12722 0.190235 -0.1168 0.027004 0.041079 0.38444 0.232086 0.226799 0.410182 0.236959 0.204428 Liquidity 2009 0.169284 0.114063 0.073337 0.074856 2010 0.189981 0.139949 0.153622 0.156308 IBBL FSIBL SHIBL SIBL 2006 0.158201 0.049374 0.048109 0.050425

IBBL FSIBL SHIBL SIBL

2007 2008 2009 2010 0.089236 0.1357 0.134694 0.118134 0.044054 0.044645 0.104912 0.076353 0.057893 0.061346 0.059668 0.076534 0.056353 0.060471 0.058971 0.076181
60

ISLAMIC 0.204446 0.155817 0.165635 0.107885 0.159965 Capital adequacy 2006 IBBL 0.066603 FSIBL 0.049082 SHIBL 0.056456 SIBL 0.054315 ISLAMIC 0.056614 Non performing Loans 2006 IBBL 0.00358 FSIBL 0.024537 SHIBL 0.004047 SIBL 0.004202 ISLAMIC 0.009092 Productive asset ratio 2006 IBBL 0.97521 FSIBL 0.99554 SHIBL 0.995655 SIBL 0.99549 ISLAMIC 0.990474

ISLAMIC 0.076527 0.061884 Efficiency

0.07554 0.089561 0.086801

2007 0.05863 0.042102 0.098343 0.098282 0.074339

2008 0.0609 0.081262 0.079736 0.079278 0.075294

2009 0.072243 0.059723 0.083614 0.083331 0.074728

2010 0.071068 0.061616 0.086179 0.085971 0.076209

2006 IBBL 0.449192 FSIBL 0.519798 SHIBL 0.211891 SIBL 0.213665 ISLAMIC 0.348636 Net Interest Margin 2006 IBBL 0.027636 FSIBL 0.01041 SHIBL 0.046042 SIBL 0.048771 ISLAMIC 0.033215 Size

2007 0.377199 0.689937 0.192664 0.205132 0.366233

2008 0.354987 0.668978 0.220918 0.232004 0.369222

2009 0.368786 0.434454 0.297658 2.999827 1.025181

2010 0.388792 0.422791 0.25658 0.257881 0.331511

2007 0.009533 0.00376 0.005187 0.005419 0.005975

2008 0.006279 0 0.008357 0.008299 0.005734

2009 0.005886 0.002686 0.004166 0.004247 0.004246

2010 0.004236 0.004221 0.003332 0.00319 0.003745

2007 0.035617 0.002685 0.053258 0.056156 0.036929

2008 0.040997 0.008075 0.043627 0.045174 0.034468

2009 0.038644 0.026207 0.014576 0.014693 0.02353

2010 0.039109 0.027266 0.018846 0.019459 0.02617

2007 0.979164 0.994981 0.995518 0.99572 0.991346

2008 2009 2010 0.980911 0.9766 0.979586 0.994098 0.992153 0.990984 0.992507 0.98947 0.981274 0.992564 0.98946 0.982496 0.99002 0.986921 0.983585

2006 IBBL 25.73559 FSIBL 23.74118 SHIBL 23.78397 SIBL 23.73598 ISLAMIC 24.24918

2007 25.97743 24.01694 24.06779 24.03187 24.52351

2008 26.16516 24.16495 24.53474 24.51237 24.8443

2009 26.35198 24.59402 24.79946 24.78234 25.13195

2010 26.52413 24.87619 24.93604 24.92113 25.31437

Loan to Deposit Ratio 2006 2007 2008 2009 2010 IBBL 0.857692 0.871308 0.890847 0.878521 0.901658 FSIBL 0.775716 0.792043 0.970609 0.912849 0.925085 SHIBL 0.785336 0.841297 0.800264 0.850617 0.88196

Return on Assets (ROA) 2006 2007 2008 2009 2010 IBBL 0.009322 0.007459 0.011585 0.01223 0.013502 FSIBL -0.00573 0.001137 0.003338 0.006812 0.008623 SHIBL 0.021704 0.022824 0.018084 0.006132 0.013239
61

SIBL 0.772776 0.833956 0.794635 0.847402 0.865024 ISLAMIC 0.79788 0.834651 0.864089 0.872347 0.893432

SIBL 0.022279 0.023289 0.016207 0.006238 0.013438 ISLAMIC 0.011893 0.013677 0.012304 0.007853 0.0122

Cash to Deposit Ratio 2006 IBBL 0.179506 FSIBL 0.057391 SHIBL 0.056757 SIBL 0.06002 ISLAMIC 0.088419

2007 0.102669 0.050498 0.072556 0.071287 0.074252

2008 0.155012 0.053943 0.076029 0.075353 0.090084

2009 0.153446 0.118651 0.074078 0.07352 0.104923

2010 0.133774 0.086211 0.094944 0.093261 0.102048

7.10 Appendix J Average ratios of Conventional Banks Return on equity (ROE) 2006 2007 AB 0.206053 0.421912 City 0.079602 0.119492 Prime 0.272518 0.265616 Standard -0.1168 0.027004 Conventional 0.110344 0.208506 Capital adequacy 2006 AB 0.05382 City 0.049453 Prime 0.053496 Standard 0.049082 Conventional 0.051463 Liquidity 2008 0.342121 0.094395 0.186192 0.041079 0.165947 2009 0.332027 0.139612 0.239345 0.114063 0.206262 2010 0.282007 0.132448 0.20856 0.139949 0.190741 2006 AB 0.067662 City 0.054011 Prime 0.051587 Standard 0.049374 Conventional 0.055658 Efficiency 2007 0.070993 0.058955 0.066257 0.042102 0.059577 2008 0.080974 0.073842 0.053672 0.081262 0.072438 2009 0.096102 0.07669 0.106741 0.059723 0.084814 2010 0.105571 0.079961 0.112302 0.061616 0.089862 2006 AB 0.731833 City 0.553931 Prime 0.340675 Standard 0.519798 Conventional 0.536559 2007 0.285894 0.511748 0.32377 0.689937 0.452837 2008 0.303571 0.500061 0.335929 0.668978 0.452135 2009 0.299089 0.483586 0.355089 0.434454 0.393054
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2007 0.067652 0.055502 0.059755 0.044054 0.056741

