NORTH SOUTH UNIVERSITY

SCHOOL OF BUSINESS & ECONOMICS

Course Title: Financial Markets and Institutions

Course Code: FIN643
Section: 01

Topic: Relative Performance of Islamic versus Traditional Private Banks in Bangladesh

Submitted to:

Dr. A. K. M. Atiqur Rahman

Professor, Department of Economics
School of Business and Economics, North South University.

Prepared by:
Name ID
Ahnaf Sadat Ahmed 1825231660
MD. Abdur Rahim 1825263060
Sakib Ul Alam 1835224660
Tanjil Rabbi Begh 1915082660

Date of Submission: 06 Oct, 2020

Contents
Introduction...........................................................................................................................................3
Historical Background of Banking Industry in Bangladesh:....................................................................3
Scheduled Bank................................................................................................................................3
Non-Scheduled Bank:........................................................................................................................3
History of Private Banks in Bangladesh:................................................................................................3
History of Islami Bank in Bangladesh:....................................................................................................4
Difference between Conventional Bank and Islami Bank:.....................................................................5
Objective of the Study:..........................................................................................................................5
Methodology of the Study:....................................................................................................................5
Discussion..............................................................................................................................................6
Comparative Business Volume of Islamic Banks in terms of All Banks:.............................................6
Distribution Channel of Selected Four Banks:....................................................................................6
Comparative Deposit Performance:..................................................................................................7
Comparative Loans and Advances Performance:..............................................................................7
Comparative Net Profit after Tax (NPAT):..........................................................................................8
Comparative Non-Performing Loan (NPL) Position:...........................................................................8
Capital to Risk Weighted Asset Ratio (CRAR):....................................................................................9
Net Interest Margin (NIM):................................................................................................................9
NPAT Conversion Efficiency Indicator:.............................................................................................10
Return of Asset (ROA):.....................................................................................................................10
Return of Equity (ROE):....................................................................................................................11
Regulatory Reserve Comparison:.....................................................................................................12
Cost of Funds:..................................................................................................................................12
Net Interest Spread:........................................................................................................................13
Findings:..............................................................................................................................................13
Conclusion:..........................................................................................................................................14
References:..........................................................................................................................................15
Introduction
A country’s economic growth basically depends on the financial institutions especially
banking sectors of that country. Banking sector of Bangladesh is one of the major
sectors, which contributes significantly to the national economy. The sector comprises a
number of banks in various categories.

Historical Background of Banking Industry in Bangladesh:

After the independence, banking industry in Bangladesh started its journey with 6
nationalized commercialized banks, 2 state owned specialized banks and 3 foreign Banks.
In the 1980s banking industry achieved significant expansion with the entrance of
private banks. Now, banking sector in Bangladesh is primarily of two types:
A). Schedule Bank
B). Non-schedule Bank

Scheduled Bank: The banks which get license to operate under Bank Company Act,
1991 (Amended in 2003) are termed as Scheduled Bank. State-owned commercial
banks, private commercial banks, Islamic commercial banks, foreign commercial banks
and some specialized banks are Scheduled Bank.

Non-Scheduled Bank: The banks which are established for special and definite
objective and operate under the acts that are enacted for meeting up those objectives are
termed as Non-Scheduled Bank. These banks cannot perform all functions as like as
scheduled banks. Grameen Bank, Probashi Kallyan Bank, Karmasangsthan Bank, etc.

History of Private Banks in Bangladesh:

During the period 1982-83, procedure of denationalization and privatization had started
which included 2 types of reforms - transfer of existing publicly owned assets to private
sector and introduction of competition between the NCBs (Nationalized Commercial Banks)
and the newly emerging private banks. Arab Bangladesh Bank (presently known as AB
Bank) is the 1st private sector bank in Bangladesh set up in 1982 followed by National Bank
Limited set up in 1983. Also 2 NCBs - Uttara and Pubali Bank were denationalized and
transferred to private ownership in 1983. Subsequently, 4 new banks- City Bank
Limited/UCBL (United Commercial Bank Limited) / Islami Bank Bangladesh Limited / IFIC
(International Finance, Investment and Commerce Bank Limited) joined the club of the
private sector banks. At present, there are 34 Private Commercial Banks in the country.

