Thesis 1

EVALUATON OF PERFORMANCE OF ISLAMIC BANKS IN PAKISTAN BY CAMEL MODEL
EVALUATON OF PERFORMANCE OF ISLAMIC BANKS IN PAKISTAN

BY CAMEL MODEL
SUBMITTED BY
SHARYAR ARBAB (FA16-MBAR-0019)
SUPERVISED BY
MR. ABDUL GHAFFAR
THESIS SUBMITTED TO THE FACULTY OF BUSINESS

ADMINISTRATION AND SOCIAL SCIENCES, MOHAMMAD ALI
JINNAH UNIVERSITY IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS
ADMINISTRATIVE (REGULAR)
SPRING 2019
ii
ACKNOWLEDGEMENT
AL’HUMDUL’LILAH! By the grace of Allah (SUBHANA-TAALA) the three Chapter is done
on EVALUSTION OF PERFORMACE OF ISLAMIC BANK IN PAKISTAN BY CAMEL
MODEL has been successful as its extreme. This project is supervised by ASISITANCE
PROFEESSOR MR. ABDUL GHAFFAR of “Muhammad Ali Jinnah University”
I have tried my best to accumulate all this information by literature, work on it and gives my
views as clearly as possible using terms that we hope will be comprehended by the widest
spectrum of researches, analysis and further studies.
We also thank you to our Supportive “MR. ABDUL GHFFAR” which always ready to lend a
hand to Support us & guide us for this THESIS. We would be failed in our duty if we didn’t
acknowledge the esteemed scholarly guidance, assistance and knowledge. I have received from
them towards fruitful and timely completion of this works.
Lastly, Muhammad Ali Jinnah University because of whom we are able to associate ourselves
with a reputable institution.

iii
Abstract
The purpose of study to evaluate the performance of Islamic banks in Pakistan, the model used
for assessing the performance of Islamic banks which is CAMEL model. The target population
of my research is Islamic banks and the sample size of my research is four completely Islamic
base operation banks and two non-free interest bank’s Islamic division. The sampling technique
for my study is convenience sampling because the annual report of Islamic banks and also
Islamic branches of conventional banks is available on internet and the variable were measure
according the formula like for capital adequacy, total deposits to total equity ratio, for asset
quality non-performance loans to gross advances, for management capability gross advances to
total deposits ratio, for earning net-markup income to total assets ratio, for liquidity investment
to total assets ratio and also the performance which is dependent variable of my study which is
measure as return on equity. The descriptive statistics use for describing my data and unit root
test were used for checking the whether it is stationary or non- stationary but stationary is
desirable and also Hausman test is apply for checking whether fixed model is appropriate or
random model is appropriate, the model were selected according Hausman test which is fixed
model. In two decades, the CAMEL model was adapted, this model based on rating system it
was developed by federal banking regulators in U.S such as Federal reserve, The Office of the
Comptroller of the Currency, National Credit Union Administration, Farm Credit Administration
and Federal Deposit Insurance Corporation. The CAMEL is acronym which is represent five
factors which is “capital adequacy”, “asset quality”, “management capability”, “earning”,
“liquidity”, and this model use in U.S financial institution then adapted the overall world. The
banking sector is backbone of an economy many depositors deposit their saving and also many
people like invertor, businessmen.

iv
Table of Contents
ACKNOWLEDGEMENT............................................................................................................Ii
INTRODUCTION.........................................................................................................................1
BACKGROUND OF THE STUDY........................................................................................................1
Islamic Banking in Pakistan…………………………………………………………………………………………………………6
Problem Statement……………………………………………………………………………………………………………………8
Research Questions……………………………………………………………………………………………………………………8
Research Objectives………………………………………………………………………………………………………………….8
Justification……………………………………………………………………………………………………………………………….9
Scope………………………………………………………………………………………………………………………………………….9
Significant of The Study………………………………………………………………………………………………………………9
Research Limitation………………………………………………………………………………………………………………….10
Gap of The Study………………………………………………………………………………………………………………………10
LITERATURE REVIEW...........................................................................................................11
Camel Model…………………………………………………………………………………………………………………………….25
Conceptual Framework…………………………………………………………………………………………………………..…26
v
METHODOLOGY......................................................................................................................22
Study Area And Approach:.............................................................................................................22
Target Population And Sample Size:..............................................................................................22
Sampling Techniques:.....................................................................................................................23
SAMPLE (SIMILAR CASE):.........................................................................................................23
Data Collection Method:......................................................................................................................24
Method Data Analysis:........................................................................................................................24
Definition And Measurement Of Variables.........................................................................................25
Measurement Of Variables:..................................................................................................................28
Descriptive Statistics:............................................................................................................................29
Diagnostic Test:.............................................................................................................................29
Unit Root Test:...............................................................................................................................29
Hausman Test:................................................................................................................................30
Auto /Serial Correlation Test:.........................................................................................................30
Normality Test:...............................................................................................................................31
ANALYSIS AND DISCUSSION................................................................................................32
Descriptive Test:..............................................................................................................................32
Unit Root Test:.................................................................................................................................34
Hausman Test:..................................................................................................................................40
Fixed Effect Model And Auto Correlation:......................................................................................41
Normality:..........................................................................................................................................43
vi
Conclusions And Recommdations.....................................................................................................44
REFERENCES............................................................................................................................45
1
CHAPTER #1
INTRODUCTION
1.1.1 BACKGROUND OF THE STUDY
In two decades, the CAMEL model was adapted, this model based on the ranking structure it was
create by federal banking regulators in U.S such as Federal reserve, The Office of the Comptroller
of the Currency, National Credit Union Administration, Farm Credit Administration and Federal
Deposit Insurance Corporation. The CAMEL is acronym which is represent five factors which is
“capital adequacy”, “asset quality”, “management capability”, “earning”, “liquidity”, and this
model use in U.S financial institution then adapted the overall world[ CITATION Sha102 \l 1033 ].
The CAMEL model which highlight five factor of banking system and interpret the financial
soundness using of financial performance and also financial position this model basically uses to
evaluate the condition of traditional banks or any banks and many financial institution play play
most important role of the economy and also capital development the model is most powerful
instrument to judge the performance of non-free interest bank and also economic activities and
easily give rank any traditional bank or any banks with help of CAMEL model and easily
calculate the performance. For the critical investigation of banking position, this framework also
helps and easily to examine the strength of banking sector[ CITATION Ish16 \l 1033 ]. The banking
sector is backbone of an economy many depositors deposit their saving and also many people like
invertor, businessmen, salaried person and many more therefore CAMEL model is important and
assess the banking sector performance to save the bank from bankruptcy or insolvency and it is
useful for many depositor because with the help CAMEL model to easily save the depositor
2
money and also save the banks form future crisis because the world is uncertain no predict the
coming crisis.
In eight decades, the Islamic bank play vital role of world economy it took Islamic law and
prohibited Riba in any financial transaction [ CITATION Mem07 \l 1033 ]. Islamic banks are
existing those countries who is not follower of Islam and also who is follower of the Islam, and
also it used a replacement of commercial bank according to Dusuki (2008). In conventional bank
Riba is a source of earning, but free-interest based bank deal on the basis of P&L sharing and
Islamic product like "MUSHARAKAH", "MUDARABAH" and "IJARAH" etc. the Islamic
financial institution(banks) appears with brilliant growth and annual growth in Pakistan more
than 30% [ CITATION Kum15 \l 1033 ]. Islamic banks are highly appreciated in the world
particularly in "Europe and UK" because of effective utilization of resources. According to Iqbal
(2001) free-interest banks is effective performance as compare to commercial bank. Islamic
banks are performing their services in many countries like "BAHRAIN", "MALAYSIA" and
also "GULF REGION", and in past memorandum was a signed to established "first international
financial market with participation of Islamic development bank"[ CITATION Ayu02 \l 1033 ]. In
"BAHRAIN" the liquidity center is established to render cash to free interest bank on their
demand and an Islamic financing system has introduced in "Pakistan", "Iran", and "Sudan" on
the country level. There is not allow to perform "Riba" based transaction and any country
modified their legislation it must follow "Saudi Arabia", and Islamic bank split into two parts
like "Islamic commercial bank" and "Islamic investment institution" [ CITATION Reh12 \l 1033 ].
State bank of Pakistan play an essential role to promote Islamic financial institution and its
regulatory framework, the main purpose of SBP to create diversified banking opportunity for
soundness of the financial system through Islamic product[ CITATION abd \l 1033 ]. The main
3
purpose of Islamic financial institution to the capable economic system with doing for justice
Islam always talk about accountability, equality and fairness [ CITATION Ayu02 \l 1033 ]. Many
countries market economy consists on "ownership", "competitive environment", "freedom of
enterprise", and Islam support that types of market economy, the price can be determined on the
basis of demand and supply to effectively serve for the society. The most important purpose is
point out by an Islamic system, which is "economic growth" and "economic stability" [ CITATION
Reh12 \l 1033 ]. Main changes in free-interest bank and non-free interest bank is, the free-interest
bank deal in P&L sharing and, the interest is prohibited in Islamic banks cannot deal with
interest, Islamic banks follow rule and regulation of sharia and it limited their investment
opportunity because Islamic bank operations cannot be anti-Islamic project like gambling and
alcoholic drinks. In Pakistan Islamic banks is very not long past, even though Islamic banks are
more effective form of banking it shows remarkable increment since its commencement. In
2016, there are five full fledge Islamic banks and sixteen Islamic branches of commercial banks,
in the Islamic bank, the deposit has increased more than 200% as compared to 2008 before 2008
the Pakistan banking sector with limited growth, the financial institution is the more profitable
and stable business in Pakistan [ CITATION Tah17 \l 1033 ] . According to Abu Bakar (2003) free-
interest bank is superior than non-free interest bank, and according to SAMAD (2009) the
performance of the free-interest bank and non-free interest banks is not similar in the term of
profitability & liquidity. According to Jaffar (2011) Islamic financial institution is not effective
to recover their money therefore the provision is higher. According to Beck (2013) Islamic
financial institution (banks) is more cost effective than non-free interest banks, but in free-
interest banks is not stable due to the small scale of operation. [ CITATION Akh11 \l 1033 ]
compares free interest banks with non-free interest banks regarding of liquidity risk
4
management, the finding shows in the term of capital adequacy and between Islamic banks and
non-free interest bank. There are the small number of comparative studies which exit on Islamic
financial institution and conventional banks through CAMEL model [ CITATION Tah17 \l 1033 ].
[ CITATION Jaf11 \l 1033 ] study for interpreting the free-interest financial institution and non-free
financial institution performance on the basis of camel model it took sample size for his study
was five free interest banks and five non-free interest banks which is limited for his study and
second author, [ CITATION Reh12 \l 1033 ] it also use camel model for his study for Pakistani
financial institution it took sample size as Islamic, mixed, and the non-free interest banking
sector and the author found that the Islamic banking sectors have best "capital adequacy", "asset
quality", "earning", "management capability", sample size about nine which is include four non-
free interest banks, and five division of traditional banks which is not deal with riba , and four
non-free interest bank.[ CITATION Tah17 \l 1033 ] used CAMEL approach and took sample size
19 non-free interest banks and the five free interest banks the author consider as a large sample
and, provides in-depth analysis of free interest banks and non-free interest banks about the
performance through the CAMEL model. There are many studies conducted in the past on the
bank's profitability the finding is, the optimistic relationship between the return on equity, the
interest rate, "bank concentration", "government ownership", "risk", and "inflation", such as the
size of bank has insignificant impact. Few scholars interpreted the performance of the banking
sector through ROA, but there is the major disadvantage is existing in the off-balance sheet asset.
Internal factor must be focus like financial structure, and show the capacity of the bank in the
term of cover the loss according to Petria (2015). Various banks factors which significantly
influence on credit risk. In 2008, the world suffers from financial crisis the risk management was
the major topic where most of researcher sort out different aspect of micro and macro factors
5
which influence on risk management[ CITATION Mis15 \l 1033 ]. The bank's "capital adequacy"
ratio is changing in the term of different scenario and comparing non-free interest banks to free-
interest banks to investigate, and found the Islamic bank more sensitive in the term of change in
exchange rate and non-performing loan. The sensitivity of Islamic banks because of capital
adequacy not profit[ CITATION Has16 \l 1033 ] . Islamic bank follow the practices of CGDI
(corporate governance, development index) and crucial role in the term of depend on public trust
and more diverse stakeholder when banks follow adverse corporate governance it will be
harmful while crisis and financial scandals and conventional banks have lack of corporate
governance which similar to Islamic banks it will alarming of any financial institution it will be
exposed during the crisis and financial scandal, this type of failure may be audit failure, BOD
collaboration with top management, highly risk taking by management and ignore the minority
of shareholder interest and the most important challenge for Islamic financial institution to
maintain the corporate governance to reduce the risk to the near future [ CITATION Sra15 \l 1033 ] .
Another research which indicates the financial institution (banks) performance, outcomes show
strength of risk management practices generally has a negative relationship with profitability and
the branch network is associated with profitability strongly positive when an economy growth
increase in the term of profitability will also be increased [ CITATION Zub15 \l 1033 ]. The financial
institution most important factor of the wealth of country and in Bangladesh Islamic financial
institution most growing industry because there is the majority which belongs to Islam means
they are Muslims, and they always prefer free-interest banks and also save their saving because
Riba is prohibited in Islam and they prefer to take interest free loan (QARZ-E- HASNA) and the
author sort out about the performance of the non-free interest banks in Bangladesh by CAMEL
model[ CITATION Moh16 \l 1033 ] .The Malaysian financial institution was the major change in the
6
last third year and the economy strength belongs to the soundness of financial institution, in
1997-98 there was the crisis where many banks of Malaysia was not save from that on basis,
many Malaysian bank become ill and the government must be intervene and they did, BBMB
reported his loss 1.41 billion due to crisis where many countries was suffered and there is need to
redevelop it needed monetary is 750 million for fresh capital[ CITATION Sit15 \l 1033 ]. In Pakistan,
SBP is promoting the Islamic bank and took away people from interest and apply the shariah
law, SBP announce the regulatory framework, SBP allow to Islamic bank operates parallel with
the non-free interest bank the primary purpose of SBP to create diversified opportunity in
banking industry, and to develop economy with help of Islamic financial institution the SBP
plan of 2014-2018 to strengthen the Islamic bank in the term of regulatory, legal, improving
reporting structure, and improve shariah governance, and also shariah practices and also enhance
the collaboration between internal and external stakeholders in the term of aware abut Islamic
finance[ CITATION abd1 \l 1033 ].
1.1. ISLAMIC BANKING IN PAKISTAN
There was an agrarian economy in 1700's - 1800's there is no concept of financial institution
when industrialization established in sub-continent on that basis the financial institution came
into being and they appreciate RIBA.
In late 1930's: first mudarabah corporation was established in hyderabad deccan of undivided
India.
In 1962-63: free-interest bank starts which is first branch in mesar.