2008 0.048652 0.042293 0.051587 0.044645 0.046794

2009 20 0.050002 0.049 0.057489 0.0561 0.084399 0.0534 0.104912 0.0763 0.074201 0.058

20 0.31 0.5064 0.3492 0.4227 0.3981

Net Interest Non performing Loans Margin 2006 2007 2008 2009 2010 AB 0.005705 0.012399 0.012101 0.008312 0.011617 AB City 0.015874 0.016702 0.021521 0.020115 0.018863 City Prime 0.008665 0.015776 0.0183 0.007777 0.004637 Prime Standard 0.024537 0.00376 0.00321 0.002686 0.004221 Standard Conventional 0.013695 0.012159 0.013783 0.009723 0.009834 Conventional Size Productive asset ratio 2006 2007 2008 2009 2010 AB 0.976068 0.962533 0.970962 0.977206 0.969494 AB City 0.974823 0.971475 0.955976 0.963539 0.967044 City Prime 0.973257 0.991701 0.988958 0.985723 0.988789 Prime Standard 0.99554 0.994981 0.994098 0.992153 0.990984 Standard Conventional 0.979922 0.980173 0.977499 0.979655 0.979078 Conventional Return on Assets (ROA) Loan to Deposit Ratio 2006 2007 2008 2009 2010 AB 0.743619 0.766559 0.841049 0.867369 1.020575 AB City 0.613159 0.660797 0.764327 0.697079 0.647283 City Prime 0.822494 0.818055 0.858309 0.84001 0.952227 Prime Standard 0.775716 0.792043 0.970609 0.912849 0.925085 Standard Conventional 0.738747 0.759364 0.858573 0.829327 0.886293 Conventional Cash to Deposit Ratio

2006 0.019671 0.033587 0.033334 0.01041 0.024251

2007 0.035177 0.035385 0.032999 0.002685 0.026561

2008 0.035043 0.043767 0.026167 0.008075 0.028263

2009 20 0.041136 0.042 0.04762 0.0492 0.026987 0.0391 0.026207 0.0272 0.035487 0.039

2006 24.59424 24.39571 25.81747 23.74118 24.63715

2007 24.87509 24.61008 25.10013 24.01694 24.65056

2008 25.15635 24.76833 25.55146 24.16495 24.91027

2009 25.39696 25.06012 25.42843 24.59402 25.11988

20 25.621 25.191 25.770 24.876 25.36

2006 0.01109 0.003937 0.017516 -0.00573 0.006702

2007 0.029953 0.007045 0.017599 0.001137 0.013933

2008 0.027703 0.00697 0.009993 0.003338 0.012001

2009 0.031909 0.010707 0.025548 0.006812 0.018744

20 0.0297 0.0105 0.0234 0.0086 0.0181

63

AB City Prime Standard Conventional

2006 0.07717 0.059574 0.066925 0.057391 0.065265

2007 0.080548 0.066749 0.067446 0.050498 0.06631

2008 2009 2010 0.059745 0.064452 0.069801 0.053638 0.070467 0.061525 0.073199 0.08711 0.06658 0.053943 0.118651 0.086211 0.060131 0.08517 0.071029

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Appendix K: Calculation for Hypothesis testing

Islamic Banks: ROE (X) X 0.12722 0.027004 0.232086 0.236959 0.190235 0.041079 0.226799 0.204428 0.169284 0.114063 0.073337 0.074856 0.189981 0.139949 0.153622 0.156308 2.35721
X = 0 .157147333

X-X -0.029927333 -0.130143333 0.074938667 0.079811667 0.033087667 -0.116068333 0.069651667 0.047280667 0.012136667 -0.043084333 -0.083810333 -0.082291333 0.032833667 -0.017198333 -0.003525333 -0.000839333

(X-X) SD 0.000895645 0.016937287 0.005615804 0.006369902 0.001094794 0.013471858 0.004851355 0.002235461 0.000147299 0.00185626 0.007024172 0.006771864 0.00107805 0.000295783 0.0000007045 0.0000007045 0.068646941

65

Conventional Banks: ROE (Y)

Y 0.421912 0.119492 0.265616 0.027004 0.342121 0.094395 0.186192 0.041079 0.332027 0.139612 0.239345 0.114063 0.282007 0.132448 0.20856 0.139949 3.085822
Y = 0.205721467

Y-Y 0.216190533 -0.086229467 0.059894533 -0.178717467 0.136399533 -0.111326467 -0.019529467 -0.164642467 0.126305533 -0.066109467 0.033623533 -0.091658467 0.076285533 -0.073273467 0.002838533 -0.065772467

(Y-Y) 0.046738347 0.007435521 0.003587355 0.031939933 0.018604833 0.012393582 0.0003814 0.027107142 0.015953088 0.004370462 0.001130542 0.008401275 0.005819483 0.005369001 0.0000080573 0.004326017 0.193566036

SD

66