History of Islami Bank in Bangladesh:

In Bangladesh, Islamic banking started its journey during 1983 by establishing Islami Bank
Bangladesh Ltd. Following that, seven more Islami banks were established. The innovation
of interest-free banking systems proved its worth in the country’s money market in
compliance with Shariah and many traditional banks have opened their Islamic banking
windows. Islamic Banking means Islamic Shariah-based banking (without interest) i.e. goals,
objectives, and activities are to be done according to the principles of Islamic Shariah.

At present, eight full-fledged Islamic banks are operating with 1,380 branches out of total
10,578 branches in the banking industry.

In addition, 19 Islamic banking branches of nine conventional commercial banks, and 88

Islamic banking windows of seven conventional commercial banks are providing Islamic
financial services in Bangladesh.

FCBs SOBs
9 6 Specialized Banks
Islamic PCBs 3
8
Traditional PCBs
34

Source: Bangladesh Bank website; accessed on 27.09.2020

Difference between Conventional Bank and Islami Bank:

Conventional Bank Islami Bank
 Runs on fully commercial basis, Main objective is to help in building
maximization of profit is the prime development and making welfare of the
objective. human being.
Follows laws & procedures evolved through Follows Islamic law (Shariah) i.e. as per
human research, studies and innovation. directives of the Holy Quran & Sunnah.
Source of income is interest (Riba) and Source of income are profit, rental and
services & commission. service charges, commissions etc.
Relation between customer and banker is An Islamic bank is not only a banker but
debtor & creditor. also a partner in business.

Objective of the Study:

The main objective of this study is to compare the financial performance of Islamic Banks
and Conventional Banks in Bangladesh.

Methodology of the Study:

This study is basically based on the financial data which collected from respective Banks
annual reports, Bangladesh Bank Website and Publications. The population for this study is
the all Islamic and Conventional banks that operate inside Bangladesh. The sample size is
comprised of 2 full-fledged Islamic and 2 Conventional banks. These 2 Islamic and 2
Conventional banks are selected randomly from 8 Islamic banks and 34 Conventional banks
in Bangladesh. These selected banks are:
Islamic Banks Conventional Banks
Islami Bank Bangladesh Ltd. (IBBL) BRAC Bank Ltd. (BBL)
Shahjalal Islami Bank Ltd. (SJIBL) Eastern Bank Ltd. (EBL)

To compare the performance of Islamic and Conventional banks, we have compared some
parameters of CAMEL viz. capital, liquidity, assets, earning along with some other business
performance parameters viz., NPAT, deposit, NPL, etc.
Discussion
Comparative Business Volume of Islamic Banks in terms of All Banks:
Amount Tk. In billion
As on 31.12.2019
Particulars Islami Bank share Other Bank share
Total Deposit 24.65% 75.35%
Total Investment 24.82% 75.18%
Remittances 35.34% 64.66%
Total Excess Liquidity 9.21% 90.79%
Total Number of Bank Branches 13.05% 86.95%
Total Agricultural Credit 2.57% 97.43%
Source: BB report on Development of Islamic Banking in Bangladesh

There are total 60 banks in Bangladesh. Only 13% belong to Shariah Based Banking the
others are conventional and specialized banks. Islamic Banks hold 25% of the total deposit
where conventional banks provide 75% of the deposits. The percentage is same for total
investment/loans advances. There is significant spike in the remittance of Islamic Banks, they
hold 35% where conventional banks contribute 65% of the total remittance.

