banks

How Islamic & Conventional banks are performing in Pakistan? / Comparative study of financial performance of Islamic & conventional banks?

Abstract

This study is based on comparative analysis of conventional and Islamic banking system and has supported to present a clear picture of both types of banking systems in the context of financial performance, especially in Pakistan. To understand the difference between both banking systems, I have referenced the findings of various past researches, which has supportedmeto analyze the study on the basis of different point of views. This study is based on secondary data analysis method and has collected the data from the annual reports of conventional as well as Islamic banks. For the study purpose, six banks of each banking system have been selected which has assisted to discuss the study on the basis of facts and figures. In like manner, the findings of annual report are correlated with the literature review which has supported to increase the reliability of the study.

  Chapter 1: Introduction

1.1 Research Background

The banking sector of Pakistan has been unstable since last many decades owing to unstable policies and external uncertainties. The inferior products and services impacted the performance of the nationalised banks who demonstrated poor performance. This finally led to privatisation of banks in Pakistan during 1992 (Muhammad Bilal and Hanudin Amin, 2015). However, from past few years, the changing global environment has enhanced the performance of the banks in Pakistan province. The Pakistan banks are undertaking multiple functions and developing products and services to provide latest feature adding to the convenience to its customers. In the recent years, the global expansion of Islamic banking system is considerable. It is analysed that Sharia compliant assets are growing by around 10% a year. Even during the financial crisis, Islamic banks have shown good performance (Beck, et al., 2013). According to the figures, it is analysed that financial crisis has resulted in great loss towards the commercial banking system. Due to which, at present,investors ‘concern towards conventional banking system has increased and investors are focusing towards investing in Islamic banks. In like manner, it is analysed that at present Islamic banks are not just limited to traditional Muslim regions but there are 300 plus Islamic financial institutions which are dealing in across 70 countries.

This research is based on comparative analysis of Islamic & conventional banks. For this purpose, the study has undertaken which has supported to analyse the financial performance of Islamic and conventional banks while comparing them on various perspectives. This study has given focus towards secondary data collection method which remained highly supportive to offer in-depth knowledge regarding the research topic. Furthermore, I have correlated the case study findings with the literature review which has supported to increase the relevancy and reliability of the study.I have used quantitative approach which has enabled me to present the data in the form of graphs and charts and has enabled to understand the research outcome in a glance. The facts and figures are collected from the annual report of banks for the year 2006 to 2016. The time span of ten years is fair enough to evaluate the financial performance for both type of banking system. There are various factors due to which the financial performance of both financial systems differs from each other. The major factor is difference between the rules, regulations and laws of both types of banks.At the same time, difference in capital adequacy, asset quality, liquidity, management quality, size and many other parameters which create difference between the financial performance between both the banking system. These factors have also a direct impact on market share, shareprices, customers’perceptions and risk factor of banks and are also responsible for difference in the financial performance of the banks. So, in this context, this study has focused towards the major parameters on the basis of which the financial performance for both kinds of banks will be analysed.

It is identified that banking sector plays vital role in the economic growth of a country and it supports to channelize the public savings towards the productive investments which supports towards economic growth. In the context of Pakistan, it is identified that Islamic banking system was started in Pakistan in the year of 2002, at that time, initiallyMeezan bank was established. Islamic banking system is based on Shari whichis highly focused towards interest (riba) as ribais prohibited in Islam. Insteadof riba,Islamic principles workon profit and loss sharing strategy. However, in contrary, conventional banking is interest basedbanking system. Islamic banking is growing at a very rapid pace in Pakistan although conventional banks are also showing their significant place(Kamarudin et al., 2014). For the proposed research, I have included six Islamic and six Conventional banks. In the context of Islamic Banks, Meezan Bank Limited, Bank Islami Pakistan Limited, Dubai Islamic Bank Pakistan Limited, Al Baraka formerly Burj bank Limited, Emirates Global Islamic Bank Limited and Bank Alfalah Islamic are selected while in the context of conventional banks, Habib Bank Limited, United Bank Limited, National Bank of Pakistan, Askari Bank Limited, Allied Bank Limited and Muslim Commercial Bank Limited are selected.

1.2 Research Aim and Objectives

The research aim of this study is to analyse the difference between the financial performance of Islamic & conventional banks in Pakistan on the basis of comparative study. Moreover, this study also aims to make the people aware about which banks are more profitable, more liquid, more efficient and less risky so that they can take effective decisions regarding their investments.

The research objectives of this study are as follow:

  • To define the Islamic and conventional banking system
  • To analyse the difference between Islamic and conventional banking system especially in Pakistan
  • To evaluate the limitations of Islamic and conventional banking system in Pakistan
  • To recommend the ways to improve Islamic and conventional banking system in Pakistan

1.3 Research Questions

The research question of this study is as follow:

  • What is the difference between the financial performance of Islamic & conventional banks in terms of financial ratios especially in the context of Pakistan?
  • What are the factors that have impacted the performance of Islamic & conventional banks?

1.4 Research Significance

The research significance of this study is that it has supported to offer clear picture of financial position and performance of both Islamic & conventional banks which will remain supportive for the depositors, investors, bank managers and shareholders and will facilitate to take effective decision. The proposed research has also given consideration towards making the people aware about which bank is more profitable and have more liquidity and efficiency and has less risk. In this study, the research is expanded for the time span of 10 years period and has supported to provide up to date results.Moreover, it is identified that Pakistan is an ideological state which had been established on the name of Islam and in this country both Islamic and Conventional banks are operating under SBP (State bank of Pakistan)(Johnes, et al., 2014). Due to this reason, this country is selected to conduct the study in an effective manner.

1.5 Research Structure

Chapter 1: Introduction

This chapter of the research supports to offer the in-depth understanding regarding the research topic. For this purpose, this section includes research background, research aim and objectives, research question & research structure which support to offer brief introduction of the research.

Chapter 2: Literature Review

In this chapter of the research, I have used various existing theories;concepts and frameworks in order toobtain an understanding of the research topic on the basis of past findings. In this section, I have referred to various journals, magazines, reports and articles. This chapter is based on critical analysis of the researchquestion whichhas enabled to compare both banking systems in an effective manner while focusing towards positive as well as negative aspects.

Chapter 3: Research Methodology

This section ofresearchdiscusses the methods which are needed to be used to analyse the research outcomes. Secondary data collection method is used which has supported to increase the reliability of the research outcomes. This research paper involves literature review and case study data collection method. Inliterature review, I have referenced only the reliable sources, which has increased the authenticity of the study. The data is collected from the annual report which is reliable source.

Chapter 4: – Research Analysis

In this section, I have analysed the secondary findings while correlating it with the literature review which has supported to increase the reliability of the research outcomes and has enabled to interpret the research outcomes in an effective manner. Quantitative data analysis method has been used which has supported to analyse the research findings on the basis of facts and figures. For this purpose, 6 Islamic banks, i.e. Meezan Bank Limited, Bank Islami Pakistan Limited, Dubai Islamic Bank Pakistan Limited, Al Baraka formerly Burj bank Limited, Emirates Global Islamic Bank Limited and Bank Alfalah Islamic are taken. In like manner, 6 conventional banks, i.e., Habib Bank Limited, United Bank Limited, National Bank of Pakistan, Askari Bank Limited, Allied Bank Limited and Muslim Commercial Bank Limited conventional banks are taken. Moreover, the findings of literature review have correlated with the annual report findings.

Chapter 5: Conclusion &Recommendations

This chapter concludes the overall research which supports to summarise theresearch and enables to understand the research outcomes while focusing towards the research objectives. At the same time, this section has recommended the ways to improve the banking system and financial performance of Islamic and conventional banks.

Chapter 2: Literature Review

2.1 Introduction

This chapter of the research has supported towards offering in-depth knowledge regarding the research topic while utilizing the past studies. Moreover, it has supported to critically analyse the research topic. For this purpose, various books, magazines, articles and reports are referred by me who have supported to understand the research topic on the basis of the point of view of different authors.This section discusses the theoretical concept of Islamic banks and conventional banks. At the same time, this study has supported to analyse the difference between Islamic and conventional banks. Furthermore, it has discussed the performance of Islamic and conventional banks in Pakistan while focusing towards various parameters (Wang, et al., 2014). In like manner, it has supported to offer true picture of financial position and financial performance of both the banks to facilitate the depositors, investors, bank managers and shareholders in the context of decision making. Additionally, it has critically analysed that which banking system is more profitable, shows more liquidity, more efficiency and less risky.

2.2 Theoretical Concept

2.2.1 Banking System

Pozsar (2013) depicted that banking system is the group of institutions which is designed to provide financial services to the clients. Banks are responsible to operate the payment system as well as it offers various facilities such as providing loans, taking deposits, offering assistance with the investments, etc. According to the views of Sunderam (2014), banking sector plays crucial role towards the economic growth of a country by channelizing the public savings towards the productive investments. Ergeç&Arslan (2013) stated that there are various functions which are performed by the bank. However, the functioning of the bank also depends on its network. Most of the banks deal for the purpose of profit which is majorly obtained by the stockholders. In this context, Sunderam (2014) stated that banking system follows the structural network of institutions in the context of financial services. The major function of banking system is to deposit the funds and offering the loans. Moreover, banks offer the facility of currency exchange as well as set monetary policy.

