Introduction

Traditional Banking has a long history. It took decades to develop and shape itself into the
modern banking on which the worlds economy is so dependent today. Islamic Banking,
although having a brief history of 40 years, has given a full-on competition to Conventional
Banking and is consequently on its way to growth. Since its introduction, the concept of Islamic
Banking has attracted a prominent market share towards itself. A large audience has eagerly
involved itself in understanding and practicing Islamic Banking and has chosen to prefer it over
Conventional Banking Practices. This is the main reason why Islamic Banking has become the
talk of the town.
In comparison to the Conventional Banking, Islamic Banking may lack in the
diversification of products, but it definitely is not lagging in the escalation war. It is double the
growth rate of Conventional Banking, which shall be proved through facts and figures at a later
stage. The noticeable traits that have attracted investors towards Islamic Banking are:
i.
Shariah Compliant
The basis of Islamic Banking is Shariah. Shariah means the law of Islam which
discourages interest and any speculative action whilr performing a financial deal. The
Islamic concept also implies that everything existant is the property of Allah and is
entrusted upon man whereby every person has an equal right on the creations of nature.
ii.

(Ali, 2006, p. 16)

Growing demand of investors
The markets are expanding and so are the businesses bringing a consequent increase in
the ways of transactions are safe for all the parties involved in the business. Islamic
financing is prudently accepted because risk is shared proportionally and only one party
does not suffer loss. The concept of Islamic Banking has been widely accepted because
investors are growing demands and Islamic banking has the capacity to cater to their
needs.
1

iii.

Islamic finance
Most people are attracted towards the concept with a religious point of view. They invest
in/through Islamic banking only to comply by the rules of trading by Islam, hence,
increasing the ratio of investments done through Islamic Banking.
Besides these grounds, Conventional Banking itself provided reasons that encouraged new

entrant. A few of the prominent reasons were

i.

Increased Competition
Since the last two decades there has been a prominent increase in the number
entrants in the banking industry. In order to look different, many banks started with the
concept of Islamic banking as a USP. It expanded their market and promoted the products
of the bank as people accepted the fact that they were being offered something new,
different from what they were already being provided.
Resultantly, banks started to diversify into new activities that brought higher returns

ii.

and helped in capturing a higher market share.

Deregulations:
As the competition among banks increased, they started to acquire funds at any cost
leading to improper valuation and judgment of customers which resulted in frauds, non
productive loans and ultimately towards bank losses.
Ultimately, the central bank had to put some regulations and procedures to counter
mismanaged loans. These deregulations generated
a. Diminished advantage over acquiring funds
b. Diminished income advantage
The central bank of Pakistan had to imply certain restrictions such as reserve
requirements (Ahmed m. Khalid, 2004). In order to follow these regulation banks had to
generate enough profit so that the requied amount of reserves caould be put in spare.
Consequently they had to generate new sources of earnings, Islamic Finance being one of
them.
2

The results of increased competition thereof, were either bankruptcy or shrinkage in Market
Share. Islamic Banking has benefited from the later and has captured prominent market share in
a short span of time; which resultantly encouraged Conventional Banks to open Islamic windows
or introduce Islamic Banking side by side.
*******

CHAPTER 1
LITERATURE REVIEW
A lot has already been said and written about Islamic Banking. Many research articles and
projects have been published; people have taken keen interest in exploring the reason behind the
ready acceptance of the new banking concept. The research has mainly been conducted in
Muslim Countries because the acceptance of a Sharaih compliant concept was comparatively a
lot more readily acceptable. Moreover, the interesting part is that Islamic Banking has also
affected the markets of Non-Muslim Countries. This fact in itself has attracted researches

towards answering the various questions that may exasperate any mind. In Southeast Asia,
Islamic Banking has grown significantly during the last three decades (Loghod, 2008). Although,
the banks have progressed a lot and have introduced Islamic complying products but the clarity
among Islamic and conventional is still blur (Anwar). Most of the previous research has been
comparison based. A comparison based on profitability, capitalization and stability suggests that
Islamic banking is way more beneficial; however, it does not appear to be very cost-effective.
(Iqbal, April 2001)
Contradicting views suggest that there are no significant differences among the productivity
of the two concepts, although a GCC based study suggested that Islamic banks were more
profitable comparatively reasons being competition and market diversification. (Loghod, 2008)
These are mostly country specific. The research conducted keeping in view the Pakistans
banking sector is a lot limited. A few of the Pakistan based research findings suggest that Meezan
Bank being the pioneer of Islamic Banking is the most trusted bank. (Hassan, 2009).
While investigating whether the bank that is more profitable tends to provide better satisfaction,
many previous researches are avaialable. The second part of the report deals with measuring the
customer satisfaction in both Conventional and Islamic Banks and then comparing them to
conclude which mode of banking has more satisfied customers. For that purpose, the need to
define the variables that effect customer satisfaction arises. According to Surabi Singh and Renu
Arora, Customer satisfaction is highly effected by employee behavior, listening to the customers
attentively, speaking with a smile on the face and appreciating the organization affects customer
satisfaction in a positive way. (Surabi Singh, 2011). The employees can instill confidence in
customers through empathy, reponsiveness, assurance and competance. Complying with the
work of Bennett & Barkensjo (2005) and Negi (2009), JENET MANYI AGBOR suggested in
4