Distribution Channel of Selected Four Banks:

Branch ATMs
661

424
357

187 207
132 107
85

SJIBL IBBL BBL EBL

Source: Respective Banks Annual report of 2019

Islami Bank Bangladesh Ltd. is the first-generation bank in Bangladesh established in 1983.
EBL established in 1992, Shah Jalal Islami Bank in 1999 and BRAC Bank established in
2001. So its obvious for Islami Bank to have the highest volume of branches and ATMs in
Bangladesh.

Comparative Deposit Performance:

IBBL BBL EBL SJIBL

20,338
Amount Tk. In crore 17,686 24,016
14,635 19,963 26,831
12,441 16,735
10,926 23,351
14,028 19,622 94,629
12,799 16,886
15,022 82,257
75,502
68,135
61,536

2015 2016 2017 2018 2019

Source: Respective Banks Annual report of 2019

Being the very first Islami Banks and owing to highest number of branches, IBBL holds the
highest amount of deposits among the four Banks followed by BBL, EBL and SJIBL. From
the graph it appears that deposit growth is in increasing trend over the years.
Comparative Loans and Advances Performance:
IBBL BBL EBL SJIBL

19,729
Amount Tk. In crore 18,609 23,205
15,867 20,931
26,409
12,299 18,403 23,801
9,684 15,208 20,256 89,901
13,023 17,361 80,576
14,743 71,073
61,642
53,019

2015 2016 2017 2018 2019

Source: Respective Banks Annual report of 2019

Being the very first Islami Banks and owing to highest number of branches, IBBL holds the
highest amount of loans and advances among the four Banks followed by BBL, EBL and
SJIBL. From the graph it appears that loans and advances growth is in increasing trend over
the years.

Comparative Net Profit after Tax (NPAT):

IBBL BBL EBL SJIBL

147 172
Amount Tk. In crore
308 401
120
156 241
266 555
565
525
129 446
222
244 631
492 548
448
341

2015 2016 2017 2018 2019

Source: Respective Banks Annual report of 2019

BRAC Bank has the highest NPAT due pioneer in SME Banking as well as effective
corporate banking, low cost of funds and low operational costs due to centralized banking
system followed by IBBL, EBL and SJIBL.
Comparative Non-Performing Loan (NPL) Position:
SJIBL IBBL BBL EBL

3.27%
5.99% 2.35% 3.35%
2.69% 3.10%
2.50% 3.99%
3.40% 3.56%
4.22% 4.12%
3.83% 3.82%
3.59% 6.84%
6.47%
4.70% 4.91%
3.97%

2015 2016 2017 2018 2019

Source: Respective Banks Annual report of 2019

From the figure, it appears that EBL has the lowest NPL position (3.35%) in 2019 followed
by IBBL (3.82%), BBL (3.99%) and SJIBL (4.91%). However, the NPL position is still far
lower than the average NPL position of banking industry which stood at 9.32% as on
31.12.2019.

Capital to Risk Weighted Asset Ratio (CRAR):

The ratio measures a bank's financial stability by measuring its available capital as a
percentage of its risk-weighted credit exposure. According to RBCA Guideline of BB, Banks
have to maintain a minimum CRAR as guided to increase the Bank’s shock observing
capacity.

SJIBL IBBL BBL EBL

14.74%
14.24% 14.09% 12.16%
15.10%
15.07%
13.67%
12.23% 12.72%
12.26%
12.95%
11.66% 11.97%
10.82% 11.30%

14.50% 16.02%
13.52% 11.54% 12.19%

2015 2016 2017 2018 2019

Source: Respective Banks Annual report of 2019

It appears all of these four banks complied with the guideline. In 2019, the benchmark set
was 12.5%. Here, one thing can be mentioned, based on our sample size, BBL and EBL are
better in keeping higher CRAR than IBBL and SJIBL.