Rahim&Zakaria (2013) stated that banking system was formally started in Pakistan in 1947. During thatperiod, British colonialism had taken place in the South Asia. Pakistan has shown fast pace growth in banking industry and the banking system is increasing and expanding on

a continuous basis. The oldest bank of Pakistan is the State Bank of Pakistan. This is the bank which deals on a central basis in the nation. In support of this, Aziz, et al. (2016) determined that before independence (August 14, 1947), the Reserve Bank of India was the central bank of Pakistan. However after independence, the actions had taken by Muhammad Ali Jinnah for the establishment of the central bank in Pakistan. Due to this reason, the State Bank of Pakistan was developed. The headquarters of this bank is situated in Karachi. From the survey, it is identified that in Pakistan only 7% of the total population is utilizing the banks (Ansari&Rehman, 2011). However there is a tremendous potential in Pakistan so there is a need of attracting and pushing the population to avail the banking services.

2.2.2 Islamic Banks

Islamic banks follow the Sharia principles and under this law, interest (Riba) is prohibited. Sharia is an Arabic word which defines ‘the way to the source of life’. It supports to refer legal system to maintain the code of behaviour according to the Holy Islamic book Quran (Anginer and Demirguc-Kunt, 2014). Moreover, under the Islamic principles, Islamic banks shares profit as well as loss. This banking system is based on normative concept and follows conduct of value system in its banking activity. These banks are dedicated to operate in a manner that it remains assistive towards the development of the Islamic economy. According to Seyed-Javadin, et al. (2014), at present Islamic banks is offering their services in 60 plus countries at a global platform. Islamic banking shows the consistency with the Islamic law and also follows the Sharia principles. According to the belief of Islamic finance, it is identified that the movement of Islamic finance prohibits interest so riba is prohibited. Moreover, under justice equity, there is a rule of profit and loss sharing (PLS) in Islamic banking. Islamic banks earn money by profit and loss sharing, charging fees for the services, trading, leasing, etc. (Hamzahet al., 2015). At the same time, it also uses other Sharia contracts for the purpose of exchange.

Bhala (2012) stated that financial crisis has hugely impacted on the worldwide economy but the impact of crisis has not been seen in Islamic banking & finance system. In the contrary, it has shown greater extent of growth and competitiveness. In the views of BourkhisNabi (2013), Islamic banking system has shown remarkable double digit growth in the last decade. In the current scenario, Islamic banks are showing competitiveness at a global platform and expanding the business service. This banking system is dealing towards quick and transparent solution in the context of Islamic finance. This is the major reason behind that this banking system attracts Muslim citizens. Moreover, as it follows Sharia law, so its rules, regulations, policies are religion based. Islamic banking system is equity based system which shows high effectiveness. It enables to eliminate the chances of risk and applies the religious tax for the Islamic welfare and economic growth.

Mobarek & Kalonov (2014) reminds that Meezan bank was the initial fully fledged Islamic bank that was registered in 2002 in Pakistan state. This indicates that in the banking sector of Pakistan, the Islamic banks were new entrantsthat pose competition to conventional banks in terms of facilities, products and services to attain customer satisfaction.

2.2.3 Conventional banks

Conventional banks are based on interest system and these banks earn money by charging interest and fees from the clients for the services they offer. In the other words, conventional banking involves business activities which offer the services of receiving, lending, safeguarding or exchanging the money to earn profit. At the same time, Johneset al.,(2014) depicted that conventional banking services can be availed by Muslims as well as by non-Muslims. Conventional banking system offers a loan on fixed interest rate. Additionally, the longer time a borrower takes to pay the loan, the more his interest increases. Conventional banks also resell the loans to other parties for the purpose of acquiring more cash. In this situation, the borrower needs to pay back to the new owner.

2.3 Difference between Islamic and Conventional Banks

Islamic banking and conventional banking are extremely different in different ways. According to Seyed-Javadin, et al.(2014), the goals of the banks, risk sharing practices and Riba form the three essential differentiating factors for the Islamic banks and conventional banks.  In another study, Khairi & Baridwan (2015) state that the major difference in both banking systems is that Islamic banking follows Sharia law. Islamic banks are based on the Islamic faith and follow the limitations of the Islamic Law in its all actions and deeds. KhairiBaridwan (2015) also states that Islamic banking prohibits interest (Riba) of interest based system. At the same time, it prohibits speculating based trading profit while designing the law of risk sharing under PLS rule. In the context of Islamic banks, asset backing is used in the process of financing which supports to eliminate the situation of economic depression. However, in the contrary, Mulla (2017) depicted that conventional banking system is based on debtor-creditor relationship. In this banking system, two types of relationships take place. One is between depositors and the bank and the other is between the borrowers and the bank. Moreover, this banking system is based on interest system.

So, the client gets the interest of the credited amount which offers them an opportunity to earn the cost of money. At the same time, a client can borrow money while paying the interest rate. However, in the contrary, Islamic law facilitates to give or take loan without paying any interest which supports to offer opportunity for the borrower but eliminates the opportunity of the lender (Bourkhis&Nabi, 2013). It supports to develop the value of equity and enables the people as well as economy to grow while supporting the citizen. It allows eliminating any kind of advantage of the borrower from the creditors. According to Islamic law, money which is lent out on the basis of interest shows injustice. So, the riba is prohibited under Islamic law and due to which Islamic banks do not follow debtor-creditor relationship framework. On the other hand, Khediri, et al.(2015) depicted that Islamic bank do not offer any receipt of the payment however under conventional bank, client gets the complete detail of the financial transaction. Moreover, Islamic bank, do not provide any reward for the financial transactions but also eliminate the situation of risk-taking for the labour and capital. However, in the conventional banking, bank charges huge interest rates to the clients and provides nominal interest rates to the investors. So, it can be understood that conventional banks offers services to generate their own profit (Seyed-Javadin, et al., 2014). However, Islamic bank deals towards the Islamic economic development.

MiahSharmeen (2015) determined that in the last three decades, Islamic banking system has increased its worldwide presence. It has supported this banking system to increase the efficiency of the performance. In like manner, Ferhi&Chkoundali (2015) depicted that this banking system is based on humanitarian and social welfare based policies which enables to increase the goodwill of this banking and financing system. Ismail, et al. (2013) identified that OIC (Organisation of the Islamic Conference) is the inter-governmental organisation and this organization is developed through the collaboration of 56 states. This organisation is focused towards ensuring the progress and well-being of the worldwide Muslim community. In this context, this organization gives focus towards discussing the need of Islamic population to fulfil their economic as well as financial need. In support of this, Sufian et al. (2017) determined that this conference is designed to supports the Islamic people to adhere and expand their religious beliefs and principles in the society. In the contrary, conventional banks work for their own benefit to earn the interest. They are not designed to assist any particular community but they are designed to offer banking services to the citizens so that the customer can earn interest on the savings and can take loan in an easy way whenever required.

At the same time, Ergeç&Arslan (2013) stated that the worldwide Islamic community needs financial products and services. In this context, Islamic banks support them to mirror their faith and to develop the business or to fulfil their personal needs while creating the global presence. However conventional banking does not remain assistive in this context. Due to this reason, Islamic banking system remains highly assistive towards the uplift of the Muslim community to offer them the solution of financial issues and assist them to fulfil their financial needs. OIC gives huge focus towards the establishment of the supervisory and regulatory framework which enables to flourish as well as increasing the economic growth of the country. In the context of Pakistan, the first bank which was established in the country was Meezan bank. Due to its great success, further development in banking sector has taken place (Bourkhis&Nabi, 2013). Islamic banks of Pakistan offer various products such as leasing, investment, loans and many other schemes. Seyed-Javadin, et al. (2014) identified that due to the great success of Islamic banks in Pakistan, conventional banks have also entered in Pakistan and have started to offer variety of products to compete with the Islamic banks. Moreover, the Islamic finance market has come into the scenario during the Gulf war, as during this time span, oil prices and revenues had shown huge rise. Due to this reason, the investments in Islamic products haveincreased which has activated the development of Islamic banks.

2.4 Financial Performance of Islamic and Conventional Banks

Hassan, et al.(2016) depicted that Pakistan is one of the best ideological Muslim state where both Islamic and conventional banks operate under SBP (State bank of Pakistan). In the year 2002, first Islamic bank was established in Pakistan, i.e. Meezan bank. Islamic banking has shown fast pace growth in Pakistan. In the current scenario, six full-fledged Islamic banks are dealing in Pakistan. Conventional banks are also dealing in Pakistan. According to the views of Pozsar (2013), Islamic banking sector has shown rapid growth in Pakistan by capturing more than 15 per cent financial market share by the year 2016. At the same time, the market share of Islamic banking assets is 11.7 per cent and the deposits are 13.2 per cent of overall banking industry by the end of the year March 2017. In the context of Pakistan, there are overall 21 Islamic banking institutions in which 5 are full-fledged Islamic banks. Moreover, there are 16 conventional banks too which are operating approx. 1239 Islamic banking branches. In like manner, Anginer&Demirguc-Kunt (2014) identified that the overall system has 2317 Islamic windows which are spread in 116 districts and run by conventional banks. In the context of the comparative analysis regarding the performance of conventional and Islamic banks, it can be determined that as conventional banks are working for so many years so their performance is better as compared to Islamic banks.