year 2011 that customers perception of quality of service is assessed by reliability of the
company and also confirmed that tangibles, empathy and assurance should be taken under
consideration while measuring customer satisfaction. (AGBOR, 2011)
Lastly, it is important to note that customer satisfaction leads to more sales and henceforth better
profitability. Surabi Singh in his research concluded that if customer retention increases by five
percent it can increase profitability by 35 percent. (Surabi Singh, 2011).
The history of conventional banking extends back to the year when the concept of a bank
evolved. The function of a bank is to act as an intermediary between the lenders and the
borrowers. It ca further be divided into basic functions and derived functions. The basic
functions include accepting deposits (saving deposits, fixed deposit, current deposit and
recurring deposit) and granting advances (overdraft, cash credit, loans, discounting of billing),
whereas, secondary functions may include intermediary functions (funds transfer, standing
instructions, cheque collection, portfolio management, collections) and services (drafts, lockers,
underwriting).
The above mentioned are the main activities of any bank. What basically differentiates a
conventional bank is that:
* It is based on the principle of loaning on a fixed rate of interest, specifically compound interest
* Before lending, the bank checks on the credit history to ensure repayment of loan
* The longer the tenure of repayment, the more the lender shall have to pay

The basis of Islamic banking on the other hand is Islam and therefore it is limited to Islamic Law
(more commonly known as Shariah) in all of its actions. The literal meaning of Shariah is a path
to the origination of life and henceforth it refers to a legal system in accordance with the Holy
Qur'an. The governing principles of an Islamic bank are:

* Non interest-based Dealings

* Zero oppression
* Avoiding speculation;
* The implication of an Islamic tax i.e. Zakat;
* Not dealing or producing the goods and services discouraged by Islam
In Islamic Banking, money itself is not considered as an asset but a means of generation of assets
once combined with human effort. Earning an interest on an activity (such as lending money)
that does not include any human action or effort is termed senseless and unacceptable. (Ali,
2006, p. 16)
*******

Purpose and Scope

As mentioned above, the research finding based on Pakistans Banking sector are very few
and have not touched the roots of the concept. Many comparisons among Islamic and
conventional banking based on their products and the conceptual differences have already been
published. This comparative study, however, will not only highlight the difference among the
two but also the comparison between the productivity of the two modes of banking. It shall shed
light on the profitability of the two modes to the bank and their benefits to the customers. It shall
also analyze the reason behind the continuous growth and acceptance of Islamic Banking during
the last decade in Pakistan.

Hypothesis Model

H
1

Islamic banking is
more profitable for
banks compared to
conventional
banking
7

Islamic Banks
Customers are more
satisfies compared
H
to the
Conventional
In this case, 2ignorance is not bliss. There is little or no knowledge about
basic difference
banks customers

Limitations

between Islamic and conventional products among the audience. This may cause them to choose
based on their beliefs but, satisfaction. A Muslim may be attracted towards Islamic banking
because its faade says that it is the right or the Islamic way to bank; whereas, a non-Muslim
may avoid Islamic Banking because he/she has bad ideas about Islam.
The concept of opening Islamic banking windows under one roof does not draw a clear line
between the two concepts. The problem starts when Islamic and conventional products which are
factually rivals to each other start selling their products on the same counter with the same brand
name in order to give profits to the same organization. Henceforth, the question whether Islamic
Banking is being implemented in its true notion or not, arises. Time constraints and limitation of
resources is a hurdle in itself.
Project Outline
Further to this, a short introduction to Islamic and conventional Banking shall be given; the
similarities and the differences among the two shall be discussed. The research approach that
shall be used to reach the end results shall be introduced. The sample banks shall be listed and
the data collection methods and the data collected henceforth shall be elaborated. Firstly, H2 will
be covered through sampling, focus groups and customer survey questionnaire and consequently
the observations made thereof will be quoted.
8