7
In 1973:
According to 1973 constitution of Pakistan, that every law must be in accordance with the
Quran, sunnat -e- nabwi and Ahadees -e- mubarka and people has right to appeal against such
laws which against Sharia.
In 1979:
The Federal shariat court and shariat appellant bench were established and ulema hazrat along
with other Muslim appeal against Riba in federal shariat court.
In 1979 -89: Fiscal policy was freeze for ten years
In 1989-91: in 1979 ulema hazrat and along with other Muslim appeal against Riba now in 1989
a petition was analyzed for the period of 2.5 years.
In 1991: The federal shariat court was ban interest (Riba).
In 1991-99: The government of Pakistan who rule in 19’s and higher official of HBL that time
filed a 67 petition against the federal shariat court decision in supreme court of Pakistan.
In 1999 MARCH-JULY: The supreme court of pakistan invited accountant, businessmen,
economist, accountant & ulema hazrat along with a person of world bank to analyze 67 petitions.
In 1999 23rd December: The supreme court of Pakistan considered that the federal shariat court
decision was right.

8
The Current Scenario: The government of Pakistan and along with UBL filed the petition in
the supreme court of Pakistan against own decision.
1.2 PROBLEM STATEMENT
The motive of research to interpret the financial performance of free-interest bank in Pakistan
with the help of CAMEL model, this model help to assess the performance and also rank free-
interest bank on the basis of their performance, this model base on "capital adequacy", "assets
quality", "management capability", "earning", and "liquidity", on this basis the performance can
be measured and easily to analyze the free-interest bank performance.
1.3 RESEARCH QUESTIONS
1. How to interpret the Islamic bank performance by capital adequacy?
2. How to assesses Islamic bank performance by asset quality?
3. How to evaluate Islamic bank performance by management capability?
4. How to determine earning for Islamic bank's performance?
5. How to judge Islamic banking sector performance by liquidity?
1.4 RESEARCH OBJECTIVES
1. To interpret the financial performance of Islamic banking sector by capital adequacy
2. To assesses Islamic bank performance by asset quality

9
3. To evaluate Islamic bank's performance by management capability
4. To determine earning for Islamic bank performance
5. To judge liquidity for Islamic bank’s performance
1.5 JUSTIFICATION
The purpose of research to investigate the performance of non-free interest banks in Pakistan by
CAMEL framework, and many researches is conducted about conventional bank and also
comparative study on non-free interest banks and free-interest banks, but there is some research
on Islamic banks, therefore decided to investigate only Islamic banks performance by CAMEL
framework.
1.6 SCOPE
CAMEL model has five parameters to assess the performance of free-interest banks like “capital
adequacy”, “assets quality”, “management capability”, “earning”, and “liquidity” and there are
different ratios which can be used to assess these parameters.
1.7 SIGNIFICANT OF THE STUDY
The study deal with the Islamic bank’s performance, soundness and also financial position, the
significance of the research to interprets the financial health of free-interest banks by CAMEL
model because there are many depositors who save their cash in free-interest banks, study is
useful for depositors, merchant bankers and also shareholder, and stakeholders.
10
1.8 RESEARCH LIMITATION
The first and a major limitation of the study is sample size because there are 21 Islamic banks in
Pakistan but, only took three Islamic banks and their operation completely follow the Islamic law
and two Islamic division of non-free interest banks in Pakistan and not studying whole
population but sample, this research show the performance of Islamic banks only and it is not
become whole mirror of Islamic banks performance and second limitation may be, this research
base on secondary data, all information will be gathered from annual report, which indicate the
limited information for the study.
1.9 GAP OF THE STUDY
The scholar of Pakistan mostly conducts the research on conventional banks and comparative
study about conventional and Islamic bank but few researchers conduct the research on Islamic
banks performance only, this is main GAP because time to time some factors changes, for
example, if in past study the Islamic banks is not good in capital adequacy, in near future it will
be good in capital adequacy than conventional banks.