According to the views of Ansari&Rehman (2011), conventional banks show better financial performance as compare to conventional bank. In this context, the study has taken place to compare the performance of Islamic and conventional banks for the years 2013-2015. This comparative study shows that conventional banks show better financial performance. To measure this parameter, financial ratio analysis had taken place to measure the profitability, solvency and capital adequacy of conventional and Islamic banks. From the study, it is identified that conventional banks are more profitable in the context of ROA, ROE and NPM (Wang, et al., 2014). However in the contrary, Islamic banks show better performance in efficiency ratio, debt to asset ratio, debt to equity ratio as well as credit to deposit ratio. So, from this it could be understood that both banking systems has proficiency in different areas. This finding has shown consistency with the study of Mobarek&Asma (2014).

While exploring the details, on the basis of efficiency and financial stability, it is identified that conventional banks show more efficiency as compared to Islamic banks however, in the context of financial stability, Islamic banks are better. In like manner, conventional banks show better productivity but it also indicates risk factor for the client. Not only this, but also it is identified that the customers show higher satisfaction level in conventional banking as compare to Islamic banking as they get interest rate which enables to increase the satisfaction of the consumers as they get the profit over their savings. Moreover, it motivates the customers to utilize the banking services. On the other hand, Ansari&Rehman (2011) argued that while borrowing the funds, Islamic banks remains better as it supports to eliminate the interest which assist the borrower to deposit the money without giving any kind of interest rate. So, it contributes towards the uplift of the Islamic society. Some researchers stated that there is only single difference between the performance of Islamic and conventional banks, i.e. liquidity. In this context, Ikaet al.(2011) has conducted the comparative study to evaluate the performance of Islamic and conventional banks for the years 2000 – 2007 in Indonesia. In this study, ratio analysis has been used to measure the profitability, liquidity, risk, solvency and efficiency. In this context, it is identified that Islamic banks show more liquidity.

According toHassan, et al.(2016), Islamic banks are founded in Pakistan due to the Islamic faith to stay within the limits of Sharia and it’s all actions and deeds are designed according to it. There is an absence of riba and avoidance of cruelty in the context of economic activities. At the same time, gharar or risk is prohibited under economic activities of Islamic bank. Moreover, religious tax (zakat) is applicable under Islamic banking. Additionally, Islamic banks discourage any rules which contradict with the Islamic value (Riaz, et al., 2014). It is known as haram and according to it, any act which is forbidden by Allah and is one of five Islamic commandments of morality of human action are haram and are prohibited under the Quran and the Sunnah (Mulla, 2017) while conventional banking system is concerned towards the debtor-creditor relationship while focusing towards interest rate. So, there are different perspectives of these two banks. In the view of Hamzahet al.(2015), it is considered that there are some interbank factors which show significant impact on the financial performance of both conventional as well as Islamic banks. In the context of Pakistan, various studies have taken place to compare performance of both banking systems in the country.

For this purpose, comparative study has taken place on the basis of the data for the year 2006 to 2014. From the four types of ratios, it is identified that the overall banking industry standards for the banking reflects the efficiency, liquidity,and leverage and asset quality. From this measurement, it was concluded that the performance of Islamic banks is better than conventional banks in terms of efficiency, return and asset quality (Anginer&Demirguc-Kunt, 2014). However, Islamic banks have shown issues related to investment, liquidity deposits, advances, capital, etc. While in these parameters, conventional banks have shown better financial performance. In support of this, Wang, et al. (2014) determined that Islamic banks are lacking performance in the context of fair distribution of profits among the depositors. Due to which it is showing the performance which is against the Islamic principle of fair distribution. So, there is a need of developing fresh equity system while developing new products in a manner so that the issues related to low performance can be eliminated.

From the results, it can be identified that Islamic banks are less profitable and have less liquidity as compared to conventional banks. At the same time, it shows less effective operations too, in the context of Pakistan (Khairi&Baridwan, 2015). However,BourkhisNabi (2013) argued that the major governing principle of Islamic banking is that it shows lower risk as the investment remains covered by the actual assets. It deals in present as well as on owned assets. Moreover, while borrowing the money, it remains highly assistive as it does not charge any interest over the loan, not even on a delayed repayment. It is identified that Islamic banks show more stability and consistency as compared to conventional banks (MobarekKalonov, 2014). Besides, they get less affected from the financial crises too. Islamic banks also support the small businesses to get easy loan without interest which supports towards the development of the Islamic economy.

In the views of Riaz, et al.(2014), in the past decades, Islamic banks have shown fast pace growth. Its principles are based on social framework, which has supported to attract the attention of the global finance system. From the evaluation, it is identified that Islamic banks have not only shown the incredible growth in Islamic countries but also they have shown their strong presence and growth in non- Islamic countries. However as per Beck, Demirgüç-KuntMerrouche (2013),Islamic banking have faced huge barriers as it was unable to adequately fit with the legal, economic and the regulatory frameworks at a global platform because different countries follow different policies, rules and regulations. This variance highly impacts the reliability of Islamic banking and hinders its growth. Due to this reason IBF (Islamic Banking & Finance) faces more challenges as compared to conventional banking system while dealing at global platform (Bourkhis&Nabi, 2013).

NobaneeEllili (2016) stated that IBF is focused towards making the employees understand the rules and regulations of Islamic banking in various countries under different Islamic schools which supports them to learn the regulatory and supervisory frameworks of Islamic bank in the context of Sharia law. On the other hand, conventional banks offer the training to the employees according to the bank laws and it also givesconsideration towardsthe financial rules and regulations of the country. Amendments are made in banking laws according to the country’s legal and regulatory framework (Khairi&Baridwan, 2015).To license the Islamic banks in Pakistan, there are a need of proper validation of license. Additionally, there is a need of executing the overall operations of the banks under the Sharia law. In the context of conventional banks, license is provided under the Companies Act (CAP. 42:01).Conventional banking system remains limited by share capital and it is essential for the bank to provide the receipt to the employees for the financial transaction. Banking Act requires the submission of legal proofs, memorandum of agreement, articles of association, financial documents and other corporate documents by the applicant to grant the operating license.(Mobarek&Kalonov, 2014). So, in conventional banking system, there isno involvement of religion and its rules, process and regulations show contradiction with Sharia law.

In support of this, Ismail, et al. (2013) stated that the client needs to fulfil various terms and conditions as mentioned in the contracts and agreements. Client also needs to follow the legal documentation, rules and regulations mentioned inthe document which needs to be fulfilled for the licensing process of Islamic bank. Under this documentation process, bank also describes the products or services that are offered by it. Moreover, bank also gives consideration towards necessary ex-post while offering the license (Miah&Sharmeen, 2015). For this purpose, ex-post of the client is observed in an adequate manner. Additionally, bank also gives focus towards reviewing the internal Sharia processes and compliance. However, in the context of conventional banking, agreement takes place on the basis of proper documentation and it does involve any religious perspective.

To identify the differences between Islamic and conventional banking, numerous empirical studies have taken place. These studies are highly assistive to evaluate the dissimilarities of the financial performance of both the banking system. From the study, it is identified that Islamic banks follow the novelty system due to which its legal and regulatory frameworks remain quite complex as well as it has also a lacking point of standardization (Kamarudinet al., 2016). Moreover, Islamic banking system follows variety of accounting practices, which do not have any universal recognized standards. In this context, Al-adwani, et al. (2014)stated that some Islamic banks follow International Accounting Standards (IAS),others follow Accounting Auditing Organization standards while some Islamic banks adhere to the accounting standards according to their local markets. Due to this reason, there is always confusion while dealing with the Islamic banks. Unlike to Islamic banks, conventional banks follow standardised rules and regulations which assist to eliminate the chances of any kind of confusion (Rahman&Banna, 2016). It reflects that conventional banking system shows better performance than Islamic banking system.

Furthermore, it is analysed that Islamic banks have shown unsatisfactory record towards R&D and innovation. Due to this reason, it has increased the pressure on Islamic banks to design genuine Islamic report while focusing towards the productivity of the products. This depicts a major difference between both banks’ practices as conventional banks give huge focus towards R&D and innovation records. So, there is a need to increase the concern towards distinctiveness, innovation and competitive products (Kabir& Worthington, 2017). It supports to analyse that the performance of conventional banking system is better than Islamic banking system.

The study conducted by Sufian, et al. (2017)stated that at present, there is high deficiency of skilled human resources in Islamic banks. Additionally, Islamic banks do not have any provision of adequate training for the staff members. Due to this reason, they do not have adequate knowledge about how to incorporate the fundamental Sharia law and how to deal with the customer’s complaints. While on the other hand, conventional banking system gives consideration towards the training program to make the employees proficient in dealing with the banking operations in an adequate manner (Miah&Sharmeen, 2015). It supports the conventional banking employees to handle the complaint adequately. So, in this context, conventional banking is better as compared to Islamic banking.

Moreover, it is identified that there is a scarcity of competent Sharia experts and these experts only serve Islamic banks on Sharia boards at a global platform. Also, most of the Sharia scholars do not have proficiency to deal with the current financial market’s complex situation. However, in the contrary, conventional banks hire expert human resource and offer them training to make them proficient in their fields. All these parameters support to understand the major reasons behind why the conventional banks show more customer satisfaction as compare to Islamic banks.