Comparison based on profitability (H1) shall be performed through ratio analysis and annual
growth analysis of the bank.
Aspects of Customer Satisfaction
In order to measure satisfaction of Islamic and conventional banks a questionnaire based on
previous researches has been compiled together to measure customer satisfaction on the basis of
seven parameters (AGBOR, 2011) (Surabi Singh, 2011) that are as follows:
Tangibles
Tangibles refer to the appearance and outlook of a bank, the first impression that it portrays
on the customer. The physical facilities and complementary stuff provided by the bank effect the
banks image on customers mind. (Catherine Tan Yein Ping, 2012). Tangibles have a great
impact on customer services. Henceforth, this variable has been made a part of the survey
questionnaire that assesses the level of customer satisfaction for both Islamic and Conventional
banks.

Reliability
Complying with Jamal & Nasers work in 2002, Catherine Tan Yein Ping (2012) also relates the
reliability of a service delivered with customer satisfaction. Reliability means providing the
customer with the quality of service that he expects he will get.
Responsiveness

How effectively an employee responds to customer queries acts as a prominent factor that affects
customer service. Customer demands a positive and instant response to his queries. A better
response leads to customer satisfaction
Empathy
Empathy can also be understood as a derivative of responsiveness. It measures the amount to
which a bank understand the needs of its customers and provides services accordingly.
Assurance
Assurance is the confidence that a customer has on its bank, when a customer knows that his
problem will be resolved or his transaction or service wil be completed in the defined turnout
time specifies with the bank. The conformity with the turnaround time illustrated by the bank is a
source of satisfaction to the customer.
Competence
Competency of a bank is judged on the basis of performance of the system and the staff in order
to complete a service. A competent system and competent staff leads to customer satisfaction.
Conflict Handling
Conflict handling defines how good a bank is in handling a customer complaint or avoiding
potential coflicts.

Theroratical Framework

10

The followng is the model designed based on which the survey has been conducted and
evaluated in order to compare the satisfaction levels of customers of Islamic and Conventional
Banking.

TANGIBLES
SATISFIED
CUSTOMER
RELIABILITY

RESPONSIVENESS

EMPATHY

ASSURANCE

COMPETANCE

INCREASED SALES /
PROFITABILITY

CONFLICT HANDLING

The framework also illustrates that reliability, responsiveness, empathy, assurance, competence
and conflict handling are interrelated.

CHAPTER 2
METHODOLOGY:
This is an empirical study based on past data extracted from different available sources. A
few banks from the banking sector in Pakistan have been chosen i.e. two pure Islamic Banks of
11

opposite scales (Meezan Bank & Bank ISlami), two complete conventional Banks (Allied Bank
and Samba) and two Banks that perform both Islamic and conventional banking (Standard
Chartered Bank & Bank Alfalah Ltd. The study is based on the comparison of these products and
the results there off. The methodology has been divided into two portions. Firstly, a profitability
comparison based on growth rates of both banks has been illustrated. Growth rate of ROA and
ROE of banks has also been interpreted to reach the conclusions. The second portion includes the
survey that indicates that profitability of a bank is also impacted by customer satisfaction. The
following are the research results.
2.1 Growth Based on Certain Variables
The growth of Islamic and Conventional banks has been compared on the basis of five
variables. These variables have been chosen on the basis of previous researches made that state
that size, capital, loans and deposits are directly proportional to the profitability of the banks.
(Gul, 2011). Consequently, Five variables that are Equity, Deposits, Investments, Assets and
revenue have been taken and assessed on the basis of last five years data (2007-2011) extracted
from the annual reports of the Banks. See Table 1 below

GROWTH RATE BASED ON CERTAIN VARIABLES

Company

Bank Total Total

Total

Total

Equity

Investments

Years
Name
Meezan

Total Assets
Deposits

Revenue

2007

6.55

54.58

10.54

67.18

4.57

2008
2009

5.97
9.18

70.23
100.33

14.53
23.29

85.28
124.18

6.8
10.1

Bank

12

2010
2011
Allied Bank 2007
2008
2009
2010
2011
Bank
2007
Alfalah
2008
2009
2010
2011
SC
2007
2008
2009
2010
2011
Bank Islami 2007
2008
2009
2010
2011
Samba
2007
2008
2009
2010
2011