11
CHAPTER # 2
LITERATURE REVIEW
Brown (2003) assesses the Islamic bank performance for different countries using of "DATA
ENVELOPMENT ANANLYSIS1" from 1998 and until 2001, the finding of brown is Iran and
Brunei is the most efficient market2 and the market share of Islamic banking above 40% and its
growth is massive, in 1998 and 2001 Yemen growth rate was 9.4 and 19.2. In three years,
growth rate was massively increase in past time, and Islamic banking sector creates his place in
competitive environment, and also people follow the shariah law and further brown finding, the
Bahamas was most liquid than Tunisia and Kuwait. The performance of bank Islam Malaysia
Berhad evaluate by [ CITATION sam99 \l 1033 ] he compares Islamic banks (BIMB) with eight
non-free interest banks regarding profitability, risk, liquidity, and solvency, using of T-TEST and
F-TEST for empirical study his finding was that BIMB is less risky than eight traditional banks.
[ CITATION Azh03 \l 1033 ] interpret soundness of free-interest banks, and it considered non-free
interest bank in Malaysia, using T-TEST and descriptive statistics for determining soundness
1
DATA ENVELOPMENT ANALYSIS IS A NON- PARAMATRIC METHOD WHICH USE FOR EMPIRICALLY MEASURE PRODUCT EFFICIENCY
2
EFFICIENT MARKET KNOWN AS ALL CURRENT AND PAST INFORMATION REFLECT THE PRICE OF SHARE.
12
free-interest institution and also traditional institution, and find that traditional banks is more
efficiency during 1996 until 1999 than Islamic bank.[ CITATION Ans11 \l 1033 ] they took a data for
evaluation of Islamic bank performance in Pakistan and compare 5 traditional banks with 5 free-
interest banks use ROA is proxy, the result show that the free interest banks is more profitable
than non-free interest banks in Pakistan, they have more share than commercial bank. [ CITATION
Ras071 \l 1033 ] study about Islamic bank performance in Pakistan during 1999-2006 through
using of fundamental analysis in the term of "profitability", "liquidity", "solvency", and "risk".
Rashid use like mean, standard deviation, and statistical hypotheses testing test like t-test, and f-
test for determining the financial ratio on the bank performance and also Rashid compare the
Islamic bank with conventional bank, sample size for study it took 3 non-interest banks like
"Meezan bank", "Al-Baraka", and "Al-Falah" only his Islamic division and eight conventional
banks for his study author findings the conventional bank are more profitable than free-interest
banks in Pakistan regarding author, the Islamic banks product like mudarba and musharika yet
not accepted in Pakistan.[ CITATION Has11 \l 1033 ] compared Islamic and conventional bank in
2008, it was time of financial crisis, and took sample size for one hundred twenty countries for
their study, the author finding was, conventional bank is effected during the crisis, but the
Islamic bank not effected. The author conduct the research in 2007 and 2011 in Pakistan because
author interpret the performance of Islamic and non-free interest bank, the result show that the
Islamic bank is less risky as compare to conventional bank in Pakistan in the term of loans
[ CITATION Seh12 \l 1033 ]. Using of T-test and ANOVA, evaluate the bank performance of free-
interest bank and traditional bank in Pakistan, and in regarding "profitability", "solvency", "risk",
"liquidity", and also "capital adequacy" is considered, the finding show, the Islamic bank is less
risky and efficient in operation than traditional bank [ CITATION Amj13 \l 1033 ].[ CITATION Iqb01 \l
13
1033 ] evaluate the performance of the Islamic bank, using of ratio and trend analysis for their
study for the period of 1990-1998, and the finding of author, the growth rate of the Islamic bank
slowly depreciate as compared to its starting 1980s. According to Iqbal (2001) there is general
image of free-interest institution in term of high liquid as compare to traditional banks.
According to Sarkar (1999) Islamic bank performance in term of "productive" and "operational
efficiencies", the author decided to proposed investment criteria for soundness of financial
institution is efficacy model. The model consists five test like "investment opportunity utilization
test", "profit maximization test", "project efficacy test", "loan recovery test", "test of elasticity in
loan financing", and sample size for study is "Islamic Bank Of Bangladesh Limited", "AL-
Baraka Bank", "AL-Arafah Islamic Bank Limited", "Social Investment Bank Limited", "Faisal
Islamic Bank Of Bahrain ", result show that free-interest bank can easily render effective
services and better well perform than conventional bank, if to give a chance to Islamic bank, run
their operation individually and Islamic bank can easily survive in a hostile market within non-
free interest framework by PLS mode of capitalize. [ CITATION Zam01 \l 1033 ] assesses the growth
of free-interest bank in middle east and gulf region and for study, it took data from the bank
annual report, and the author found that Islamic bank practices and their financial instrument not
according to traditional Islamic principles, and also the author found the follower of Islam which
is not aware and not instruct, person who ever understand the financial Islamic system, then must
be implement Islamic law. The author interprets the performance of fourteen Islamic bank of
eight countries which is allocated at the middle east during the period of 1993,the author
investigate particular factor like return and financial structure indicator, some their internal and
external factor which is measured like internal factor(capital, loan, overheads) and also external
factor(taxation, financial structure) by some statistical regression and the finding of the author
14
was where the large loan and high leverage to asset ratio to generate the higher profitability and
the multinational banks which is in high profitability as compare to domestic banks and further
the macro level condition positively effect to the performance of the financial institution and also
taxes negatively effect on banks[ CITATION Bas01 \l 1033 ] . Johnes (2014) examines the condition
of free-interest banks and non-free interest banks of eighteen countries during the period 2004-
2009 and the result show that, no differences between non-free interest banks and free-interest
banks in the term of efficiency and both bank must be updated their banking system. [ CITATION
Haw17 \l 1033 ] assesses the performance of bank, the sample size for the study which is include
nineteen Islamic bank and thirteen conventional bank from 2010 to 2014 in Bahrain, the author
considered the financial performance tools like "liquidity", "profitability", and also "solvency",
and the finding show that no significant differences between the Islamic bank and non-free
interest bank in the term of performance and also no major change between both banks in the
term of profitability and liquidity.[ CITATION Rah13 \l 1033 ] interprets the performance of sixty-
three Islamic bank in different countries like Middle East, North African, Gulf cooperation
countries, and also Asian countries from 2006 to 2009 and data envelopment analysis use for
measure the performance of free-interest bank, and the finding of author show that the Middle
east and North African countries is less efficient than Asian countries, in addition the gulf region
countries is more efficient in the term of economy. [ CITATION Yil15 \l 1033 ] conduct the research
about financial efficiency, the sample size for the study which is include four Islamic bank which
is located in turkey and thirteen Islamic bank which is located in Malaysia, the author compares
the financial efficiency of Islamic bank which is located different country and the duration of
study from 2010 to 2014, the finding show that Islamic bank not well in the term of optimal
scale. The author interprets the performance of Islamic bank, and observed that early six year,
15
the Islamic bank proof a remarkable improvement in Malaysia [ CITATION Ari89 \l 1033 ].
According to Samad (2004), non-free interest banks is effective than the free-interest banks in
the term of liquidity, and management capability.[ CITATION Kam13 \l 1033 ] the result show that
free-interest banks is more superior as compare to non-free interest banks in the term of liquidity
ratio and capital adequacy ratio and second author which found out the similar result that the
free-interest bank is more efficient than traditional banks in the term of asset quality and capital
adequacy.[ CITATION Hus12 \l 1033 ]. The author conduct a study for association of free-interest
bank as well as non-free interest bank performance in Bangladesh during period 2007-2014 and
using of CAMEL model on Islamic bank products, the sample size of study, which is include
three Islamic banks in Bangladesh, and the result show that, three Islamic bank they are superior
in term of performance by CAMEL dimensions[ CITATION Ahs16 \l 1033 ], and [ CITATION Saf10 \l
1033 ] conduct similar research on Islamic bank performance, and associate with non-free
interest banks to free interest banks and the author result show that free-interest banks superior
in the term of liquidity, solvency, and profitability than traditional banks. [ CITATION Isl16 \l 1033 ]
interprets the performance of free-interest bank and traditional bank, the result show that the
Islamic bank play an important role in term of capital adequacy, and liquidity and also the
Islamic bank is better than conventional bank in term of asset quality. [ CITATION Sal06 \l 1033 ]
interprets the performance of Islamic bank during the period of 1998 to 2003, and Islamic bank
operates in Jordan, many gap in the market for Islamic banks which easily fulfill that gaps.
Finding about non-free interest bank, the result show that in the term of liquidity, profitability,
management capability the Islamic bank which is better than traditional bank [ CITATION Alz15 \l
1033 ]. the author conduct the research about the free-interest banks and traditional bank the
result show that free interest financial institution is more competence than traditional bank in the
16
term of profitability and asset quality, but non-free interest banks highly in risk, compare to
tradional bank [ CITATION Ero14 \l 1033 ] and the second research about Islamic banks the finding
of above research, second author which against [ CITATION Kar15 \l 1033 ] finding about Islamic
banks that non-free interest banks is less risky, but they are not able to maintain liquidity and
capital adequacy and according to [ CITATION Aka18 \l 1033 ] the financial institution which is
based on interest it is more superior than free interest banks in the term of liquidity, capital
adequacy. [ CITATION Sai17 \l 1033 ] conduct a research about Islamic banks as well compare to
traditional banks in Saudi Arabia, the result show that about the finding of the conventional bank
has higher capital adequacy, credit risk and also liquidity as comparison of Islamic bank but
credit risk and liquidity belong to low shareholders' value in non-free interest bank, finding
show that free-interest bank performance as compare to the traditional bank free-interest banks
is better. [ CITATION Jaf11 \l 1033 ] conduct research on Islamic and conventional bank, during
2005-2009 which is located in Pakistan, the result show free-interest bank is better perform as
compare to conventional bank in the term of capital adequacy, liquidity, earning, and also
management capability but conventional and Islamic banks are similar in term of asset quality.
[ CITATION Kho14 \l 1033 ] interprets the financial performance of conventional bank by CAMEL
model and the sample size for the study is 150 conventional bank in Europe during 2003 to 2008,
the result show that the conventional bank profitability is more significant as compare to risk
management the author advice that conventional bank should be mediate the practices of risk
management, and to increase the profitability and the author further add that traditional bank
should balance the both factor.[ CITATION Zam13 \l 1033 ] judge the performance of Islamic and
conventional banks by using of camel approach for both of them the finding of the author that
Islamic financial institution is more effective from his competitor in the term of operational
17
efficiency, management capability, asset quality and also liquidity but the counterpart of Islamic
banks is more effective such as capital adequacy and the large number of size in short non-free
interest banks is more than free-interest banks which is spread in globally. [ CITATION Bad08 \l
1033 ] conduct research to compares the Islamic bank and conventional bank in the term of cost,
revenue and profit efficiency, the sample size for study is forty-three banks, and the result show
that cost and revenue is most crucial separation between them and there is no major change in
efficiency.[ CITATION Has10 \l 1033 ] conduct research on the Islamic bank and traditional bank
in the term of credit, asset growth, and profitability during the period of crisis, the sample size
for the study which is include one hundred-twenty banks which is located at Middle East
countries and the Islamic banks is one fourth from the data and the rest is traditional banks and
the finding of study show that unfavorable effect on Islamic banks profitability, but traditional
banks is not better in term of credit and asset growth than Islamic banks. [ CITATION Rim10 \l
1033 ] interprets the Islamic banks and traditional banks in the term of competitive and financial
side, the sample size for the study which is include thirteen banks during the period 2000-2006,
the multivariate technique is used, finding show that the free-interest banks are better in the term
of capitalization.[ CITATION Sam04 \l 1033 ] interprets the Islamic bank and traditional bank in the
term of profitability, liquidity, and credit risk, and using the nine ratio to easily determine
profitability, liquidity, and credit risk, and the result show that, the profitability and liquidity is
same, and Islamic banks which is high on credit risk than traditional banks. According to
SAMAD (2009), the risk is high in Islamic banks because in Islam the risk must be taken, and
Islam do not allow person to earn money on money, the conventional banks who earn interest on
money, therefore the conventional bank in low risk the origin amount of depositor is save, but in
Islamic banks, the origin amount of depositor is not save, when banks suffer from loss then
18
depositor also suffer from loss in non-free interest banks because non-free interest banks believes
on sharing the profit and loss, but traditional banks do not follow. [ CITATION Akh11 \l 1033 ]
conduct the study free-interest and non-free interest banks using financialratio in term of
solvency and liquidity, the sample size for the study which is include twelve financial institution
during the period of 2006-2009, the result show that net working capital and net asset has an not
true connection between liquidity and risk management, further the capital adequacy in
traditional bank, and return of asset in Islamic banks have significant relationship. [CITATION
Khand \l 1033 ] conduct research on free-interest and non-free interest banks to determine
operational efficiency, bank which is located in Sudan, the researcher use technique which is
called stochastic cost method, and the sample size for the study which is include seventeen banks
and the period of study was 1990-2000, the result show that the bank which located in Sudan is
more efficient than those banks own by the government, the cost of efficiency is increasing due
to abroad investment but they should focus on capital adequacy. [ CITATION Cih08 \l 1033 ] conduct
the research on soundness of the bank, and the sample size for the study, which is include
eighteen banks, which further divided into the parts like, small free-interest, large free-interest,
small traditional banks, large traditional institution, the author use regression techniques, the
finding of author about, the small Islamic bank is the more strong in soundness as compare to