2.5 Comparative study of financial performance of Islamic and conventional banks in Pakistan

Islamic banking sector is growing at a rapid pace in Pakistan as it has captured at least 15 per cent of the overall financial market share in 2016 (Gulf newspaper,2016). The market share of Islamic banking assets and deposits in overall banking industry stood at 11.7 per cent and 13.2 per cent represented by the end of March 2017. Pakistan has 21 Islamic banking institutions including 5 full-fledged Islamic banks and 16 conventional banks which operate 1239 Islamic banking branches. The system as a whole has 2317 Islamic windows spread in 116 districts which are run by conventional banks. (IBD, SBP Bulletin, March 2017).

Comparative analysis has been used by most of previous studies to compare the performance of similar organisations. The financial ratios have been used by following studies to measure and compare the performance of Islamic and conventional banks (Bilal,2016; Siraj&Pillai,2012; Muhammad Bilal,2015; Saleh&eitun,2006).

2.6 Ratio Analysis on the Basis of Studies

There is an argument in literature that as conventional banks are operating for many years so their performance is better than Islamic banks. The following studies results support this argument.(Bilal,2016) carried out study while comparing performance of Islamic and conventional banks in Oman for the years 2013-2015.Financial ratio analysis had been used to measure profitability, solvency and capital adequacy of seven conventional banks and two Islamic banks. Independent sample t-test was used to determine whether there is significant difference in performance for Islamic and conventional banks. The results of the study showed that Conventional banks are more profitable and significantly different than Islamic banks in terms of ROA, ROE and NPM while Islamic banks are better in terms of efficiency ratio, debt to asset ratio, debt to equity ratio and credit to deposit ratio.These results are consistent with study conducted by (Mobarek&Asma,2014) who investigated the performance of Islamic banks v Conventional banks in 18 OIC (Organisation of Islamic performance) countries and explored the relationship between the efficiency and financial stability of banks. (DEA) Data envelopment analysis and SFA (Stochastic Frontier approaches) has been used. The results showed Conventional banks are more efficient than Islamic banks. However Islamic banks are financially more stable than conventional banks. (Safiullah, 2010) found the same results in Bangladesh for the years 2004 to 2008 by using the ratio analysis. The results showed that performance of conventional banks is better than Islamic banks in term of productivity and efficiency.This argument is also supported by results of a study conducted by (Ali et al., 2013) regarding Islamic and Conventional banks which showed that satisfaction level of clients using conventional banking is higher than that of Islamic banks.

Some studies concluded that there is no major difference in performance of Islamic and conventional banks except for liquidity.One of them is a study conducted by (Ika& Abdullah,2011) who compared the performance of Islamic and conventional banks in Indonesia for the years 2000 to 2007.Profitability, liquidity, risk and solvency and efficiency had been measured using ratio analysis. The study concluded that there are no major differences in financial performance of Islamic and conventional banks except liquidity. The study found that Islamic banks are more liquid than conventional counterparts. Same results were shown by a study conducted by (Yousaf& Samir, 2015) who performed a comparative analysis to measure and compare the financial performance of Islamic and conventional banks in Egypt. Descriptive, correlation and regression analysis have been used to test the research hypothesis. The results revealed that some of the interbank factors have significant effect on the financial performance of both types of banks however no considerable differences between the two groups of banks have been found. Similar study conducted by (Wasiuzzaman&Gunasegaven,2013) investigated the performance of five Islamic and nine Conventional banks in Malaysia for the period of 2005-2009 by using descriptive statistics, Independent sample t- test and regression analysis. It was found that ROA, bank size and board size values of conventional banks are higher than Islamic banks. The results also found that capital adequacy, liquidity, asset quality and operational efficiency were higher for Islamic banks. There were no significant differences in profitability and board’s independence for both types of banks.

Several studies have been conducted to compare performance of both banks in Pakistan. The recent research was conducted by (Aziz, et al.,2016) to compare the financial performance of Islamic and conventional banks operating in Pakistan for the years 2006 to 2014.The comparison has been made using ratio analysis on average values of ratios and by using five Islamic and five conventional banks of similar size. The comparison has also been made with overall banking industry standards. Four types of ratios were used as efficiency, liquidity, and leverage and asset quality.The results revealed that in terms of efficiency, return and asset quality the performance of Islamic banks is better. However Islamic banks are facing difficulties in terms of investment, liquidity deposits, advances and capital as conventional banks is better in these areas. Islamic banks are lacking fair distribution of profits among depositors which is against the Islamic principles. Islamic banks need to inject fresh equity & should develop the new products to cope with these issues.Bilal& Amin (2015) also carried out research to compare the financial performance of Islamic and Conventional banks during and after the US subprime crisis in Pakistan for the period of 2007 to 2012.Five Islamic and five conventional banks had been used as sample. Ratio analysis and t-test had been used to measure profitability,risk and solvency,liquidity and capital adequacy. The results revealed that Islamic banks are less profitable, more liquid, and operationally lessefficient than conventional banks.The study concluded that conventional banks are more profitable and efficient than Islamic banks. Similar study conducted by(Mughal& Shah, 2015) in Pakistani context for the years 2010 to 2014 concluded same that profitability of Conventional banks is higher than Islamic banks.Moin (2013) made the comparison of Islamic and conventional banks performance in Pakistan for the years 2003 to 2007.He used twelve ratios for comparison and found that conventional banks have better performance as there are operating for many years. A study conducted by (Usman& Khan,2012) measured the performance of Islamic and conventional banks in Pakistan for the years 2007 to 2009 concluded that growth, profitability and liquidity of Islamic banks is higher than Conventional banks.Jaffar&Manarvi (2011) compared financial performance of Islamic and conventional banks in Pakistan for the year 2005 to 2009 using CAMEL test.They concluded that conventional banks have better earning ability and liquidity management. There is no difference in asset quality of both banks. They also concluded that Islamic banks have better performance than conventional banks if using UNCOL ratio analysis.

Another study was conducted by (Ansari&Rehman,2011) using 3 Islamic and 3 conventional banks for the period of 2006 to 2009 in context of Pakistan to compare the performance of Islamic & Conventional banks to facilitate investors, equity holders, bank managers & regulators by performing a Financial analysis. The ratio analysis and Inter-bank analysis has been used to measure the performance of banks. Eighteen different financial ratios had been used to compare the profitability, liquidity, risk and solvency, capital adequacy, deployment and operational efficiency. Independent sample T-test and ANOVA was used to determine the significance of mean differences of ratios between & among the banks. The study concluded that Islamic banks more liquid, less risky and operationally efficient than conventional bank and concludes that there is not much difference in the profitability of both banks. These results contradict with the results of (Aziz, 2016). Further research is needed to provide the more up to dated results and to give a true picture.Similar performance measures in terms of profitability, liquidity, risk and efficiency for the period of 2003-2007 were used by Moin (2008) to evaluate the performance of Islamic and conventional banks. Under this study, the performance of first Islamic bank in Pakistan i.e. Meezan Bank was compared with a group of 5 conventional banks.Financial ratio analysis had been used where twelve financial ratios had been used. T-test and F- test were used to measure the significance of these performances. The results showed that MBL is less profitable, more solvent (less risky) and less efficient. However, there was no significant difference in liquidity between the two sets of banks. The study concluded that as conventional banks are in operation for many years while Islamic banking is just in its introductory phase so performance of Conventional banks is better than Islamic banks. Islamic banks business development framework is not working efficiently as compared to conventional banks (Farrukh,2006).

(Siraj&Pillai,2012) made research regarding comparison of Islamic and convention banks in GCC region for the years 2005 to 2010.Operating expense ratio, Net profit ratio, ROA, ROE had been computed by using ratio analysis. Six Islamic and six conventional banks had been selected as a sample study. The results implied that Islamic banks have more equity finance and more operating profits than conventional banks. (Akhtar,et al.2011) also performed comparative analysis of Islamic and Conventional banks and found that liquidity risk and net working capital to asset has positive relationship. Also, ROA of Islamic banks and capital adequacy of conventional banks has positive and significant relationship with liquidity risk.

2.7 Conclusion

All of above studies carried out in different countries dealt with common problem of comparing the performance of Islamic & conventional banks. However, all studies have not same results due to differences in time periods selected, analytical tools used and also due to difference in cultural perspective. In the context of Pakistan, the previous studies performed analysis for few years except for (Aziz& Hussein, 2016). The present study is being conducted for longer time period i.e. 2006-2016.  Islamic banking started in Pakistan in year 2002 however till 2006 few other new Islamic banks emerged in industry. The current research is extended to maximum time period which would give more up to dated results and better performance review.

Chapter 3: Research Methodology

3.1 Introduction

The aim to conduct this research is to analysis the financial performance of Islamic and Conventional banks in Pakistan. So, this chapter of research assist in developing an understanding about different parameters such as research techniques, methods, approaches, etc. These concepts play an important role to make the research reliable and valuable for others (Cooper et al., 2009). In addition, the research provides information about the different data collection methods, data analysis techniques, etc. to achieve the targets in time and generates valid outcomes from the study.

3.2 Research Philosophy

It helped me in identifying the effective information that will be needed in conducting the research and the kind of data that should be used and analysed. Research philosophy is further referred as the exterior layer or the first stage of the research methodology. It has its own significance in the research methodology.

The research philosophy is majorly based on the different source, beliefs, nature, assumptions, concepts etc. to develop understanding about the research subject. The research philosophy is sub divided into positivism research philosophy, realism research philosophy, and interpretivist research philosophy(Zeshan, 2016). The positivism research philosophy is considered by me in the research study when there is a need of natural phenomenon.