11.08
13.79
19.88
22.24
29.92
35.99
43.48

131.07
170.03
263.97
297.47
328.87
371.28
399.56

10.51
4.07
83.96
82.45
94.67
121.16
195.79

154.75
200.55
320.11
366.58
418.34
449.97
515.89

12.29
18.03
21.2
30.59
41.14
45.01
51.83

16.22

273.17

89.58

328.9

25.78

17.04
22.13
21.65
25.9

300.73
324.74
354.02
401.25
0
174.55
206.96
220.27
235.95
9.93
12.48
27.99
38.2
50.57
12.64
9.86
12.52
14.87
17.67

76.02
99.28
113.43
166.53
0
29.59
83.78
72.64
104.38
3.86
5.02
6.81
13.73
21.07
3.95
3.83
5.81
11.09
9.66

43.65
48.7
52.1
55.66
3.84
5.18
4.74
4.76
5.31
6.2
5.46
7.08
7.93
8.18

Total Investments
Meezan
SC

Allied

Following is the graphical representation of table 1

Alfalah

Total Revenue

BankIslami
Samba
Total
Equity

Meezan
SC

60
200
180
50
160
140
40
120
100
30
80
20
60
40
10
20
00

348.99
30.97
389.07
35.56
411.8
37.53
468.35
44.3
0
0
267.57
24.65
317.61
27.24
327.3
28.57
364.19
32.83
3.84
0.6
19.01
1.47
34.21
2.19
44.95
3.81
58.72
5.5
20.66
1.18
16.49
1.76
23.73
1.88
30.51
2.38
31.33
3.35
*Amount in Billions

Allied
BankIslami

Alfalah
Samba

60
Meezan
Allied
Alf alah
SC
BankIslami
Samba

50
40

13

30
20
10

2007 2008
2008
2007

2009
2009 2010

2011
2010

2011

0
2007 2008

2009

2010

2011

Total Deposits
Meezan
SC

Allied
BankIslami

Alf alah
Samba

450
400
350
300
250
200
150
100
50
0
2007

2008

2009

2010

2011

For the purpose of keeping the comparison on the same scale, Meezan Banks growth over the
years is compared with Allied Bank and Bank Islamis with Samba Bank. Furthermore, the
growth of Bank Alfalah and Standard Chartered is analyzed simultaneously to see the effects of
providing Islamic and conventional banking on the same booth. The comparison between
Meezan Bank and Allied Bank is taken into account first.
The percentage average growth rate of Meezan

Investments

Banks Investment during the last five years has

200
180

remained -4.49, whereas, Allied Bank has been

160

2007
2008
2009
2010

140
120
100
80

2011

60

very aggressive towards investment and its

percentage average growth rate has been 25.65.
This is mostly because of the size of the bank.

40
20
0
Meezan

Allied

As, Allied is an older bank, it is more scattered

and have comparatively a lot more branches,

consequently it has more liabilities to look after, therefore increased investment is justified. In
case of Meezan, its not making its owners invest ore and still growing which in itself is a good
sign.
14

Assets
600

The assets of both the banks have apparently risen at

500

a consistent rate. The calculated average percentage

400

change in assets of Meezan Bank during the last five

2007
2008
2009
2010
2011

300
200

years has been 31.69, whereas, for Allied Bank it

100

has been 12.71. Increase in assets is a good sign in

0
Meezan

Allied

itself. Meezan with lower investment and late entry

has a better growth rate of assets, which can be stated as a win-win situation for Meezan Bank.
Both banks have a growing trend in terms of revenue. Comparatively, Meezan Banks
revenue is growing at a larger pace. Its average percentage growth rate has been 41.4, whereas,
Allied Banks revenues growth rate is 21.2.

Revenue

These statistics give act as the finishing touches

60
50
2007
40

2008
2009
2010
2011

30
20

to the recipe. The bank that has better revenue

at the end of the day has done its homework
right. The growth rate of Meezan bank is almost
double of what Allied Bank has generated.
The equity growth percentage of Meezan

10
0
Meezan

Allied

Equity
45
40
35

2007
2008
2009
2010
2011

30
25
20
15
10
5
0
Meezan

Allied

and Allied Bank has a nominal difference where Meezan Bank being at 20.85 and Allied Bank at
15

21.34, which again suggests that with lower investments Meezan Bank, is growing at a higher
rate.
The growth rate of deposits of Meezan Bank (at 32.97) has been way higher than that of
Allied Bank (at 10.94).
To conclude, Meezan Bank has been