tiny traditional banks and also huge non-free interest banks is the more powerful as considered
than non-free interest bank and further the researcher include that the small Islamic banks is
financial sound than large Islamic banks.[ CITATION Bec13 \l 1033 ] compares the Islamic banks
and conventional banks in term of efficiency, and the author considered different product and
services which is offer by both banks, and the sample size for the study which is include, five-
hundred banks which is selected through twenty-two countries during the period of 1995-2009,
19
the finding of researcher about Islamic banks, is the more efficient, profitable and also
capitalize, and further the free interest banks which is better than non-free interest bank in the
term of asset quality, and the scholars finding about the free-interest banks is more effective for
economy and their stability, and also Islamic banks is better in term of financial soundness,
capitalization, and also liquidity. [ CITATION Abd \l 1033 ] conduct the study on efficiency for free-
interest bank and also traditional banks, author compares free-interest banks efficacy with non-
free interest banks in the term, quality of services, recovery of loan, financing and also
investment, the primary data use and also secondary during the time span of 2006-2008, the
finding considered as the non-free interest is better in term of efficiency as compare to non-free
interest bank, and further free-interest bank is better in the term of asset quality, solvency, and
also liquidity.[ CITATION Sha101 \l 1033 ] consider five Islamic banks and conventional banks the
author apply technical test, cost and allocate efficiencies during the period of 2004-2008 and
using of DAE test for the finding of the result in regard the performance of financial institution
under the CRS and VRS method the finding of research that traditional banks is most efficient as
compare to free interest banks, but in addition cost and allocate efficiencies is similar in both of
them. [ CITATION Sam09 \l 1033 ] conduct research in Malaysia regarding operational and
managerial efficiency with in free-interest, and traditional banks the author found that the
traditional banks is better the term of managing in operation and also insignificant change in
product efficiency.[ CITATION Kad07 \l 1033 ] conduct research in middle east on Islamic banks
and traditional banks performance, in the term of profitability and also liquidity, the author
conduct comparative study, the result show that, no differences between conventional and
Islamic banks in the term of profitability and liquidity. [ CITATION sam04 \l 1033 ] interpret the
performance of Islamic banks and traditional banks in Bahrain the time span 1991-2000 the
20
result show that free interest banks and non-free interest banks have no major differences
between them regarding credit performance and also there is no change in profitability and
liquidity performance between the financial institution. In India the author analysis the public
sector banks for the period of 2006-2011 by CAMEL model and the banks rank by their
performance, after the result, it revealed that Andhra bank which is ranked first and central bank
of India was ranked last and same author conduct research on 2012 it expose that public bank of
Indian and private banks in Indian which not differ significantly in term of management
capability and liquidity[ CITATION Pra11 \l 1033 ]. Malhotra (2013) judge the soundness of
public bank, also it exclude state bank group for the period of 2007-11 baroda bank which is
ranked as first position due to his performance in term of liquidity and asset quality and united
bank of india was ranked last due to his poor asset and earning and also management capability.
[CITATION Red11 \l 1033 ] used the new version of CAMEL model to evaluste converntinal banks
performance in India, it expose that three banks which include mashreq bank, china trust
commercial bank, and bank of ceylon, three of them is leading banks in india which ranked top
position in term of capital adequacy and liquidity and other three banks which include american
express bank, development credit bank and catholic syriyan bank which perform worsely in term
of low capital adequacy, low asset quality and earning and poor management capablitiy.
[ CITATION Jha12 \l 1033 ] conduct reseach in nepal to judge the performance of conventinal bank
in nepal it took eighten traditional bank for the period of 2005-10 which was elected for the
research and the result expose that public sectors banks in nepal are less efficeint than private
banks.additional about that study return on asset has significant influence by capital adequacy
ratio and also capital adequacy has significant effect on return on equity. Lakhtaria (2013)
conduct the study on traditional banks in India it took three banks which related to public sector
21
namely, bank of Baroda (BOB), state bank of India (SBI), and Punjab National Bank (PNB) for
the period of three years for the study starting from 2010-12 and also the author focus on
CAMEL model for evaluating the performance of conventional banks and the author expose that
three of one which ranked first named bank of Baroda and two banks which come on second
position which is Punjab national bank and last position of state bank of India in term poor
performance.[ CITATION Vij12 \l 1033 ] conduct the research on CAMEL model which aim to target
the conventional banks only for the period of 1996-97 and also 2009-10 and the result show that
the state bank of India and their associated banks which comes to successes for maintaining the
capital adequacy ratio on their higher level. [CITATION Mis12 \l 1033 ] attempt the research for
evaluating the performance of conventional banks in India, the sample size for the study for
judging the performance of traditional banks is twelve public sectors banks and also private
banks over the period of 2000-11 the author use CAMEL model to assessing the performance,
the result show that private sector more efficient than public sector banks in term of performance
and financial soundness. Pinyani et al. (2013) conduct the research on conventional and Islamic
banking system by CAMEL model it took three models which is Islamic, American, Canadian,
according to the result American and Islamic banks is more efficient in term of asset quality,
expenses, securities, liquidity, and earning and also the result show that Islamic banks is more
efficient then two system like American and Canadian banking system in term of capital
adequacy and management capability. Siva and Natarajan (2011) conduct the research about
banks, the authors tested empirically about CAMEL model and test the major effect and cause on
the performance of SBI banks of groups according to the result of author CAMEL model is
helpful for identifying the banks performance and indicate that the bank poor or best
performance and suggest the banks to take the some effective step for sustainable performance
22
and save to from any uncertainty. Misra and Aspal (2013) evaluate the performance of different
banks in India which include that state bank group and it took the period for the sturdy to judge
the performance of banks start from 2009 and end 2011, the author use CAMEL approach to
identify the performance of different banks the study of result indicate that capital adequacy of
different banks which include that state bank of Bikaner and Jaipur and state banks of Patiala
they were on top position because they are better in capital adequacy and state bank of India is
top position in term of liquidity and state bank of Mysore was on bottom position in term of
liquidity. According to study of Sheeva Kapil (2006) the author judge the level of CAMEL
model, the author check whether the CAMEL rating system reflect the degree of the risk in U.S
banking sector and also it consider bank’s U.S is greater efficient term of taking risk and
according to the result manager of lower level are not able to identify between risk-taking and
inefficient banks and they more prefer their investment strategies than inefficient banks. Reddy
and Prasad (2011) explain the study which is conducted in the Indian the time horizon of
research was five years and it tell about the financial performance of banks which is selected by
the author that banks relate to the reginal rural and the approach which use in the study was
CAMEL model which useful, checking of soundness the banks, the author extract some result
and examine that the entire performance of Indian banks which include Andhra Pragathi
Grameena Bank and Sapthagiri Grameena Bank and this model help to tackle the poor
performance of banks and it is effective model and the author use CAMEL model to measure the
financial health of all traditional banks in India. The author define about the CAMEL Model
according to the author CAMEL represent five factor which is include the capital adequacy,
assets quality, management capability, earning and also liquidity of any financial institution
which also include the banks and the main purpose of the study is to judge the performance of
23
Indian banks it took the two Indian public banks which include like Andhra Bank and banks of
Maharashtra it asses the performance of banks with the help of CAMEL model. These state
which is taken in the study they are most famous state in the India and they are most popular in
top five and also in this two states the farmers high horrible events means they suicide because
they do not have any single penny to pay the banks the occurrence of suicide is more and more
and these two state were taken because of above background and those states banks were taken
which is public sector banks not a private banks and compare those banks and checking
performance of two states banks with help of CAMEL model this model based on ranking
system which rank the banks according their better performance and the author evaluate the
performance of these banks which is taken in the study and in India the ruler of the country
reforms the banking sector, the banks has adopt the change which include traditional banks and
also public sectors and before the reform of conventional banks the government was control the
banking sector and the government possess the banking sector system and after the reform the
public sector losing his share in the market because reform was favorable for traditional banks
and public banks being damage because of reform. As result the traditional banks also working
in developing county like Pakistan, India, and also Sri Lanka only the Pakistan elected and
Pakistan has high significantly competence because of reform approved by the government of
Pakistan. The idea is ordinary which better the soundness of banks and enhance the functions and
activities of the organization, support the performance of financial sectors, support research and
also discussion but many study suggested that financial presentation and research and it’s made
within management and finance fields and the question will be arises that the institution size,
asset management, and the operational efficiency and three basic principle to make the banks
better in term of performance. The idea of the study is that the paper money has derive the value
24
from the gold anyone who claim that the paper we have we want the gold and silver which is
store in the banks. Islamic banks are entirely following the Islamic rules of financing and interest which
is considered prohibited. In this era mode of financing is amiable which is based on Islamic and all
Islamic rules apply on first Islamic banks which is established in Egypt in early sixties and in
Egypt this was a local bank which follow Islamic rules and which was small setup in local (the
MytGhamr Savings Bank). When the first bank established in Egypt then Islamic banking and
financial framework has created an entire financial system and most fundamental demand of
Islamic banks which is include that like compliance with shariah and now this concept is
accepted whole world and depreciate the interest now a days the Islamic banks has been facing
most important challenges in term of reputation and intentions, but people do not trust on Islamic
banks and also other financial institution now adays Islamic banks and other financial institution
has achieved a lot of respect and also gain reputation in the society because of better
communication and aware to people about Islamic law and other financial institution also gain
because Islamic banks and other financial institution achieve that respect according to their
growth and stable system and Islamic banks able to increase their capability and also create
financial instrument which is used by Islamic banks for the people who is interest to deposit their
money in and not which is significantly build in from asset and liability aspect asset side of
Islamic banks represent the current asset and fixed asset and liability side is represent that where
depositor deposit their money or their saving. (Ayub, 2002). The Indian author which named is
Gupta and Kaur (2008) both author perform the research in India, the author want to investigate
about private banks performance, the model which is used, it is useful to identify the poor and
better performance of banks and also any financial institution which CAMEL model and this
Model allocate the ranking on the behalf of performance if any banks is best for any factor it will
25
be top position and who worst then it will be bottom from others banks and the author considered
the time horizon which is five year which start from 2003 to 2007 and it took sample size for the
study were 20 old banks and 10 new private banks and authors want to apply CAMEL model on
their study and according to the result two private banks were better in term of management
capability which include Karur Vyasa and the Tamilnad mercantile banks which is in top
position but two banks which is bottom position according to worst management system which is
global trust bank and the nedungradi banks and in the study where the author took new private
banks they achieve a higher position because of their core banking and they aware people to their
goal and using of technology is better than others.
2.1 CAMEL MODEL
CAMEL framework is most using model for the evaluation of a bank performance [ CITATION
Rom13 \l 1033 ]. the model is developed by federal banking regulators to interpret the
performance of the banking sector and analytical framework base on camel rating
system[ CITATION Ros10 \l 1033 ]. every bank should use camel framework to judge the bank
performance, the central bank of any country is responsible to make a mandatory for using of
rating system[ CITATION Dou10 \l 1033 ]. The most famous method is CAMEL framework, and has
26
five important factor and the abbreviation of CAMEL as "capital adequacy", "assets quality",
"management capability", "earning", and "liquidity"[ CITATION Dou10 \l 1033 ]. The purpose of
CAMEL model to calculate the banking sector rating on this basis to show the financial position
of the financial institution in different aspect [ CITATION Özt11 \l 1033 ] .[ CITATION Wir08 \l 1033 ]
conduct the research on the major Nigerian banks to interprets the financial position by CAMEL
framework.[ CITATION Ali04 \l 1033 ] this author also done research on CAMEL model for
evaluating the Kathmandu banking sector performance.[ CITATION Das00 \l 1033 ] evaluates the
performance of conventional banks in India, the author follow CAMEL framework, the sample
size for the research which is include 58 banks which is running their operation in India, and
twenty-nine were private banks and also twenty-nine is public banks during the period of 2003-
2008, the result show that the private traditional bank in Hindustan, is better than public banks
the author suggests on the basis of finding, the public banks must focus on changing of market
condition and easily to compete to private bank in India.
2.2 CONCEPTUAL FRAMEWORK
INDEPENDENT VARIABLE
INDEPENDENT VARIABLES
CAPITAL ADEQUACY
ASSEST QUALITY
27
[ CITATION Reh12 \l 1033 ]