In realism philosophy the research is based on natural realities, where interpretations and perceptions are developed. The natural phenomena for gathering the data in an optimistic manner are done with the assistance of positivism philosophy (Srivastava, 2013). In addition to this, the realism research philosophy considers the overall facts that are linked to the natural realities. Interpretivist research philosophy is used when there is a requirement to conclude the research study because of the dependence on subjective nature. On the other hand, interpretive philosophy considers the subjective comprehension and helps in researching towards the conclusion of the research study(Latif et al., 2016).

Interpretivist philosophy suits the current research as it includes the concepts from natural science as well as develops the understanding for various logics and reasons.  The interpretive research philosophy is considered over the two other research philosophies. The desired outcomes were only possible to be achieved by using the interpretive research philosophy (Saif-Alyousfiet al., 2017).The subjective comprehensions create effective conclusion regarding the challenges of Islamic and Conventional banks in Pakistan. It is understood by evaluating the views and suggestions of Pakistan financial analytics and experts. Utilization of this philosophy has supported me to collect the data from the annual reports of the banks and has enabled to analyse the study more effectively. It has supported to collect the actual data from the annual reports and to conclude the study in the right direction while utilizing reliable and relevant facts and figures(Latif et al., 2016). It has supported to conclude the study in the right direction on the basis of using quantitative approach.

3.3 Research Approach

The research approach with the use of various tools, techniques & methods provides justification to the research study for collecting reliable information and making it authentic.(Neuman& Robson, 2014). The two types of research approaches have been used to conduct the current research study. These two kinds are inductive research approach and deductive research approach, which are used in accordance with the various objectives of the research (Mackey&Gass, 2015). In deductive research approach, hypothesis is developed by understanding and working on already existing theories. The deductive approach examines the hypothesis of the research, which are formulated on the basis of various theories. The other research approach is the inductive research approach, where the theories are formed after observation. In the context of current research, the theories are self-designed as per the collected information and existing phenomena (Mackey&Gass, 2015). In this research, the hypothesis is developed on self-basis and in accordance with the research issues and the various diverse objectives of the research. The data collected for the research study is also considered at the time of creating the own self theories.

(Source: Blackstone, 2016)

For this research, inductive research approach is selected instead of the deductive research approach. The reason behind selecting inductive research approach is that it provides flexibility in interpreting the data for concluding the results.

Another reason of going for inductive research approach is that it is more simple than the deductive research approach and also it allows to create and use the new theories rather than focusing on the already existed theories for testing the hypothesis in the research study. The inductive research does not formulate the hypothesis and supports to complete the research successfully on time. Any alterations in the research study are done in the inductive research at the beginning stage because no theories and hypothesis are applied(Brannen, 2017). Thus, for examining the financial performance of Islamic and Conventional banks in Pakistan, inductive research approach is used.

3.4 Research Strategy

The research strategy has its own vital significance and role to play in the research methodology. The research strategy plays the role of nuts and bolts in the research study in order to examine the issues and problems associated with the research topic. It further helps to carry out an effective research investigation in the context of the issues that existed in the research study and also the various objectives in the research study (Riazet al., 2014). The research strategy also helps to gain a thorough understanding and insight in the context of the research study and its various objectives.  At the same time, this part of the research study will help to develop an accurate and valid authentic result in the regard of the objectives of the research study and also helps to develop the valid research outcomes in the research study. The examination of the research is done with the support of different techniques such as surveys through questionnaire, experiments, interviews, case studies, etc. (Noor, 2008). The appropriate technique is used as per the research size and the research issues.

For this research, case study and literature review method is adequate and for this purpose, different journals, magazines, reports, articles, etc. are referenced which remained supportive to get the details of the research topic. Case study has also utilized facts and figures which have enabled to collect relevant information. It has supported to collect the data to calculate liquidity ratios for the years 2006 to 2016 and to perform ratio analysis for the years 2014 to 2016.In this research, it is important to collect the maximum data within a limited time framework for making it reliable for others (Marshall&Rossman, 2010).

3.5 Research Method

This part of research methodology helps to gain and obtain the various kinds of information and data which is needed to conduct the research study on time and achieve its objectives effectively. To conduct the research effectively there are three different kinds of research methods that can be used to accomplish the objectives and the research study. The three types of research methods are qualitative research method, quantitative research method and the mixed research method as per the objective and the issues involved in the research study. The research method helps in providing the information about the way of collecting the information (Silverman, 2016).

When we need to obtain the information in relation to the behaviour of human and the nature, then qualitative research method is adopted(Adriansyahet al., 2016). In this context of the research, there are certain factors that should be analysed well to gather and obtain the accurate and valid research outcomes at the time of conducting the research study. Whereas on the other hand, the quantitative research method is been used when there is a requirement to analyse the statistical data which is been generated by the polls, questionnaires, etc. for conducting the research effectively and on time(McCusker&Gunaydin, 2015). This part of the research methodology is also helpful as it finds the actual needs of the individuals in context of certain things and conditions. The last method which is the mixed research method is used when there is a need to use the combination of both research methods.

In this research, quantitative research method is used. The quantitative research develops in-depth understanding about the financial performance of the banks in Pakistan. It has supported to analyse the research findings on the basis of past facts and figures regarding the conventional as well as Islamic banks and has supported to represent the data in a tabular format (Flick, 2015). I have used the case study method for performing the research study.

3.6 Time Horizon

The time horizon provides the time line under which the research work is supposed to be completed. It is a framework, which is a foresight exercise and is beyond the actual planning but remains close towards the existing decisions. Time horizon is also one of the important parts of the research methodology (Bauer, 2014). There are two types of time horizon such as longitudinal time horizon and cross-sectional time horizon. The time horizon is used as per the research study as well as the convenience level of the research. The longitudinal time horizon is used for collecting the information from the respondents at different point of time (Koul, 2009). In cross-sectional time horizon the data is collected from different participants at a single point of time.

In this research, we have selected longitudinal time horizon over cross-sectional time horizon. It is because the longitudinal time horizon helps in drawing the results by evaluating the data at a different point of time (Qu&Dumay, 2011). It is a time consuming process but helped us in concluding the research work effectively. In this research study, the longitudinal time horizon is chosen because the data is collected from the participants at different point of time. It is necessary to collect the financial information at multiple point of time for analysing the performance of Islamic and Conventional banks in Pakistan. The financial information is very critical and is necessary to maintain secrecy as well as confidentiality in the data, thus longitudinal time horizon is effective.

3.7 Data Collection Methods

The data is the information or the basic input which is collected for formulating the decisions in respect to a particular topic. In the field of research work, the data is gathered in respective to the research issue as well as the research objectives(Bourkhis&Nabi, 2013). The information is collected from the respondents for evaluating the results or outcomes in order to reach the desirable conclusion stage.

There are two types of data collection methods such as primary method and secondary method. The primary data is collected through focus groups, case studies, observations and surveys etc. (Vaismoradi et al., 2013). The fresh data is collected in primary method but it is referred as a time and cost consuming method.  Primary data is also referred to as the first hand data as it is collected for the first time and it doesn’t exist before.

On the other hand, secondary data is collected with the help of books, journals, official websites etc. It is a cost and time effective method for collecting wide information within limited time frame. In concern to this research, secondary data collection method is used in order to increase the reliability as well as to measure the outcome in an effective manner(Mertens, 2014). It is also called as the second hand data because it hasalready been available.

Secondary Data Collection

In this research, secondary data is collected through case studies about the financial performance of Islamic and Conventional banks in Pakistan. It is done to draw the evidence as well as to justify the literature findings for concluding the research outcome (Smith, 2015). The secondary research has helped to understand the importance of financial performance of banks in Pakistan in detail. Case study method has supported to increase the reliability of the study while including the information related to Islamic banks, i.e. Meezan Bank Limited, Bank Islami Pakistan Limited, Dubai Islamic Bank Pakistan Limited, Al Baraka formerly Burj bank Limited, Emirates Global Islamic Bank Limited and Bank Alfalah Islamic. At the same time, this study has included the Habib Bank Limited, United Bank Limited, National Bank of Pakistan, Askari Bank Limited, Allied Bank Limited and Muslim Commercial Bank Limited conventional banks which has supported to analyse the financial performance for both type of banks while conducting critical analysis.Secondary data further helped in providing validity to the literature review as well as for gaining positive conclusions for conducting the research study on time and achieving its objectives successfully(Creswell, 2013). Under the secondary data collection method, three years ratios were also calculated for each bank. In this, the researcher was concerned financial year 2014, 2015 and 2016. For this,

Current ratio, quick ratio, returns on assets, return on equity, and debt to equity ratio, debt to assets ratio and capital adequacy ratios are calculated.

3.8 Data Analysis Method

Data analysis is that part of the research methodology which contains the data that is collected from the respondents for the aim of attaining the valid and accurate results for the research study. The data analysis method is used for evaluating the collected information in an appropriate manner(Hartas, 2015). For conducting the research study, data analysis is an integral part because it assists to interpret and generate valid outcomes. It is necessary to select right method because it facilitates in answering to the research questions for achieving the research objective on time. The critical methods, which are used for analysing the data are content analysis, statistical analysis, factor analysis and cluster analysis (Blumberg et al., 2014). The method of data analysis is used as per the need and issue involved in the research. At the same time, the data gathered from the respondents is analysed to reach to the conclusion in order to accomplish the purpose of the research.