Net Interest Margin (NIM):

NIM is a powerful ratio to measure the gross margin of a Bank. In 2019, BB reported that
average NIM of all the Banks of the country was 2.99%. Net interest margin (NIM) is a
measure of the difference between the interest income generated by banks and the amount of
interest paid out to their lenders relative to the amount of their (interest-earning) assets.
Source: Respective Banks Annual report of 2019
Here from the graph, it appears that in 2019, all of our selected banks had quite well
performed compared to the standard. In fact as we can see BRAC Bank is one of the leading
commercial banks, NIM is close to double of country average NIM.

NPAT Conversion Efficiency Indicator:

Source: Respective Banks Annual report of 2019

The above graph shows how much NPAT was generated from NII in 2019, the ratio can be
considered as an efficiency indicator. Here, it’s clearly seen that the 2 commercial banks are
well ahead of 2 Islami Banks. This is because those 2 Islami Banks have a higher operating
expense due decentralized branch banking system.

Return of Asset (ROA):

Return of Asset, ROA is used to measure how profitable a Bank’s assets are in generating
revenue. According to BB, average of all Banks in 2019 was 0.30% and private banks
average was 0.65%.
 SJIBL IBBL BBL EBL
1.15%
1.04% 1.15% 1.30%
1.23%
1.89%
2.02% 1.87%
1.65%
1.13%

0.62%
0.43% 0.61% 0.64%
1.02% 0.50%
0.98%
0.64% 0.65% 0.67%

2015 2016 2017 2018 2019

Source: Respective Banks Annual report of 2019

Here, from the graph it can be seen that the 2 commercial banks asset book is quite efficient
in generating revenue. But, it can’t be ignored that the mode of finance in Islami banking is
quite different. And also they’re established not for the purpose of profit making solely.

Return of Equity (ROE):

A higher return on equity indicates that a Bank is effectively using the contributions of equity
investors to generate additional profits and return the profits to investors at an attractive level.

SJIBL IBBL BBL EBL

12.94% 13.83%
11.41% 16.52%

10.95% 22.16%
22.14% 19.25%
16.29%
13.32%

9.17% 11.38% 9.23%

7.18% 9.71%
10.78% 12.40% 10.47% 10.98%
9.14%

2015 2016 2017 2018 2019

Source: Respective Banks Annual report of 2019

In 2019, according to the Department of Off Site Supervision (DOS) of BB, the average ROE
of the Banks of Bangladesh was 4.68% and average ROE of the private banks of the country
was 9.54%. In terms of ROE, except Islami Bank Bangladesh, all of the sample Banks are
ahead of the BB average. Again, commercial banks performances are superior here because
of their business modality.
Regulatory Reserve Comparison:
From the RR context, sample banks performance was as follows for 2019:
Tk. in crore
Particulars SJIBL IBBL BBL EBL
CRR Required (5.50% of ADTL for the Banks) 1,166.9 5,111.66 1,396.5 1,276.53
4 0
CRR Maintained 1,260.5 5,738.37 1,448.3 1,436.60
5 6
Surplus 93.61 626.71 51.86 160.07
SLR Required (5.50% for Islami Banks and 13% 1,166.9 5,111.66 3,630.9 3,318.99
for Traditional Banks of ADTL) 4 0
SLR Maintained 1,577.1 6,397.41
4,696.3 3,566.90
34
Surplus 410.19 1,285.75
1,065.4 247.91
4
Note: The CRR section of RR requirement was reduced in the mid 2020 to
CRR=4.00%; ADTL-Average Time and Demand Liabilities

Here, it’s visible that, Commercial Banks have to maintain a higher SLR than Islami Banks.
This is because of different operational modality & fewer qualified investment opportunity
for islami banks.

Cost of Funds:
Cost of Funds is the weighted average interest rate of the interest-bearing liabilities of a bank
financial institution. It serves as the reference rate for pricing the variable interest loan
products.