28
CHAPTER #3
METHODOLOGY
3.1 Study Area and approach:
The study of area which is focused is banking sector which include only Islamic banks and to
investigate the performance of Islamic banks by CAMEL model in Pakistan. The study
conducted on 6 Islamic banks which operates in Pakistan and the approach of the study which is
used in research is quantitative approach and also the secondary data is used in my study.
According to Creswell 2009 the quantitative may be describe as it testing the objective theories
whether check the relationship among the variables.
3.2 Target Population and Sample Size:
The target population of my research is Islamic banks and the sample size of my research is four
completely Islamic base operation banks and two non-free interest bank’s Islamic division which
is listed down.
Full Fledge Islamic Banks in Pakistan
 MEEZAN BANK LIMITED
 BANKISLAMI PAKISTAN LIMITED
 AL- BARAKA ISLAMIC BANK
 DUBAI ISLAMIC BANK

29
Islamic divisions of Conventional banks in Pakistan
 HABIB BANK LIMITED
 BANK AL FALAH LIMITED
3.3 Sampling techniques:
The sampling technique for my study is convenience sampling because the annual report
of Islamic banks and also Islamic branches of conventional banks is available on internet.
3.4 RESEARCH DESIGN:
The purpose of the study to evaluate the performance of Islamic banks with the help of
CAMEL model and those variables measured by above ratio. It based on secondary data
and sampling techniques which is convenience sampling and data is run on SPSS and
also e-views, the analysis of the study based on nature of data and analysis tools.
30
3.5 SAMPLE (SIMILAR CASE):
ishaq AB (2016) conduct the research about performance of commercial banks and the
population of the study is banking sector, the sample size of the study is ten commercial
banks in Pakistan and he also investigate the performance of banks through CAMEL
model and the author use data analysis tools like descriptive statistic, correlation analysis
and regression model for their study.
3.6 DATA COLLECTION METHOD:
The purpose of study to judge the soundness of free-interest banks in Pakistan, the data is
secondary in nature and the research is quantitative and the data gather from the annual
report of banks over the period of 2006-2018 years for the study, the purpose of data to
evaluate financial ratio and run data on e-views, for the analysis of performance of
Islamic banks. The types of data using in a study which is panel data.
3.6 METHOD DATA ANALYSIS:
The data were taken from annual report of banks which related to Islamic system and the
type of data was panel data and the data run on E-views for interpret the variables and
variable is measured on their formula which was given article and also ratio were given
31
and apply many test as unit root test, Hausman test and checking serial correlation and
normality test and apply fixed effect model by considered Hausman test prob value.
3.7 DEFINITION AND MEASUREMENT OF VARIABLES
With the help of CAMEL model to assess the performance of Islamic banks and CAMEL
in term of “capital adequacy”, “assets quality”, “management capability”, “earing”, and
“liquidity”, these factors are defining below and also their measurement and also
dependent variable.
A) CAPITAL ADEQUACY RATIO
This factor can be defined as it show level of financial leverage of any financial
institution(banks) [ CITATION AlF09 \l 1033 ] and this variable also point out the banks has
enough capital to face unexpected losses[ CITATION Red12 \l 1033 ]. According to Chen
(2003) when off set the total asset by total liability known as capital furthur significant
level of capital adequacy must be maintain because when any banks suffer form loss on
loan it will be major risk for banks and not able to fulfill the demand of depositor there is
chances the banks will be insolvence. Capital adequacy can be measured as TOTAL
DEPOSITS TO TOTAL EQUITY RATIO[ CITATION Ish16 \l 1033 ].

32
B) ASSET QUALITY RATIO
It show the ability of banking sector in term of recovery of unpaid or outstanding loans
and due advances at time may known as asset quality [ CITATION Kab12 \l 1033 ]. According
to Badrul Hisham (2012) it show the degree of financial strenght and also risk level of
assets within the banks. Asset quality may be determine as NON-PERFORMANCE LOANS
TO GROSS ADVANCES[ CITATION Ish16 \l 1033 ].
C) MANAGEMENT CAPABILITY RATIO
The management capability show that how to perform bank management in term of
receiving deposit and it involve using of lowest possible inputs to genetrate the highest
output with best quality[ CITATION Tah171 \l 1033 ]. This factor can be measure as GROSS
ADVANCES TO TOTAL DEPOSITS RATIO (Ishaq AB et al., 2016.

33
D) EARNING RATIO
The banks incurred the cost in order to earn may known as earning, and the earning
provide to the banks to expand the funds and sustain the competitative advantage and help
to increase in capital and Earning can be determined NET-MARKUP INCOME TO
TOTAL ASSETS RATIO (Ishaq AB et al., 2016).
E) LIQUIDITY RATIO
According to Teshome (2018) Liquidity may be define as ability to convert non-cash
assets into cash and achieve the solvency and liquidity may be determined as
INVESMENT TO TOTAL ASSETS RATIO [ CITATION STA11 \l 1033 ].
F) PERFORMANCE OF ISLAMIC BANKS
The dependent variable can be determined as, RETURN ON EQUITY which can
indicate the performance of Islamic banks[ CITATION STA11 \l 1033 ].

34
3.8 Measurement of Variables:
LITERATUR
VARIABLE MEASUREMENT
E
DEPENDENT VARIABLE [ CITATION

Performance RETURN ON EQUITY Ish16 \l
1033 ]
[ CITATION
CAPITAL ADEQUACY TOTAL DEPOSITS TO TOTAL EQUITY RATIO Ish16 \l
1033 ]
[ CITATION
NON-PERFORMANCE LOANS TO GROSS
ASSET QUALITY Ish16 \l
ADVANCES
1033 ]
[ CITATION
MANAGEMENT
INDEPENDENT VARIABLES GROSS ADVANCES TO TOTAL DEPOSITS RATIO Ish16 \l
CAPABILITY
1033 ]
[ CITATION
EARNING NET-MARKUP INCOME TO TOTAL ASSETS RATIO Ish16 \l
1033 ]
[ CITATION
LIQUIDITY INVESMENT TO TOTAL ASSETS RATIO Ish16 \l
1033 ]
35
All variable were measurement according to the formula which were mentioned above table in
my study first variable is independent variable which measurement by return on equity ratio
which is equal to net income divided by shareholder equity it means the bank income which
earn from different products and different resources and public who invest in Islamic banks
which known as shareholder equity that variable was measure form that formula and capital
adequacy which is my dependent variable which is measure by total deposit to total equity
ratio it means the deposit of account holder divided by total shareholder equity and asset
quality which measure non-performance loan to gross advances, non-performance loan that
loan which not paid by debtor or it may be defaulter and gross advances means where banks
give loan to public with out interest and management capability can be measured by gross
advances to total deposit ratio it means advances which given to public and total amount which
were deposit by people saving. Earning is measure by net-mark up income total asset ratio it
means net markup income identify the earning of banks which earn from product and total
asset means which represent total current asset plus fixed asset and then net-markup income
which is divided by total asset to ger earning ratio of each banks which is in my sample size.
Liquidity which represent that non-cash asset which convert into cash and it measure like
investment to total assets ratio which means investment divided by total asset it gets a single
ratio of liquidity which represent that liquidity of ratio. All variables were measure like that and
all formula were taken from Ishaq who is author which also conduct a research about bank
performance by CAMEL model and all ratio were run on e-views because easily interpret the
performance of Islamic banks in Pakistan and checking the impact of all independent variables
on dependent variable.
36
3.9 DESCRIPTIVE STATISTICS:
The purpose of descriptive statistics is that to describe the basic feature of data of the
study and it contain fixed measurement such as, standard deviation, mean, minimum
variable, maximum variable, and range. Mean can be defined as sum of all observation
divided by total number of observation and range may be maximum value minus
minimum value. Standard deviation may be defined as measurement of the amount of
variation of a set of value.
3.10 DIAGNOSTIC TEST:
3.10.1 UNIT ROOT TEST:
Apply AUGMENTED DICKEY FULLER OR PHILLIP PERRON TEST and also Levin
lin & chu to check the data for stationary or non-stationary if data is stationary then it is
desirable. Null hypothesis of ADF is Ho Data has unit root means the data has non
stationary alter Ha Data has no unit root means data is stationary when we run non-
stationary data may be face serial correlation and multicollinearity problems. When all
variables stationary at level then run simple regression, if all variables are stationary on
I(o) I(1) or I(0),I(1) then run ARDL, if all variables stationary at 1st difference or 2nd
difference then run co-integration, if variables Stationary at 1 st difference and 2nd
difference then run auto regression model.

37
3.10.2 HAUSMAN TEST:
There are three types of panel models which is pooled OLS, fixed effect, random effect
and any one of best on data first compare random effect and fixed effect models then we
run Hausman test. The hypothesis of Hausman test is null hypothesis Random effect is
appropriate and alter is fixed effect is appropriate if fixed effect is appropriate the no need
to run another test, further comparing fixed effect to pooled OLS then need to generate
dummy variable.
3.10.4 AUTO /SERIAL CORRELATION TEST:
Serial correlation test is statistical tool to measure the strength of the relationship of two
variables and also to measure linear relationship between independent and dependent
variables and auto correlation denoted by r. The correlation may be positive, negative,
and zero, if the relationship is positive then direction of variation both variables is same
and relationship is negative then direction of variation both variables is positive to each
other and if relationship is zero then both variable moves randomly [CITATION ish16 \l
1033 ]. The hypothesis of auto correlation is Ho there is no auto correlation and alter Ha
there is auto correlation, and no serial correlation between residual is desirable. The
Breusch-Godfrey test is used for auto correlation and also, we can check correlation in
Durban Watson.
38
3.10.6 NORMALITY TEST:
The hypothesis of normality test is Ho: Residuals are normally distributed and alter Ha:
Residuals are not normally distributed the desirable is normality of residuals. The Jarque-
Bera test is used for normality of residuals.