In this research, quantitative ratio analysis is done to present the data with the help of graph, chart or table. The statistical data analysis method is used over the other methods so that the findings of the research can be understood by others in a glance(Creswell, 2013). Moreover, the financial performance of Islamic and Conventional banks in Pakistan is analysed through statistical method.

3.9 Sampling Method

In this study, I have selected6 Islamic banks and 6 conventional banks to conduct the comparative analysis.In this context, Meezan Bank Limited, Bank Islami Pakistan Limited, Dubai Islamic Bank Pakistan Limited, Al Baraka formerly Burj bank Limited, Emirates Global Islamic Bank Limited and Bank AlfalahIslamic are selected as Islamic banks. Moreover, Habib Bank Limited, United Bank Limited, National Bank of Pakistan, Askari Bank Limited, Allied Bank Limited and Muslim Commercial Bank Limited are selected as conventional banks.The data was collected from the annual reports of banks which has supported to get relevant information regarding the financial performance of different banks in Pakistan(Punch, 2013).

3.10 Ethical Consideration

Research ethical consideration is a vital element of the research methodology to conduct the research effectively and on time. It will help to generate the valid and accurate research outcomes and accomplish the objectives of the research successfully. It is the duty of the researcher to carry out the research study effectively and to provide due consideration upon the ethics of the research(Taylor et al., 2015). In this research, I have given due consideration towards the privacy of the respondent. It is done by keeping the information of respondents confidential and not disclosingit toothers, without their prior consent. It is done because the leaking of information affects the personal as well as professional life of the respondents (Flick, 2015). At the same time, in context with the secondary data collection method, the consideration is undertaken in association with the reference. It is necessary that the data collected is valid as well as properly indexed by its reference. Moreover, due consideration is also given in the research to avoid the circumstances of copyright, plagiarism and other factors (Bauer, 2014). In addition, in this research, ethical framework is adopted for collecting the financial information of Islamic and Conventional banks in Pakistan.

3.11 Limitation of the Research

The limitations, which are observed in this research, are associated with the shortage of time as well as inadequate cost to collect a wide and up to dated data. It has created a negative impact on the research and also created difficulties to attain the research objectives successfully (Taylor et al., 2015). Due to this reason, in this research, I have analysed the financial performance of conventional as well as Islamic banks only for ten years. Moreover, at present, there are only six full-fledged Islamic banks in Pakistan whereas conventional banks are greater in number. Because of this reason I couldn’t select more banks to increase the sample size for both banking systems which has created limitation towards the research outcome of this study. Moreover, it has decreased the validity and reliability of the information. Due to this reason, there is an opportunity for the future researchers to involve large number of banks while evaluating the financial performance of the banks for more years.

3.12 Conclusion

From the above discussion, it can be summarized that I have used inductive approach, interpretivist philosophy and secondary data analysis method while using the quantitative approach. It has supported to collect the information about the financial performance of Islamic and conventional banks in Pakistan. In addition, secondary data analysis has supported to collect the reliable information from the annual reports of banks and to accomplish the research on time. The research is conducted by following the ethical practices in order to generate valid research outcome.

Chapter 4: Data Analysis

4.1 Introduction

In this section, financial data would be analysed by using ratio analysis under quantitative approach. Initially, this section discusses the case study of the conventional as well as Islamic banks. For the study purpose, 6 Islamic banks, i.e. Meezan Bank Limited, Bank Islami Pakistan Limited, Dubai Islamic Bank Pakistan Limited, Al Baraka formerly Burj bank Limited, Emirates Global Islamic Bank Limited and Bank Alfalah Islamic are chosen. Habib Bank Limited, United Bank Limited, National Bank of Pakistan, Askari Bank Limited, Allied Bank Limited and Muslim Commercial Bank Limited are selected as conventional banks. After that the findings of the case study are correlated with the literature review which has supported to increase the reliability of the study.

4.2 Case Study Analysis

Case study analysis enables to evaluate the study on the basis of past cases. In this study, various conventional and Islamic banks are analysed on the basis of data, facts and figures for the period of 2006 to 2016 while focusing towards profitability, Liquidity, capital adequacy and asset base as parameters.

4.2.1 Islamic banks

Meezan Bank Limited

The core values of Meezan Bank Limited are that it follows Sharia Compliance, while focusing towards integrity, professionalism, social responsibility and service excellence. The brand personality of the firm is that it is sober, established, strong and empathic which is extremely loyal and runs friend and business partner dependable business which is committed to offer Sharia value and compliant based financial solutions. This bank has committed and self-motivated staff who are professionally trained and are empathic to their customer’s needs. This bank is focused towards recognizing the customers’ needs and strives to fulfil those needs while offering the services in professional and friendly manner to ensure that the customers receive efficient and timely service.

Table 1: Meezan Bank Limited

Meezan Bank Limited
YearProfit (After Taxation)AssetsLiabilitiesLiquidity
 (in 000′ rupees)
2006604,000464,386,23416,752,641.114297
2007963,000671,785,59614,719,031.092834
2008268,322852,760,70793,010,921.075345
2009148,539,4124,181,734114,997,2751.079867
2010164,900,0154,752,000143,672,0001.07712
2011339,100,0200,550,000186,768,0001.073792
2012350,800,0274,437,000257,874,0001.064229
2013395,700,0329,725,000310,812,0001.06085
2014457,000,0437,510,000413,620,0001.057758
2015502,300,0531,850,000505,503,0001.05212
2016556,200,0657,767,000627,293,0001.04858

From the above table, it can be analysed that Meezan Bank Limited is showing the trend of positive liquidity and in this context it is showing the trend of standardised liquidity which is lying between 1.0 – 1.1. At the same time, it is analysed that this bank is showing increasing trend in assets, liabilities and profit (after tax). It is supporting to reflect that this bank has positive financial performance.

Bank Islami Pakistan Limited

BankIslami Pakistan Limited deals in commercial banking products and services in Pakistan.

It operates through Trading and Sales, Retail Banking, and Commercial Banking segments. The company offers retail banking products and services, including Islami current, foreign currency, Bachat, Dollar Bachat,MahanaMunafa, Sahulat, and Asaan accounts, as well as IslamiAmadni certificates. It also provides consumer banking products and services, such as MUSKUN home financing, and Islami auto Ijarah-new and used/imported vehicle; and corporate banking products and services comprising account and trade services, working capital finance, project finance, Musharakah and Mudarabah finance, and Ijarah. In addition, the company offers investment banking services that include advisory, private placement, sukuk arrangement, syndication, underwriting, trusteeship, structured finance, listing on capital markets, project financing, and mergers and acquisitions. As of December 31, 2016, the company operated 321 branches, including 118 sub branches. BankIslami Pakistan Limited was incorporated in 2004 and is headquartered in Karachi, Pakistan.

Table 2: Bank Islami Pakistan Limited

YearProfit (After Taxation)AssetsLiabilitiesLiquidity
 (in 000′ Rupees)
2006-835,000402,467,4202,178,71.990652
2007-370,200,0144,474,73106,027,471.362616
2008-550,00190,850,00138,967,791.37334
2009-490,000342,720,00295,464,781.159935
2010470,00450,360,00402,693,171.11837
2011410,000588,330,00535,080,001.099518
2012307,000742,490,00686,580,001.081433
2013185,000868,560,00806,130,001.077444
2014374,789101,984,149951,169,291.072198
2015316,862177,029,911165,891,3841.067143
2016306,131231,507,70134,494,291.72132

 

From the above table, it can be analysed that Bank Islami Pakistan Limited is showing the trend of positive liquidity in the time span of 2006 to 2016. Its liquidity is lying between the parameters of 1 to 2. At the same time, it is identified that in the initial years, this banks has faced the issue of loss but,later on it has shown positive performance on a regular basis which has supported to maximise its profit margin. However, it is evaluated that this bank is showing fluctuating performance in the context of profit. It has shown maximum profit in the year 2011. In the context of asset, in 2015, bank has shown highest assets, i.e. 177,029,911 which shows that bank has strong asset base.

Dubai Islamic Bank Pakistan Limited

Dubai Islamic Bank Pakistan Limited provides Sharia compliant financial products and services. The company offers cash management, trade related, investment banking, and other services for small and medium sized enterprises; and consumer finance services, such as home, auto, and business finance. It also provides deposit services, which include current, savings, junior, E-savings, savings plus, special, business, fixed deposit, and Asaan accounts.

Table 3: Dubai Islamic Bank Pakistan Limited

Dubai Islamic Bank Pakistan Limited
YearProfit (After Taxation)AssetsLiabilitiesLiquidity
 (in 000′ Rupees)
2006-835,4402,467,4202,178,71.990652
2007-369,196213,082,47169,529,081.256908
2008-181,822320,500,73269,839,461.187746
2009226,737353,688,94293,286,291.205951
2010807,4398,887,36338,403,971.178731
2011345,698481,964,49419,624,001.148563
2012190,486635,007,05566,334,621.121258
2013136,860802,566,12732,941,791.094993
2014600,513101,552,999941,139,181.079043
2015430,555157,131,182140,026,0641.122157
2016855,540152,133,399149,155,5151.019965

 

Above table reflects that the liquidity of Dubai Islamic Bank Pakistan Limited has decreased from the year 2006 to 2016 which reflects that although the liquidity position of the bank is strong but it has not shown increasing trend. In like manner, it is analysed that the profit after tax has increased from 2006 to 2016 and in the year 2016, bank has shown the highest profit.