Deposits
400

a better performer during the last five

350
300

2007

years, it as grown at larger pace and has

250

brought itself forward as a brand. Not

150

2008
2009
2010
2011

only the Bank itself has built its image, it

200

100
50
0
Meezan

Allied

has also promoted the image of Islamic

Banking in a positive way. Another reason of this outperformance can be the emerging concept
of Islamic Banking. Bring a new entrant with an innovative concept which of an example of its
own in the untapped market, the bank has captured a lot bigger share and has outperformed many
banks in terms of growth.
The above being the comparison between the pioneering banks, the report moves forward to
the next step. Below is the comparison between the growth rates of Bank Islami and Samba
Bank. One Bank being purely Islamic and the other being conventional. The purpose of doing so
is to asses the results on a different scale and verify whether the above results are acceptable or
not.
Investments
25

Bank Islami & Samba Bank

20

Assets

15

2007
2008
2009
2010
2011

60 10
50 5
40 0
30

BankIslami

Samba

20
10
0
Bank Islmi

Samba

2007
2008
2009
2010
2011

The average percentage growth of investments

for Bank Islami 55.15, where as that of Samba
Bank is 31.69 which implies that Bank Islami has
invested more. The purpose behind investments
16

truly relate to the vision of a bank and its management. What we will asses is whether the
company has grown on a similar scale or not and whether the amount invested has added up into
the banks revenues or not.
The asset growth rate over the past five years of Bank Islami has been comparatively speedy
at 134.41 whereas, that of Samba Bank is 13.75. The assets of bank Islami have grown in an
abnormal way in comparison to various banks in the market, which certainly implies that they
have invested a lot during the past five years. Although, the bank has faced many losses as well
during this tenure, but the concern here is whether these losses are less compared to Samba
Bank, which is visible in the percentage growth rate of the revenues of the two banks.

Revenue

The percentage growth rate of revenues of

Bank Islami during the past 5 years has been

5
2007
2008
2009
2010
2011

4
3
2
1

77.84, which is comparatively a lot more

compared to Samba Banks percentage growth
rate i.e. 30.75. Islamic banking here too has
outrun the conventional ways of Banking in

0
Bank Islmi

Samba

terms of generating profits for the company.

The equity of Bank Islami has also increased but not as much as its investment. Still, the
figures outrun the percentage growth rate of Samba Bank. Samba Banks percentage growth rate
over the last five yeas has been 8.61, whereas, that of Bank Islami is 9.62.

17

The deposits of a bank assess a lot about its

profitability. Bank Islamis deposits growth rate
is 54.61 compared to Samba Banks 10.64
implying therefore that Bank Islamis growth

Equity
9
8
7

2007
2008
2009

6
5

2010
2011

Deposits

3
2

60

1
0

50
2007
2008
2009
2010

40
30

2011

20
10

BankIslami

Samba

rate is better comparatively.

To conclude, the profitability of Islamic
Bank has been better compared to the

0
BankIslami

Samba

convetional bank. Even though both the banks

are not selling based on their image or brand, still the statistics show that Islamic Banking has
done better compared to conventional banking over the past five years.
Islamic Banks Productivity Compared with Banks following Dual Concepts
In continuance to the above results, Islamic Banks profitability will further be related to
Banks following both the concepts. Bank Alfalah Ltd. and Standard Chartered being two
growing banks shall ne assessed and then
compared to the growth of Meezan Bank and
Bank Islami that are purely following Islamic

Investments
180
160
140

Banking.

2007
2008
2009

120
100

The investments percentage growth rate of

BAL and SC falls at 19.13 and 17.19

2010
2011

80
60
40
20

18

0
Alfalah

SC

respectively. Both Banks have been investing a lot in order to expand their operations and have
also entered into Islamic Banking. These results if compared to the chosen Islamic Banks show
that they have invested more. This investment will be assessed by comparing the outcomes
generated thereof.
The assets of BAL increased by 9.29 percent and that of SC increased by11.09 percent
during the last five years. Alfalah 9.29 which in

Assets
500

itself is a good rate of increase but when

450
400
2007
2008
2009
2010
2011

350
300
250
200
150
100

compared to pure Islamic Banks it is way low.

Therefore, it is prominent that the Islamic
Banks have performed well in acquiring assets
as compared to other banks.