39
CHAPTER #4
ANALYSIS AND DISCUSSION
4.1 DESCRIPTIVE TEST:

Sample: 2006 2018
PERFORMANCE CAPITAL ASSET DMANAGEMENT EARINING LIQUIDITY
Mean 0.079040 0.111703 0.064709 0.001906 0.028771 0.274882

Median 0.095000 0.106450 0.065800 0.008350 0.028550 0.256650
Maximum 0.280000 0.226500 0.193400 0.176300 0.048800 0.572800
Minimum -0.910000 0.000000 0.000000 -0.145800 -0.003700 0.000000
Std. Dev. 0.154198 0.051831 0.045353 0.072308 0.009569 0.127580
Skewness -3.458208 0.019776 0.559113 0.085206 -0.707235 0.495390
Kurtosis 22.73105 2.612249 2.887126 2.535639 4.911500 2.584486
Jarque-Bera 1420.741 0.493725 4.105300 0.734014 18.37731 3.751470

Probability 0.000000 0.781248 0.128394 0.692805 0.000102 0.153242
Sum 6.165100 8.712800 5.047300 0.137200 2.244100 21.44080

Sum Sq. Dev. 1.830841 0.206858 0.158383 0.371219 0.007050 1.253296
Observations 78 78 78 72 78 78
The data were put in EViews and above result occurred, it shows the minimum, maximum,
mean, median, skewness, kurtosis and also standard deviation of independent variable and
dependent variable. In my study dependent variable is, performance and independent variables is
capital adequacy, asset quality, management capability, earning, and liquidity. There were
40
seventy-eight observation were used in dependent variable except management capability were
stationary at first level therefore there seventy-two observation were taken.
Mean is a central value of data, in my study mean of all variables like performance, capital
adequacy, asset quality, management capability, earning, liquidity which is 0.079040 0.111703,
0.064709, 0.001906, 0.028771, 0.274882. Median is a middle number in a sorted list of number
in my study median of all variables and also maximum and minimum value first median
0.095000, 0.106450, 0.065800, 0.008350, 0.028550, 0.256650 second maximum 0.280000,
0.226500, 0.193400, 0.176300, 0.048800, 0.572800 and third minimum value -0.910000,
0.000000, 0.000000, -0.145800, -0.003700, 0.000000 and standard deviation of all variables is
0.154198, 0.051831, 0.045353, 0.072308, 0.009569, 0.127580. skewness show that the data is
not equally distributed both side if tail is toward right side of the central value, we can say that
it’s positively skewed and if tail is toward the left side, we can say that it’s negatively skewed in
my study the result of skeweness which -3.458208, 0.019776, 0.559113, 0.085206, -0.707235,
0.495390. Like skewness, kurtosis is a statistical measure that is used to describe the distribution
and it show the tails of the distribution 22.73105, 2.612249, and 2.887126 2.535639, 4.911500,
2.584486. In kurtosis the positive value tells you about heavy-tails means lot of data in your tail
and a negative value tells light-tails. If kurtosis close to nearly three then say that data is
normally distributed. Jarque-bera test show the normality of data in result show that performance
and earning in not normally distributed and other variables which is capita adequacy, asset
quality, management capability, and liquidity is normally distributed the test of Jarque-bera
apply which is below it show that the data is normally distributed.

41
4.2 UNIT ROOT TEST:
Null Hypothesis: Unit root (common unit root process)

Series: CAPITAL
Date: 12/25/19 Time: 16:18
Sample: 2006 2018
Exogenous variables: Individual effects
Automatic selection of maximum lags
Automatic lag length selection based on SIC: 0 to 1
Newey-West automatic bandwidth selection and Bartlett kernel
Total number of observations: 69
Cross-sections included: 6
Method Statistic Prob.**

Levin, Lin & Chu t* -1.92416 0.0272
** Probabilities are computed assuming asympotic normality
Intermediate results on CAPITAL
Cross 2nd Stage Variance HAC of Max Band-

section Coefficient of Reg Dep. Lag Lag width Obs
1 -0.11272 8.E-05 4.E-05 0 1 10.0 12
2 -0.13566 0.0001 0.0002 0 1 2.0 12
3 -0.17876 7.E-05 0.0003 1 1 2.0 11
4 -0.32412 0.0006 0.0004 0 1 3.0 12
5 0.20347 0.0001 0.0001 1 1 1.0 11
6 -0.27445 3.E-05 4.E-05 1 1 1.0 11
Coefficient t-Stat SE Reg mu* sig* Obs

Pooled -0.12384 -3.240 1.062 -0.554 0.919 69
The data were put in E-views for unit root test and apply Levin, Lin & chu test, first
independent variable select which capital adequacy and hypothesis of unit root test about
null hypothesis which is Data has unit root and alter Data has no unit root we can see that
result show that null hypothesis is rejected because in result prob value is 0.0272% which
is less than 0.05% it means data has no unit root then data is stationary and also it is
desirable and the capital adequacy stationary at level.

42

Series: ASSET
Date: 12/25/19 Time: 16:22
Sample: 2006 2018

Levin, Lin & Chu t* -1.99372 0.0231
Intermediate results on ASSET

1 -0.37075 0.0004 0.0005 0 1 0.0 12
2 -0.41486 0.0020 0.0003 0 1 11.0 12
3 -0.37470 0.0014 0.0021 0 1 1.0 12
4 -0.37924 0.0001 0.0007 1 1 2.0 11
5 -0.48416 0.0005 0.0005 0 1 1.0 12
6 -0.24185 0.0002 0.0002 0 1 1.0 12

Pooled -0.37653 -5.015 1.005 -0.554 0.919 71
Second independent variable which is asset quality and hypothesis of unit root test
about null hypothesis which is Data has unit root and alter Data has no unit root we can
see that result show that null hypothesis is rejected because in result, the prob value is
0.0231% which is less than 0.05% it means data has no unit root then data is stationary
and also it is desirable and the asset quality stationary at level.

43

Series: DMANAGEMENT
Date: 12/25/19 Time: 16:23
Sample: 2006 2018

Levin, Lin & Chu t* -5.19241 0.0000
Intermediate results on DMANAGEMENT

1 -0.55085 0.0029 0.0009 0 1 10.0 11
2 -1.36059 0.0043 0.0038 0 1 4.0 11
3 -1.00733 0.0056 0.0033 0 1 3.0 11
4 -1.07980 0.0040 0.0011 1 1 10.0 10
5 -0.29576 0.0020 0.0013 1 1 1.0 10
6 -0.72721 0.0035 0.0024 0 1 1.0 11

Pooled -0.89630 -7.372 1.070 -0.554 0.919 64
Third independent variable which is management capability and hypothesis of unit root
test about null hypothesis which is Data has unit root and alter Data has no unit root we
can see that result show that null hypothesis is rejected because in result, the prob value is
0.0000% which is less than 0.05% it means data has no unit root then data is stationary
and also it is desirable, but the management capability stationary at 1st difference .
44

Series: EARINING
Date: 12/25/19 Time: 16:24
Sample: 2006 2018
Automatic lag length selection based on SIC: 0
Total (balanced) observations: 72

Levin, Lin & Chu t* -4.28841 0.0000
Intermediate results on EARINING

1 -0.79963 2.E-05 9.E-06 0 1 8.0 12
2 -0.63163 6.E-05 2.E-05 0 1 11.0 12
3 -1.13228 8.E-05 4.E-05 0 1 7.0 12
4 -0.52691 3.E-05 7.E-05 0 1 2.0 12
5 -0.23076 7.E-06 1.E-06 0 1 11.0 12
6 -0.50962 3.E-05 5.E-06 0 1 11.0 12

Pooled -0.57149 -6.252 1.071 -0.554 0.919 72
Fourth independent variable which is earning and hypothesis of unit root test which is
Data has unit root and alter Data has no unit root, we can see that result show that null
hypothesis is rejected because in result, the prob value is 0.0000% which is less than
0.05% it means data has no unit root then data is stationary and also it is desirable, and
earning is stationary at level.

45

Series: LIQUIDITY
Date: 12/25/19 Time: 16:25
Sample: 2006 2018

Levin, Lin & Chu t* -2.25211 0.0122
Intermediate results on LIQUIDITY

1 -0.34405 0.0059 0.0140 1 1 1.0 11
2 -0.53421 0.0034 0.0045 0 1 2.0 12
3 -0.72692 0.0042 0.0065 0 1 3.0 12
4 -0.53988 0.0021 0.0051 1 1 2.0 11
5 -0.30936 0.0026 0.0035 0 1 1.0 12
6 -0.17256 0.0033 0.0039 0 1 0.0 12
Fifth independent variable which is liquidity and we can see that result show that null
liquidity is stationary at level.

46

Series: PERFORMANCE
Date: 12/25/19 Time: 16:26
Sample: 2006 2018

Levin, Lin & Chu t* -11.0195 0.0000
Intermediate results on PERFORMANCE

1 -0.39828 0.0011 0.0007 0 1 3.0 12
2 -0.71169 0.0027 0.0005 0 1 11.0 12
3 -1.01290 0.0043 0.0484 0 1 3.0 12
4 -0.30017 0.0008 0.0006 1 1 2.0 11
5 -1.02801 0.0016 0.0011 1 1 5.0 11
6 -0.93648 0.0007 0.0013 0 1 3.0 12

Pooled -0.86120 -12.618 1.133 -0.554 0.919 70
The dependent variable which is performance and we can see that result show that null
performance is stationary at level.

47
4.3 HAUSMAN TEST:
Correlated Random Effects - Hausman Test

Equation: Untitled
Test cross-section random effects
Chi-Sq.
Test Summary Statistic Chi-Sq. d.f. Prob.
Cross-section random 89.729514 5 0.0000
** WARNING: estimated cross-section random effects variance is zero.
There are three type of panel model which is pooled OLS, fixed effect, and random effect
and there, we compare between first, random effect and fixed effect models, which
models fit on our data, then the test apply which is Hausman test, it tell about that which
model is fit for our data first we see their hypothesis which is like Ho: Radom effect is
appropriate and Ha: Fixed effect is appropriate. The result show that the prob value is less
than 0.05% which is 0.0000% it means the null hypothesis is rejected it means for our
data the fixed effect model is appropriate.