Al Baraka Formerly Burj Bank Limited

Al Baraka Bank (Pakistan) Limited (ABPL), and Burj Bank Limited (BBL) have successfully merged operations under the name of Al Baraka Bank (Pakistan) Limited. In the mid of 2016, Al Baraka Bank (Pakistan) Limited received the approval from the State Bank of Pakistan (SBP) to conduct the due-diligence of BBL; one of five full-fledged Islamic Banks in Pakistan.

The amalgamated entity will operate with a combined network of 224 branches and net assets in excess of 120 billion in addition to ABG’s global presence in 15 countries spanning from Europe to MENA and Asia, with a network exceeding 775 Branches.

Table 4: Al Baraka Formerly Burj Bank Limited

Al Baraka Formerly Burj Bank Limited
(in 000′ Rupees)
YearProfit (After Taxation)AssetsLiabilitiesLiquidity
 (in 000′ Rupees)
2006123,716762,582,7171,733,74.440495
2007-574,49748,507,4465,384,61.608363
2008-260,116165,373,87124,685,481.326328
2009-564,013197,624,50162,688,341.214743
2010-532,712607,636,64546,445,871.11198
2011410,370725,450,64660,203,961.098828
2012-644,040738,665,58678,470,981.088721
2013-412,31877,594,04819,112,111.071397
2014145,923943,487,80884,474,701.066721
2015240,446869,325,10826,592,731.051697
2016-155,527126,798,633115,409,1301.098688

From the above table, it can be evaluated that although the liquidity status of this bank is good. In the year 2006, the liquidity of this bank was 4.44 which decreased by 2016 to 1.09.However in the context of profitability, this firm has shown huge fluctuation. From the year 2007 to 2013, this bank has experienced a trend of loss on a continuous basis.It is alsoanalysed that in 2012, this bank has shown the highest loss, that is6, 44,040,000 rupees. From this, it can be identified that this bank is showing poor liquidity and profitability.

Emirates Global Islamic Bank Limited

As of October 29, 2010, Emirates Global Islamic Bank Limited was acquired by Albaraka Islamic Bank Pakistan. Emirates Global Islamic Bank Limited provides commercial banking services in Karachi and Lahore, Pakistan. The bank was incorporated in 2004 and is headquartered in Karachi, Pakistan.

Table 5: Emirates Global Islamic Bank Limited

Emirates Global Islamic Bank Limited
(in 000′ Rupees)
YearProfit (After Taxation)AssetsLiabilitiesLiquidity
 (in 000′ Rupees)
20065,33,8771,04,73,75095,07,8781.101586
20079,61,4801,69,53,9091,56,21,0031.085328
200814,99,3612,64,04,4502,47,26,3641.067866
20091,12,4222,52,89,6392,24,16,7781.128157
201059,3403,27,46,5152,98,19,3391.098164
2011-4,48,5522,27,40,1602,02,62,0741.122302
201281,1123,72,63,7603,46,41,7361.07569
20131,39,4883,97,68,9663,56,11,4611.116746
20143,64,1914,29,13,2193,84,10,9481.117213
20156,40,6795,32,02,1784,81,07,4271.105904
20161,05,6325,92,28,1895,25,39,4141.12731

From the above facts and figures, it can be analysed that Emirates Global Islamic Bank Limited is showing approximately stable trend in liquidity. However, in the context of profitability, it can be identified that profit after tax is showing decreasing trend.

Bank Alfalah Islamic

Bank Alfalah is the fifth largest private Bank in Pakistan with a network of over 600 branches in more than 200 cities across Pakistan with an international presence in Afghanistan, Bangladesh, Bahrain and a representative office in the UAE. The Bank is owned and operated by the Abu Dhabi Group. The International Finance Corporation (IFC) of the World Bank partnered with the Bank in 2014, and holds a 15 percent stake in Bank Alfalah.

The Bank provides financial solutions to consumers, corporations, institutions and governments through a broad spectrum of products and services, including corporate and investment banking, consumer banking and credit, securities brokerage, commercial, SME, agri-finance, Islamic and asset financing.

Table 6: Bank Alfalah Islamic

Bank Alfalah Islamic
(in 000′ Rupees)
YearProfit (After Taxation)AssetsLiabilitiesLiquidity
 (in 000′ Rupees)
200617,62,69127,56,85,54127,56,74,9681.000038
200731,30,00032,88,95,15232,88,81,3851.000042
200813,01,00034,89,90,76434,89,76,1551.000042
20098,97,00038,90,70,00038,90,50,2301.000051
20109,68,00041,14,84,00041,14,64,2731.000048
201135,03,00046,81,73,80216,65,31,7682.811318
201245,56,00053,64,66,69418,94,86,7622.831157
201346,75,95061,14,27,62457,95,25,8801.055048
201456,40,85174,31,28,2934,48,19,06816.58063
201512,08,14,19164,16,69,7306,17,96,45810.3836
201629,36,57,3632,03,39,32,8934,72,06,95343.08545

4.2.2 Conventional Banks

Habib Bank Limited

Habib Bank Limited, together with its subsidiaries, provides commercial banking related services in Pakistan. It operates through Branch Banking, Corporate Banking, Treasury, and International Banking segments. The company offers retail banking products, such as deposits accounts, such as term, current, savings, and foreign currency accounts; ban assurance products; car, home, and personal loans; and ATM, Internet banking, debit card, credit card, and mobile banking services. Its corporate banking services include cash management, foreign exchange, trade finance, custody, clearing and loans, capital market products, derivatives, and structures products.

Table 7: Habib Bank Limited

Habib Bank Limited
YearProfit (After Taxation)AssetsLiabilitiesLiquidity
 ( In 000′ Rupees)
2006127,003,15594,061,648540,618,2821.098856
2007100,841,37691,991,521628,754,0921.100576
2008100,009,80717,282,010652,237,5991.099725
2009122,986,43820,981,347741,885,8001.106614
2010170,343,80924,699,403828,448,6321.116182
2011223,330,22113,955,420,5102,996,721,71.106399
2012791,770,00161,047,447,4147,774,481,81.089819
2013900,360,00171,527,137,8157,283,712,41.090559
2014318,195,90186,700,338,9169,690,081,41.100243
2015928,534,952822,435,034403,468,336,90.203841
2016409,496,751840,023,443556,334,190,20.150993

United Bank Limited

United Bank Limited provides commercial banking and related services in Pakistan, the United States, the Middle East, Europe, and Africa. The company’s Corporate Finance segment offers services in connection with mergers and acquisitions, project finance, and the underwriting/arrangement of debt and equity instruments through syndications, initial public offerings, and private placements.

Table 8: United Bank Limited

United Bank Limited
YearProfit (After Taxation)AssetsLiabilitiesLiquidity
 (in 000′ Rupees)
2006946,823,2423,265,873393,402,4861.075911
2007840,259,0530,283,956487,862,5521.086954
2008844,525,1620,707,389571,311,7251.08646
2009948,795,2640,449,529573,131,1661.117457
2010111,599,30699,817,887631,402,8221.108354
2011154,996,63778,059,741698,906,8331.113252
2012178,913,58896,534,595804,296,3051.114682
2013186,139,55100,973,865,1908,824,6541.111038
2014219,295,61111,141,410,7985,897,6551.127312
2015257,271,49140,065,084,3125,851,536,81.112939
2016277,301,12157,755,102,3142,576,416,21.10646

National Bank of Pakistan

Table 9: National Bank of Pakistan

National Bank of Pakistan provides various commercial banking products and services for individuals, corporate entities, and governments. It operates through Corporate Finance, Trading and Sales, Retail Banking, Commercial Banking, Payment and Settlement, and Agency Services segments. The Corporate Finance segment provides services, such as mergers and acquisition, underwriting, privatization, securitization, research, debts, equity, syndication, IPO, and secondary private placements.

National Bank of Pakistan
YearProfit (After Taxation)AssetsLiabilitiesLiquidity
 (in 000′ Rupees)
2006172,547,17637,948,704554,882,0171.149702
2007194,051,65764,608,790646,695,1441.182333
2008877,000786,800,0517,410,000.152065
2009101,200,0763,700,0526,370,000.145088
2010471,17270,192,4527,3555.123539
2011704,60484,558,2612,1507.915678
2012130,396537,945,4102,694,85.238292
2013262,236555,504,2963,9575.762749
2014171,922552,389,4795,0866.947543
2015648,54170,636,138,3153,800,990,81.109461
2016230,880,00197,570,570,4179,897,298,81.098241

Askari Bank Limited

Askari Bank Limited provides banking products and services to individual and corporate customers primarily in Pakistan and the Middle East. The company operates through Corporate Finance, Trading and Sales, Retail Banking, Commercial Banking, Payment and Settlement, Agency Services, Retails Brokerage, and Asset Management segments. It offers current and savings accounts, and term deposits; and consumer banking, such as personal and mortgage finance, and credit cards, as well as financing for new, used, and imported vehicles.