50
0
Alfalah

Revenue

SC

Now, coming towards the most important

45

point of comparison i.e. Revenue. BALs

35

40
2007
2008
2009
2010
2011

30

revenue percentage growth rate was 14.63

25
20

whereas that of SC was 10.09. Both of these

15
10

when compared to Islamic Banks are low

which adds another feather in Islamic Banking

0
Alfalah

cap and implies that Islamic Banking solely provides a

Equity

better growth rate

60
50
2007
2008
2009

40
30

2010
2011

20
10
0
Alfalah

SC

SC

comparatively.

BALs equity growth rate over the past five years has
been 13.1, whereas, that of SC have been 8.46. These
19

two growth rates compared to that of Islamic Banking are almost at the same average. Meezan
Banks being a bit higher whereas Bank Islamis being a bit low. Reason could be obvious.
Meezan Bank, Alfalah and standard chartered are banks of the same scale whereas, Bank Islami
is a small bank it cannot compete with the scale of the other three banks based on their equity
and investments. Although, if both the banks dealing in dual banking concepts fall below the
equity growth rate of Meezan bank.
The growth rate od deposits of BAL is 10.11 and that of SC is 10.71, both giving each other a
good competition. Although, when compared o

Deposits

Islamic Banks the growth rate falls way below Meezan

450

Banks deposits i.e. 54.58.

400
350

2007
2008
2009
2010
2011

300

Conclusion

250
200

To Conclude, in accordance with the above

150
100

statistics, Islamic banks performance have been

50
0

comparatively better and it is also noteworthy that

Alfalah

SC

various banks are adopting Islamic banking to stay competitive and keep their market share up.
*******
2.2 Profitability Based on Ratios
Return on Assets (ROA)

20

Meezan Bank
2007 2008 2009 2010 2011
0.02 0.02 0.01 0.01 0.02

The ROA of the six banks with their interpretation during the last five years in as follows:

Meezan
ROA
0.03
0.02
0.02
0.01
0.01
0
2007

2008

2009

2010

2011

Allied
ROA
0.06
0.05

Allied Bank
2007 2008 2009 2010 2011

0.04
0.03

0.03 0.03 0.04 0.05 0.05

0.02
0.01
0
2007

2008

2009

2010

2011

Alfalh
ROA
0.02
0.02
0.02
0.01
0.01
0.01
0.01

21

0.01
0
0
0
2007

2008

2009

2010

2011

Bank Alfalah
2007 2008 2009 2010 2011
0.02 0.02 0.01 0.003 0.01

Standard Chartered
ROA
0.016

SC
2008 2009 2010 2011

0.014
0.012
0.010

0.003 0.003 0.01 0.02

0.008
0.006
0.004
0.002
0.000
2008

2009

2010

2011

Bank Islami

Bank Islami
2007 2008 2009 2010

ROA
0.000
-0.002

2007

2008

2009

2010

2011

2011

-0.002 -0.01 -0.02 -0.01 -0.003

-0.004
-0.006
-0.008
-0.010
-0.012
-0.014
-0.016
-0.018

22

Samba Bank
ROA
0
2007

2008

2009

-0.05
-0.1
-0.15
-0.2
-0.25

2010

2011

In
order to

Samba Bank
2007 2008 2009 2010 2011
-0.13

-0.2 -0.17 -0.13 -0.12

calculate the profitability of the bank in

accordance with the sixe of the bank the ratio of
Return on assets is calculated. It measures how

good a banks management is doing in using the banks assets for generating profits. (Appendix
to Chapter 9: Measuring Bank Performance, 2013). The higher the better. The formula for ROA
is
ROA= Net Income/Assets

The ROA of Meezan bank has been very consistent over the years. The only bank that has shown
steady growth in terms of ROA is Allied Bank whose ROA increased to .05 during the last five
years. Alfalah, although having the highest share of deposits does not seam to manage its assets
well. The ROA meter of Alfalah has shown up and down trend, hence being not very impressive.
Return on Equity (ROE)
The following are the calculations of Return on equity for the past five years of all six banks.
The value change over the years is illustrated in tables and also represented graphically

23

Meezan Bank
ROE
0.35

Meezan Bank
2007 2008 2009 2010 2011

0.3
0.25

0.22 0.31 0.17 0.15 0.25

0.2
0.15
0.1
0.05
0
2007

2008

2009

2010

2011

Allied Bank
ROE
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2007

2008

2009

2010

2011

Bank Alfalah
ROE
0.4

Bank Alfalah
2007 2008 2009 2010 2011

0.35
0.3
0.25

0.37 0.36

0.2

24

0.15
0.1
0.05
0
2007

0.2 0.05 0.17

SC
2008 2009 2010 2011
0.02
0.0220090.07 2010
0.1
2008

2011

Standard Chartered
ROE
0.1
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0
2008