Cost of Fund
8.42% 8.31%
7.08%
6.16%

SJIBL IBBL BBL EBL

Source: Respective Banks Annual report of 2019

The above figure indicates that Cost of funds of commercial banks is better in terms of
generating low cost deposit.
Net Interest Spread:
Bank spread is the difference between the interest rate that a bank charges a borrower and the
interest rate a bank pays a depositor.
4.67%
3.98% 4.00%

2.93%

SJIBL IBBL BBL EBL

Source: Respective Banks Annual report of 2019

Because of the differences in the operations and financing activities, from our sample it can
be concluded that Islamic banks spread are a bit lower compared to the commercial banks.

Findings:
Islamic banking has become popular all over the world. Various reputed local and
international banks have also started launching Islamic windows because of the success of
Islamic banking. The International Monetary Fund (IMF) has openly acknowledged the
progress of Islamic banking. According to the IMF, Islamic banks are becoming increasingly
popular around the world and the demand for this type of banking is growing rapidly. In a
report on Islamic banking, the IMF said that in this sector (Islamic banking) both parties have
to take profit and loss equally. No one have to take higher risk than another. As the risk is
low, the interest toward Islamic banking is increasing. It is expanding widely. It has a lot of
potential because of the world’s interest in this sector due to trust and religious beliefs.

The interest of the people of the country towards Islamic banking is increasing day by day.
By capitalizing on this interest of the people, the conventional banks are also leaning towards
Islamic banking. Some conventional banks want to open new branches and windows of
Islamic banking and some want to transform their operation into full-fledged Islamic
banking. Recently, the two banks have received approval to convert from conventional banks
to full-fledged Islamic banking. Some more conventional banks are trying to convert into
full-fledged Islamic banking.
According to the industry expert, most of the people in our country are religious. They are
more comfortable with Shariah-based business than interest-based business. Islamic banks
collect deposits in Mudaraba based system. Then, they invest those money in various Shariah
approved methods. The profits earned from this are distributed among the depositors and
shareholders. As a result, people's confidence in this system is increasing day by day. In
addition, Islamic banking has less risk and more opportunities. Therefore, conventional banks
are also leaning towards Islamic banking. A conventional bank can give a loan of Tk 75
against a deposit of Tk 100. On the other hand, Islamic banks can give loan Tk 90 against
deposit of Tk 100. While the conventional banks are required to keep 13 percent SLR, for
Islamic banks it is 5.5 percent. Although Islamic banks can change the rate of return on
deposits at any time, conventional banks cannot. This creates an opportunity for Islamic Bank
to make better profits than conventional banks. As a result, many banks are interested in
converting to Islamic banking. So, Islamic banking sector is increasing day by day. Several
banks in Bangladesh have been trying to convert to Islamic banking for a long time.
Recently, Standard Bank and NRB Global Bank were added to the list.

Conclusion:
The size of our banking sector is quite large. The amount of people's deposits and loans in
this sector is not less. There is always a lot of discussion and instability regarding traditional
private banks and Islamic banks. A balance between traditional private banks and Islamic
banks is important. Our central bank is trying their best to ensure the stability within this
banking sector.
References:
1. Bank Home. (n.d.). Retrieved from http://www.bb.org.bd/
2. BANK SMART. (n.d.). Retrieved from https://www.bracbank.com/en/investor-relations
3. Eastern Bank Ltd.: EBL Financial Reports. Retrieved from https://www.ebl.com.bd/financial-
reports
4. Islami Bank. Retrieved from https://www.islamibankbd.com/annual_report.php
5. Shahjalal Islami Bank Limited Retrieved from
https://www.sjiblbd.com/Financial_Statements.php
6. Dasgupta, A. K. (2019). Developments of Islamic Banking in Bangladesh. Islamic Banking Cell
Research Department Bangladesh Bank.
7. ISLAM, M. U., & ASHRAFUZZAMAN, M. (2015). A Comparative Study of Islamic and
Conventional Banking in Bangladesh: Camel Analysis.
8. Uddin, M. S., & Ahsan, M. K. (2017).  Comparisons of Financial Performance of Islamic Banks
and Conventional Banks in Bangladesh.