48
4.3.1 FIXED EFFECT MODEL AND AUTO CORRELATION:
Dependent Variable: PERFORMANCE

Method: Panel Least Squares
Date: 12/25/19 Time: 16:29
Sample (adjusted): 2007 2018
Periods included: 12
Total panel (balanced) observations: 72
Variable Coefficient Std. Error t-Statistic Prob.
CAPITAL 0.745734 0.158445 4.706578 0.0000

ASSET -0.234546 0.135030 -1.736983 0.0874
DMANAGEMENT 0.111584 0.073757 1.512856 0.1355
EARINING 2.931451 0.738561 3.969141 0.0002
LIQUIDITY 0.176819 0.048915 3.614800 0.0006
C -0.115430 0.034429 -3.352721 0.0014
Effects Specification
Cross-section fixed (dummy variables)
R-squared 0.868219 Mean dependent var 0.091876

Adjusted R-squared 0.846615 S.D. dependent var 0.102343
S.E. of regression 0.040082 Akaike info criterion -3.456019
Sum squared resid 0.098000 Schwarz criterion -3.108195
Log likelihood 135.4167 Hannan-Quinn criter. -3.317549
F-statistic 40.18877 Durbin-Watson stat 1.540189
Prob(F-statistic) 0.000000
The method which is used is panel least squares using fixed effect model, and the
coefficient show that the impact whether is positive or negative. Is significant impact of
independent variables on dependent variable, can be assess by prob value. Now the prob
values of independent variables which include capital, asset, management, earning, and
liquidity such as 0.0000%, 0.0874%,0.1355%,0.0002%, 0.0006% and except
management capability, other independent variables has significant impact on

49
performance which dependent variables but we can see that asset quality prob value
which is greater than 0.05% but it is less than 10% which acceptable it means asset
quality has significant impact on performance, because regression hypothesis like null
hypothesis there is no significant impact and alter there is significant impact. Now we can
see that management capability which does not show any impact means there is no
impact of management capability on performance which is greater than 0.05%, now we
see that is impact is positive or negative then we see coefficient because it show the
impact positive or negative in result capital, earning, and liquidity has positive impact on
performance and only asset quality has negative impact on performance. The R-Squared
is 86.82% which means independent variables explain performance by 86.82% and also
the prob value of F-statistics which is less than 0.05% which means the model is useful of
prediction and Durbin Watson is 1.540189 which is close to 2 it means there is no auto-
correlation problem in my study. If Durbin Watson is close to 2 it means there is no serial
correlation and if Durbin Watson is close to 0 it will be positive correlation in
model[ CITATION Ant18 \l 1033 ].

50
4.5 NORMALITY:
10
Series: Standardized Residuals
Sample 2007 2018
8 Observations 72
6 Mean -5.24e-17
Median -0.001199
Maximum 0.145639
4 Minimum -0.115101
Std. Dev. 0.058401
2
Skewness 0.021717
Kurtosis 2.418579
0 Jarque-Bera 1.019810
-0.10 -0.05 0.00 0.05 0.10 0.15
Probability 0.600553
The test apply for normality which is jarque-bera and the null hypothesis is Ho: Residual
are normally distributed and alter Ha: Residual are not normally distributed and the
result show that he prob value of jarque-bera test which is greater than 0.05% it confirm
that the data is normal because we fail to reject null hypothesis.

51
CHAPTER # 5
CONCLUSIONS AND RECOMMDATIONS
CONCLUSION:
In two decades, the CAMEL model was adapted, this model based on rating system it was
developed by federal banking regulators in U.S such as Federal reserve, The Office of the
Comptroller of the Currency, National Credit Union Administration, Farm Credit Administration
and Federal Deposit Insurance Corporation. The CAMEL is acronym which is represent five
factors which is “capital adequacy”, “asset quality”, “management capability”, “earning”,
“liquidity”, and this model use in U.S financial institution then adapted the overall world.
Financial institution serve most important role for the economy of country and one of them
which is bank it considered back bone of economy because the public who deposit their money
to secure saving and also banks serve for capital development there need to evaluate the
performance of banks and save from the crisis and push the economy to upward therefore
necessary for evaluating the performance of bank and easily identify poor banks performance by
CAMEL model, the purpose of model to assess the performance of banks and save from
problems, that model also apply on conventional banks but focus only Islamic banks because
many researches were conducted on conventional banking sectors and comparative study were
attempt but on Islamic banks few researches were conducted therefore decided to conduct the
research on Islamic banks. CAMEL model has five parameters to assess the performance of free-
interest banks like “capital adequacy”, “assets quality”, “management capability”, “earning”, and
52
“liquidity” and there are different ratios which can be used to assess these parameters. The
purpose of study to deal with the Islamic bank’s performance, soundness and also financial
position, the significance of the research to interprets the financial health of free-interest banks
by CAMEL model because there are many depositors who save their cash in free-interest banks,
study is useful for depositors, merchant bankers and also shareholder, and stakeholders.
In my study the limitation is considered as firstly is sample size of my research because there are
many Islamic banks in Pakistan but four Islamic banks were taken which is full-fledge banks and
rest two related to Islamic division of traditional banks in Pakistan, consideration is limited
because not studying the entire population and it is not reflect the whole mirror of Islamic banks
performance and all data which is gathered from annual reports of Islamic banks and apply
measurement or formula on data and extract a single result in percentage all data came from
annual report and one of limitation of my study belong to that like limitation of my research is
limited information of my study because all information not appear on balance sheet and income
statement some information is confidential which not appear publicly because to save business
for competitors therefor that is my limitation of my research. The scholar of Pakistan mostly
conducts the research on conventional banks and comparative study about conventional and
Islamic bank but few researchers conduct the research on Islamic banks performance only, this is
main GAP because time to time some factors changes, for example, if in past study the Islamic
banks is not good in capital adequacy, in near future it will be good in capital adequacy than
conventional banks. Brown (2003) assesses the Islamic bank performance for different countries
using of "DATA ENVELOPMENT ANANLYSIS 3" from 1998 and until 2001, the finding of
brown is Iran and Brunei is the most efficient market 4 and the market share of Islamic banking
3
DATA ENVELOPMENT ANALYSIS IS A NON- PARAMATRIC METHOD WHICH USE FOR EMPIRICALLY MEASURE PRODUCT EFFICIENCY
4
EFFICIENT MARKET KNOWN AS ALL CURRENT AND PAST INFORMATION REFLECT THE PRICE OF SHARE.
53
above 40% and its growth is massive, in 1998 and 2001 Yemen growth rate was 9.4 and 19.2. In
three years, growth rate was massively increase in past time, and Islamic banking sector creates
his place in competitive environment, and also people follow the shariah law and further brown
finding, the Bahamas was most liquid than Tunisia and Kuwait. [ CITATION Ras071 \l 1033 ] study
about Islamic bank performance in Pakistan during 1999-2006 through using of fundamental
analysis in the term of "profitability", "liquidity", "solvency", and "risk". Rashid use like mean,
standard deviation, and statistical hypotheses testing test like t-test, and f-test for determining
the financial ratio on the bank performance and also Rashid compare the Islamic bank with
conventional bank, sample size for study it took 3 non-interest banks like "Meezan bank", "Al-
Baraka", and "Al-Falah" only his Islamic division and eight conventional banks for his study
author findings the conventional bank are more profitable than free-interest banks in Pakistan
regarding author, the Islamic banks product like mudarba and musharika yet not accepted in
Pakistan. The author conduct a study for association of free-interest bank as well as non-free
interest bank performance in Bangladesh during period 2007-2014 and using of CAMEL model
on Islamic bank products, the sample size of study, which is include three Islamic banks in
Bangladesh, and the result show that, three Islamic bank they are superior in term of
performance by CAMEL dimensions[ CITATION Ahs16 \l 1033 ] . The study of area which is
focused is banking sector which include only Islamic banks and to investigate the performance of
Islamic banks by CAMEL model in Pakistan. The study conducted on 6 Islamic banks which
operates in Pakistan and the approach of the study which is used in research is quantitative
approach and also the secondary data is used in my study. According to Creswell 2009 the
quantitative may be describe as it testing the objective theories whether check the relationship
among the variables. The target population of my research is Islamic banks and the sample size
54
of my research is four completely Islamic base operation banks and two non-free interest bank’s
Islamic division which include full fledge Islamic banks like Meezan bank limited, Bankislami
Pakistan limited, Al- Baraka Islamic bank, Dubai Islamic bank, Islamic divisions of conventional
banks which include Habib bank limited bank al Falah limited. The sampling technique for my
study is convenience sampling because the annual report of Islamic banks and also Islamic
branches of conventional banks is available on internet. The purpose of the study to evaluate the
performance of Islamic banks with the help of CAMEL model and those variables measured by
above ratio. It based on secondary data and sampling techniques which is convenience sampling
and data is run on e-views, the analysis of the study based on nature of data and analysis tools .
ishaq AB (2016) conduct the research about performance of commercial banks and the
population of the study is banking sector, the sample size of the study is ten commercial banks in
Pakistan and he also investigate the performance of banks through CAMEL model and the author
use data analysis tools like descriptive statistic, correlation analysis and regression model for
their study. The purpose of study to assess the performance of Islamic banks in Pakistan, the data
is secondary in nature and the research is quantitative and the data gather from the annual report
of banks over the period of 2006-2018 years for the study, the purpose of data to evaluate
financial ratio and run e-views, for the analysis of performance of Islamic banks. The types of
data using in a study which is panel data. The data were put in EViews and above result
occurred, it shows the minimum, maximum, mean, median, skewness, kurtosis and also standard
deviation of independent variable and dependent variable. In my study dependent variable is,
performance and independent variables is capital adequacy, asset quality, management
capability, earning, and liquidity. There were seventy-eight observation were used in dependent
variable except management capability were stationary at first level therefore there seventy-two
55
observation were taken. Mean is a central value of data, in my study mean of all variables like
performance, capital adequacy, asset quality, management capability, earning, liquidity which is
0.079040 0.111703, 0.064709, 0.001906, 0.028771, 0.274882. Median is a middle number in a
sorted list of number in my study median of all variables and also maximum and minimum value
first median 0.095000, 0.106450, 0.065800, 0.008350, 0.028550, 0.256650 second maximum
0.280000, 0.226500, 0.193400, 0.176300, 0.048800, 0.572800 and third minimum value
-0.910000, 0.000000, 0.000000, -0.145800, -0.003700, 0.000000 and standard deviation of all
variables is 0.154198, 0.051831, 0.045353, 0.072308, 0.009569, 0.127580. skewness show
that the data is not equally distributed both side if tail is toward right side of the central value, we
can say that it’s positively skewed and if tail is toward the left side, we can say that it’s
negatively skewed in my study the result of skeweness which -3.458208, 0.019776, 0.559113,
0.085206, -0.707235, 0.495390. Like skewness, kurtosis is a statistical measure that is used to
describe the distribution and it show the tails of the distribution 22.73105, 2.612249, and
2.887126 2.535639, 4.911500, 2.584486. In kurtosis the positive value tells you about heavy-
tails means lot of data in your tail and a negative value tells light-tails. If kurtosis close to nearly
three then say that data is normally distributed. Jarque-bera test show the normality of data in
result show that performance and earning in not normally distributed and other variables which is
capita adequacy, asset quality, management capability, and liquidity is normally distributed the
test of Jarque-bera apply which is below it show that the data is normally distributed. Second
independent variable which is asset quality and hypothesis of unit root test about null
hypothesis which is Data has unit root and alter Data has no unit root we can see that result show
that null hypothesis is rejected because in result, the prob value is 0.0231% which is less than
0.05% it means data has no unit root then data is stationary and also it is desirable and the asset
56
quality stationary at level.Third independent variable which is management capability and
hypothesis of unit root test about null hypothesis which is Data has unit root and alter Data has
no unit root we can see that result show that null hypothesis is rejected because in result, the prob
value is 0.0000% which is less than 0.05% it means data has no unit root then data is stationary
and also it is desirable, but the management capability stationary at 1 st difference .Fourth
independent variable which is earning and hypothesis of unit root test which is Data has unit
root and alter Data has no unit root, we can see that result show that null hypothesis is rejected
because in result, the prob value is 0.0000% which is less than 0.05% it means data has no unit
root then data is stationary and also it is desirable, and earning is stationary at level.Fifth
independent variable which is liquidity and we can see that result show that null hypothesis is
rejected because in result, the prob value is 0.0122% which is less than 0.05% it means data has
no unit root then data is stationary and also it is desirable, and liquidity is stationary at level.The
dependent variable which is performance and we can see that result show that null hypothesis is
rejected because in result, the prob value is 0.0000% which is less than 0.05% it means data has
no unit root then data is stationary and also it is desirable, and performance is stationary at level.
There are three type of panel model which is pooled OLS, fixed effect, and random effect and
there, we compare between first, random effect and fixed effect models, which models fit on our
data, then the test apply which is Hausman test, it tell about that which model is fit for our data
first we see their hypothesis which is like Ho: Radom effect is appropriate and Ha: Fixed effect
is appropriate. The result show that the prob value is less than 0.05% which is 0.0000% it means
the null hypothesis is rejected it means for our data the fixed effect model is appropriate.The
method which is used is panel least squares using fixed effect model, and the coefficient show
that the impact whether is positive or negative. Is significant impact of independent variables on
57
dependent variable, can be assess by prob value. Now the prob values of independent variables
which include capital, asset, management, earning, and liquidity such as 0.0000%,
0.0874%,0.1355%,0.0002%, 0.0006% and except management capability, other independent
variables has significant impact on performance which dependent variables but we can see that
asset quality prob value which is greater than 0.05% but it is less than 10% which acceptable it
means asset quality has significant impact on performance, because regression hypothesis like
null hypothesis there is no significant impact and alter there is significant impact. Now we can
see that management capability which does not show any impact means there is no impact of
management capability on performance which is greater than 0.05%, now we see that is impact
is positive or negative then we see coefficient because it show the impact positive or negative in
result capital, earning, and liquidity has positive impact on performance and only asset quality
has negative impact on performance. The R-Squared is 86.82% which means independent
variables explain performance by 86.82% and also the prob value of F-statistics which is less
than 0.05% which means the model is useful of prediction and Durbin Watson is 1.540189 which
is close to 2 it means there is no auto- correlation problem in my study. If Durbin Watson is close
to 2 it means there is no serial correlation and if Durbin Watson is close to 0 it will be positive
correlation in model[ CITATION Ant18 \l 1033 ].The test apply for normality which is jarque-bera
and the null hypothesis is Ho: Residual are normally distributed and alter Ha: Residual are not
normally distributed and the result show that he prob value of jarque-bera test which is greater
than 0.05% it confirm that the data is normal because we fail to reject null hypothesis. The data
were put in E-views for unit root test and apply Levin, Lin & chu test, first independent variable
select which capital adequacy and hypothesis of unit root test about null hypothesis which is
Data has unit root and alter Data has no unit root we can see that result show that null hypothesis
58
is rejected because in result prob value is 0.0272% which is less than 0.05% it means data has no
unit root then data is stationary and also it is desirable and the capital adequacy stationary at
level.
Capital adequacy can be defined as public save their money into banks which is liability of
banks, and also it is responsibility of banks to invest public money in better opportunity, in
Islamic banks interest is prohibited, but they give mark-up to the depositor when bank is suffer
from loss then depositor also loss his principal amount which is invested by banks therefore
many depositor does not save their money into banks because of losing the principal amount but
Islamic banks working on it, according to my result the capital adequacy has positive impact on
performance it means the bank must focus on capital adequacy, bank must introduce new
packages for depositor and easily attract them and increase the number of account holders
because capital adequacy has a impact on performance in short we can say that when banks has
poor capital adequacy then the performance of banks will be decrease and the bank may be
liquidate because of few amount of depositor. Asset quality can be defined as it show the ability
of banks in term of recovery of loans. Asset quality has also negative impact on performance,
Islamic banks must consider asset quality because this is factor which can decrease the
performance of Islamic banks. Islamic banks must increase the ability and efficiency in recovery
department personnel therefore the banks personnel must be recovering the money of depositor
with well manner and efficiently, this is also main factor which influence the performance of
Islamic banks. Management capability may be describe as it show the ability of management to
generate output form least input but in my result show that there is no impact of management
capability on performance it means Islamic banks do not focus on management capability but
Islamic banks focus on asset quality and capital adequacy because this is most important for
59
banks and rest variables most important for Islamic banks. Earning is a factor which belong to
CAMEL model according to my result earning also has impact on performance and it may be
describe as Islamic banks incurred cost to earn may be known as earning in my result earning has
positive impact on performance in short the Islamic banks must focus on their earning when
earning of Islamic banks decrease then the performance of banks also decrease and when the
earning increase the performance of banks also increase it means the Islamic banks must
considered that factor because the earning has impact on performance. Liquidity is last factor
which show the positive impact on performance and it also defined as convert non-cash asset in
to cash may be known as liquidity in my result which run on e-views and also apply unit root test
on all variables and also apply Hausman test on data according to prob value of Hausman test it
recommend the fixed effect is appropriate for my data and liquidity has positive impact on
performance it means the Islamic banks must be efficient to covert non-cash asset into cash
immediately when bank depositor needed and liquidity has main factor for performance if all
independent variables except management capability, Islamic banks focus on that for increasing
their performance and attract potential depositor for banks and maintain capital, asset, earning,
and liquidity for better performance.