Bank Islami

2009

2010

2011

Bank Islami
2007 2008 2009 2010

2011

-0.002 -0.02 -0.12 -0.12

-0.03

ROE
0.000
-0.020

2007

2008

2009

2010

-0.040
-0.060
-0.080
-0.100
-0.120
-0.140

25

Samba Bank
2007 2008 2009 2010 2011
-0.42 -0.61 -0.56 -0.51 -0.47

Samba Bank
ROE
0
2007

2008

2009

2010

2011

-0.1
-0.2
-0.3
-0.4
-0.5
-0.6
-0.7

ROA is a good measure of Banks profitability based on Banks size, but more importantly what
is needed to be asses is how much the bank is earning against one unit of owners equity. This is
calculated through using the Return on equity ratio (Appendix to Chapter 9: Measuring Bank
Performance, 2013). The higher, the better. The formula for ROE is:
ROE= Net Income/Capital
The ROE of the six banks with their interpretation during the last five years in as follows:
The graphs with the tables above illustrate that the bank that is showing a steady consistent
growth in earning returns for its shareholders is Allied Bank. Allied bank is one of the pioneering
banks and it history dates back to 1940s. The consistency of the graph can therefore not be
26

questioned. Quite interestingly, Standard Chartered is showing a consistent growth in return on

equity. Standard Chartered has recently introduced Islamic Banking. This might be the reason for
the change as the bank has entered into a new market and is hence generating more income
against its equity.
The thing that is important to be noted is that the banks that have been working on the mode
of Islamic banking show a good growth rate in terms of ROE. Even the banks that have
introduced Islamic Banking side by side with conventional banking show a positive growth in
both ROA and ROE. Therefore we can conclude that Islamic Banking has played a vital role in
increasing the rate of return for banks over the years. This is the reason why several banks are
moving towards introducing Islamic Banking.
*******

27

Chapter #
Questionnaire analysis
The questionnaires have been filled by customers of various branches of both conventional
and Islamic Banking. The sample size is small and it is footed on Lahore based branches only. A
total of 80 questionnaires have been filled, 40 from Islamic Banking customers and 40 from
conventional banking customers. The demographics of the customers are as follows:
Demographics
Gender
Islamic Banking

vs.

Conventional Banking

Gender

Gender

80% Male 20% Female

72.5% Male 27.5% Female

Male

Female

Male

Female

Occupation
Islamic Banking

vs.

Conventional Banking

28

Occupation

OCCUPATION
Entrepreneur
Services

Retired /
House w ife
Public
Servant

Student

Entrepreneur

Teacher

Retired /
House w ife
Public
Servant

Services

Salaried

Student

Teacher

Salaried

Age
Islamic Banking

vs.

Conventional Banking

AGE
18-23
35-40

24-29
41-above

4; 10%

AGE
18-23
35-40

30-35

7; 18%

11; 28%

24-29
41-above

30-35

6; 15%
3; 8%

4; 10%
6; 15%

16; 40%
9; 23%

14; 35%

Relationship Tenure
Islamic Banking

vs.

Conventional Banking
29

RELATIONSHIP TENURE
1-2 Years
6-10 Years

RELATIONSHIP TENURE

3-5 Years
11 & Above

5; 13%

13; 34%

1-2 Years
6-10 Years

5; 13%

15; 39%

3-5 Years
11 & Above

2; 5%
12; 30%

8; 20%

18; 45%

Questionnaire Analysis
Total 80 responses were collected from Lahore based area that included the customers of
both Islamic and conventional banking. These eighty responses were first analyzed using
regression. It calculated the amount to which customer satisfaction of a bank was effected by the
variables mentioned in the framework. Regression was performed for both Islamic and
Conventional banks. The results are as follows:

Regression
Following are the regression results performed for both Islamic and conventional banks.

30

Model Summary

Model

R Square
a

.776

.602

Adjusted R

Std. Error of

Square

the Estimate

.515

.57901

a. Predictors: (Constant), Conflict Handling, Tangibles,

Responsiveness, Reliability, Competency, Assurance,
Empathy
R= .776, which indicates a high level of correlation among the dependent and independent
variables. R square implies how much the dependent variable i.e. Customer Satisfaction be
explained by the independent variables that are Conflict Handling, Tangibles, Responsiveness,
Reliability, Competency, Assurance and Empathy. According to the result, 60.2 % can be
considered as large.
The next is the anova test that indicates that the above table is authentic and the values
calculated represent the framework exceptionally well. As, Sigma is less than .05, it indicates
that the model applied can help calculate the required results.