60
RECOMMENDATION:
Firstly, apply the descriptive statistics on data which only describe the data it means it tells us
about how many observations were taken which is denoted by capital N, also identify the
maximum and minimum value in data, calculate the mean and standard deviation and then apply
unit root test because checking that whether data is stationary or non-stationary but stationary
desirable and then apply Hausman test because it help to easily identify the model it means
which model is best for our data, prob value of Hausman test which indicate about model,
selected model is fixed model because Ho: Random effect is appropriate Ha: fixed effect
appropriate null hypothesis were rejected prob value was less than 0.005, therefore the model is
appropriate for data which fixed model and normality were checking in data, jarque-bera test
were apply on data because checking normality according to prob value it is greater than p value
which is 0.005 it prove that data is normally distributed. According to the result, we can see that
in fixed effect model, where performance is dependent variable and capital adequacy, asset
quality, management capability, earning, and liquidity is independent variable. Capital, asset,
liquidity earning, and also liquidity has impact on performance but management capability does
not have impact on performance it means Islamic banks must focus on four factors which is
capital adequacy, asset quality, earning, and also liquidity and there no need to focus on
61
management capability according to result all my recommendation reflect the result which is
appear according to data.
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EVALUATON OF PERFORMANCE OF ISLAMIC BANKS IN PAKISTAN BY CAMEL MODEL

EVALUATON OF PERFORMANCE OF ISLAMIC BANKS IN PAKISTAN

THESIS SUBMITTED TO THE FACULTY OF BUSINESS

AL’HUMDUL’LILAH! By the grace of Allah (SUBHANA-TAALA) the three Chapter is done

on EVALUSTION OF PERFORMACE OF ISLAMIC BANK IN PAKISTAN BY CAMEL

PROFEESSOR MR. ABDUL GHAFFAR of “Muhammad Ali Jinnah University”

spectrum of researches, analysis and further studies.

them towards fruitful and timely completion of this works.

with a reputable institution.

factors which is “capital adequacy”, “asset quality”, “management capability”, “earning”,

people like invertor, businessmen.

BACKGROUND OF THE STUDY........................................................................................................1

Islamic Banking in Pakistan…………………………………………………………………………………………………………6

Significant of The Study………………………………………………………………………………………………………………9

Gap of The Study………………………………………………………………………………………………………………………10

Study Area And Approach:.............................................................................................................22

Target Population And Sample Size:..............................................................................................22

SAMPLE (SIMILAR CASE):.........................................................................................................23

Data Collection Method:......................................................................................................................24

Method Data Analysis:........................................................................................................................24

Definition And Measurement Of Variables.........................................................................................25

Unit Root Test:...............................................................................................................................29

Auto /Serial Correlation Test:.........................................................................................................30

ANALYSIS AND DISCUSSION................................................................................................32

Unit Root Test:.................................................................................................................................34

Fixed Effect Model And Auto Correlation:......................................................................................41

Conclusions And Recommdations.....................................................................................................44

1.1.1 BACKGROUND OF THE STUDY

(2001) free-interest banks is effective performance as compare to commercial bank. Islamic

countries market economy consists on "ownership", "competitive environment", "freedom of

finance[ CITATION abd1 \l 1033 ].

1.1. ISLAMIC BANKING IN PAKISTAN

into being and they appreciate RIBA.

In 1962-63: free-interest bank starts which is first branch in mesar.

laws which against Sharia.

with other Muslim appeal against Riba in federal shariat court.

In 1979 -89: Fiscal policy was freeze for ten years

a petition was analyzed for the period of 2.5 years.

In 1991: The federal shariat court was ban interest (Riba).

In 1999 MARCH-JULY: The supreme court of pakistan invited accountant, businessmen,

decision was right.

the supreme court of Pakistan against own decision.

1.2 PROBLEM STATEMENT

be measured and easily to analyze the free-interest bank performance.

1.3 RESEARCH QUESTIONS

1. How to interpret the Islamic bank performance by capital adequacy?

2. How to assesses Islamic bank performance by asset quality?

3. How to evaluate Islamic bank performance by management capability?

4. How to determine earning for Islamic bank's performance?

5. How to judge Islamic banking sector performance by liquidity?

1.4 RESEARCH OBJECTIVES

1. To interpret the financial performance of Islamic banking sector by capital adequacy

2. To assesses Islamic bank performance by asset quality

3. To evaluate Islamic bank's performance by management capability

4. To determine earning for Islamic bank performance

5. To judge liquidity for Islamic bank’s performance

different ratios which can be used to assess these parameters.

1.7 SIGNIFICANT OF THE STUDY

1.8 RESEARCH LIMITATION

limited information for the study.

1.9 GAP OF THE STUDY

be good in capital adequacy than conventional banks.