31

ANOVAb
Sum of
Model
1

Squares

df

Mean Square

Regression

16.247

2.321

Residual

10.728

32

.335

Total

26.975

39

6.923

Sig.
.000a

a. Predictors: (Constant), Conflict Handling, Tangibles, Responsiveness,

Reliability, Competency, Assurance, Empathy
b. Dependent Variable: Customer Satisfaction
T-Test
Hence, the authenticity of the framework model has been verified and henceforth, moving
forward towards calculating the next step i.e. the comparison between the customer satisfaction
of Islamic and Conventional Banks, the T-test is performed on the basis of the responses gathered
by the customers of Islamic and conventional banks.

Group Statistics
VAR0
0001
VAR00002 .00
1.00

Mean

Std.

Std. Error

Deviation

Mean

40

2.7750

.83166

.13150

40

3.4250

.78078

.12345

Here, zero indicates conventional banking results, whereas, 1 indicates Islamic Banking results.
40 responses were collected from each mode of banking. In the above box, the Mean for
Conventional banking is 2.77, whereas the mean for Islamic Banking is 3.42. The mean is an
important indicative of the difference of results between Islamic and conventional banking. The
mean of Islamic banking is greater than the mean of Conventional banking. This indicates that
Islamic banks customers are comparatively more satisfied. Similarly, the standard deviation for
Conventional banking is higher than the deviation for Islamic banks.
Levenes Test for Equality of Variances
32

In the following Independent Samples test, it is visible that sigma = .98, which illustrates that the
results shall be read from the first low of the table. It also means that the variability between the
two conditions is not large, which can be taken as good in this scenario because Islamic and
conventional banks have the same roots, but perform differently. Therefore a low variability is
expectable. It also implies that the two conditions are not significantly different. Comparison is
always possible among the things that are at the same bar. This result also illustrates that the
comparison between the two is possible.
As, the result is above .05, therefore further implications shall be done using the information
illustrated in the first row. The next step illustrates whether the two conditions are statistically
different or not and it also explains the extent to which they are different. We take the value of
Sig (2-Taied) in the first row of the table which is .001. According to the benchmark, as the sig
value is less than .05, there is statistically a great difference between the two conditions. This
result strengthens the hypothesis as the difference between the mean of Islamic and conventional
Banking is large. The group statistics box revealed that the mean for Islamic Banking was greater
than the mean of conventional banks, hence it can be concluded that the participants of Islamic
banking were more satisfied than the participants of conventional banks.

33

Independent Samples Test

Levene's Test
for Equality of
Variances

t-test for Equality of Means

95% Confidence
Interval of the
Sig. (2-

F
Equal
variances

.001

Sig.

.980

df
-

Mean

Std. Error

tailed) Difference Difference

Difference
Lower

Upper

78

.001

-.65000

.18037 -1.00908 -.29092

- 77.691

.001

-.65000

.18037 -1.00910 -.29090

3.604

assumed
Equal
variances

3.604

not assumed

Main Findings of the Report:

34

1. In terms of growth, Islamic Banks have performed well during the last five years ascompared
to the conventional banks and following this prominent trend many conventional banks have
initiated to provide Islamic Banking services side by side.
2. If the profitability in terms of return on assets and capital are assessed, it is prominent that
Islamic banking through its ups and downs have proved to provide a better growth in the rate
of return of banks. The focal point is that Islamic banking being a new concept is showing a
growing ratio. Although, Allied bank has been pretty smooth in providing returns, but it can
be taken as an exceptional case in comparison to the other 5 banks because of the size ad the
history of the bank.
3. Customer Satisfaction is a matter of customers choice. In accordance with the survey,
customers are more satisfied with the Islamic mode of banking. The participants of Islamic
banking were more satisfied than the participants of conventional banks.
*******

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35

3. (n.d.). Retrieved 2012, from http://www.zaharuddin.net/senarai-lengkap-artikel/38/297differences-between-islamic-banks-a-conventional.html para 2

4. Usmani, M. I. (2002). Meezan Bank's Guide to Islamic Banking. DARUL - ISHAAT
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6. Ahmed m. Khalid, M. N. (2004). CORPORATE GOVERNANCE OF BANKS IN
PAKISTAN.
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Retrieved January 31, 2013, from wps.aw.com:
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Economic Journal .
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36

14. al, Z. e. (2002).

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37