Table 10: Askari Bank Limited

Askari Bank Limited
YearProfit (After Taxation)AssetsLiabilitiesLiquidity
 (in 000′ Rupees)
2006604,000464,386,23416,752,641.114297
2007963,000671,785,59614,719,031.092834
2008268,322852,760,70793,010,921.075345
2009148,539,4124,181,734114,997,2751.079867
2010164,900,0154,752,000143,672,0001.07712
2011339,100,0200,550,000186,768,0001.073792
2012350,800,0274,437,000257,874,0001.064229
2013395,700,0329,725,000310,812,0001.06085
2014457,000,0437,510,000413,620,0001.057758
2015502,300,0531,850,000505,503,0001.05212
2016556,200,0657,767,000627,293,0001.04858

Askari Bank Limited has shown good financial performance from the year 2006 to 2016. In this context, from the above data, it is analysed that the firm has shown steady performance. Only in the year 2008, bank’s profit has decreased. However, this bank has shown increasing trend in profitability over this 10 years’ time span. It is also analysed that the liquidity of the bank has decreased from 2006 to 2016.

Allied Bank Limited

Allied Bank Limited provides various banking products and services. It operates through Corporate & Investment Banking, Trading and Sales (Treasury), and Commercial & Retail Banking segments. The company offers savings and term deposits; everyday accounts, and transaction and business accounts; bancassurance services; remittance services; treasury and home remittance services; finance/credit and demand finance facility, guarantee, and foreign bill purchase services; cash management solutions; and SME and agriculture financing services.

Table 11: Allied Bank Limited

Allied Bank Limited
 (in 000′ Rupees)
YearProfit (After Taxation)AssetsLiabilitiesLiquidity
 (in 000′ Rupees)
2006533,877104,737,50950,787,81.101586
2007961,480169,539,09156,210,031.085328
2008149,936,1264,044,50247,263,641.067866
2009112,422252,896,39224,167,781.128157
2010593,40327,465,15298,193,391.098164
2011-448,552227,401,60202,620,741.122302
2012811,12372,637,60346,417,361.07569
2013139,488397,689,66356,114,611.116746
2014364,191429,132,19384,109,481.117213
2015640,679532,021,78481,074,271.105904
2016105,632592,281,89525,394,141.12731

Above table has supported to understand that from the year 2006 to 2016, the profit margin of the bank has decreased from 5,33,877,000 rupees to 1,05,632,000 rupees. It reflects that the bank financial performance has decreased in this time span.

Muslim Commercial Bank Limited

MCB Bank Limited, together with its subsidiaries, provides commercial banking and related products and services in Pakistan, the South Asia, the Middle East, and Eurasia. It operates through Corporate Finance, Trading and Sales, Retail and Consumer Banking, Commercial Banking, and Asset Management segments. The Corporate Finance segment is involved in underwriting, securitization, investment banking, syndications, secondary private placements, and IPO related activities.

Table 12: Muslim Commercial Bank Limited

Muslim Commercial Bank Limited
 (in 000′ Rupees)
YearProfit (After Taxation)AssetsLiabilitiesLiquidity
 (in 000′ Rupees)
2006533,877104,737,50950,787,81.101586
2007961,480169,539,09156,210,031.085328
2008149,936,1264,044,50247,263,641.067866
2009112,422252,896,39224,167,781.128157
2010593,40327,465,15298,193,391.098164
2011-448,552227,401,60202,620,741.122302
2012811,12372,637,60346,417,361.07569
2013139,488397,689,66356,114,611.116746
2014364,191429,132,19384,109,481.117213
2015640,679532,021,78481,074,271.105904
2016105,632592,281,89525,394,141.12731

From the above table, it can be understood that from the year 2006 to 2016 the bank has shown better performance but there are also huge fluctuation during this time span. At the same time, it is analysed that the liquidity of the bank lied between 1 – 1.1 from 2006 to 2016, which shows that firm has shown good liquidity in this time period while reflecting the capability of fulfilling the liabilities.

4.3 Ratio Analysis

Year 2014
RatiosMeezan Bank MCB BankDIB BankUnited BankNBP BankAskari Bank
Current Ratio1.061.121.080.026.951.06
Quick Ratio1.061.121.0819.46.951.06
Return on Asset1.192.82.0429.941.10.97
Return on Equity22.219.6716.280.819.4119.07
Debt to Equity Ratio0.650.440.1829.940.210.29
Debt to Asset Ratio17.320.8612.657.67.4917.63
Capital Adequacy Ratio11.8811.46

Year 2015
RatiosMeezan Bank MCB BankDIB BankUnited BankNBP BankAskari Bank
Current Ratio1.051.111.120.021.111.05
Quick Ratio1.051.111.1217.441.111.05
Return on Asset1.042.542.3221.571.231
Return on Equity20.5717.9617.6869.4211.3619.36
Debt to Equity Rationil0.145.5821.570.132.12
Debt to Asset Ratio17.060.870.858.278.9718.8
Capital Adequacy Ratio10.9810.57

Year2016
RatiosMeezan Bank MCB BankDIB BankUnited BankNBP BankAskari Bank
Current Ratio1.051.131.020.061.11.05
Quick Ratio1.051.131.0221.391.11.05
Return on Asset0.942.11.9124.281.250.9
Return on Equity20.7115.3713.7769.5513.1517.47
Debt to Equity Ratio0.950.135.4224.280.250.28
Debt to Asset Ratio18.070.860.849.391017.86
Capital Adequacy Ratio12.9110.08

4.4 Discussion

Above data has supported to understand the financial performance of the sample size. On the basis of above facts and figures, the financial performance of the Islamic and conventional banks can be analysed in Pakistan.

In this context, it is analysed that conventional banks have shown better performance as compared to Islamic banks as all the conventional banks have shown the trend of profit in the time span of 2006 to 2016. However, in the contrary, Islamic banks such asAl Baraka Formerly Burj Bank Limited and Emirates Global Islamic Bank Limited has shown the lower performance due to diminishing trend in profitability.From this, it can be analysed that conventional banks are more profitable as compared to Islamic banks.In the context of liquidity all 12 banks have shown positive aspects which reflect that in Pakistan, conventional as well as Islamic banks are focused towards liquidity parameters. However the Bourkhis &Nabi (2013) claimed that Islamic banking system has shown remarkable double digit growth in the last decade. In the current scenario, Islamic banks are showing competitiveness at a global platform and expanding their business service. In this context, the findings of Beck, et al., (2013) has shown similarity with the facts that Islamic banks facehuge barriers relating to legal, economic and the regulatory frameworks at a global platform. Islamic banks of different countries follow different policies, rules and regulations and they have differences in legal and regulatory frameworks. This is the major reason behind confusion which highly impacts the reliability over Islamic banks and decreases the trust of the clients. This is the major reason behind IBF (Islamic Banking & Finance) faces more challenges and shows negative financial performance as compared to conventional banking system. Moreover, it is analysed from the literature review thatin the past few decades, Islamic banks have shown fast pace growth due to social framework which has supported the Islamic banking to gain the attention of global finance system.

The reason found behind the effective performance of conventional banks as compared to Islamic banks is that conventional banks are dealing in the global market for longer time period due to which the performance of this banking system is better than Islamic banks. Above findings are consistent with the findings of Bilal (2016), who carried out a research on Islamic and conventional bank on the basis of comparing the financial performance of seven conventional banks and two Islamic banks of Oman for the years 2013-2015, while measuring the profitability,solvency and capital adequacy. From the independent sample t-test, it was determined thatthere is a significant difference in performance of Islamic and conventional banks. According to the financial ratio analysis, the profitability and efficiency of the conventional banks are higher as compare to Islamic banks. Similarly, according to the findings of Ali et al. (2013), it is analysed that conventional banks show more satisfactory results as conventional banks have large number of clients as compared to Islamic banks.

On the other hand, it is analysed that in the context of financial crisis, most of the conventional banks have shown decrease in profit. This scenario can also be analysed through the data of six conventional banks which were taken for the study purpose. This finding has also shown similarity with the outcomes of Beck, et al.(2013) that during the financial crisis, Islamic bank has shown good performance when conventional banking system has shown huge loss. This is the major reason behind the investor’s increased concern towards conventional banking system due to which they are focusing towards investing in Islamic banks. Moreover, from the findings of Bhala (2012), it is evaluated that financial crisis has hugely impacted the worldwide economy but this impact has not been seen on Islamic banking’s financial performance as it has shown greater extent of growth and competitiveness during the financial crisis. Similarly, according to the research outcome ofMobarek& Asma (2014),it is analysed that Islamic banks are more financially stable as compared totheir conventional counter parts. Due to which Islamic banks remain stable during the situation of financial crisis as well.

At the same time, from the literature review, it is analysed that the Islamicbanking system is having quick and transparent solutions which attracts Muslim citizens. Islamic banks have shown incredible growth and strong presence in Muslim and non- Muslim countries. Additionally, Islamic banking system eliminates the element of risk and focuses towards religious tax (Zakat) which contributes to Islamic welfare and economic growth and assists to attract the clients to invest.

Moreover, it is analysed that Islamic banking system is focused towards eliminating riba and cruelty in economic activities. In like manner, gharar(risk) is prohibited under Islamic banking system and religious tax (zakat) is applicable. Additionally, this banking system does not follow any rules and regulations which are contradictory to the Islamic values as it is known as haram which states that any act which is forbidden by Allah is prohibited.

On the other hand, according to Hamzah, et al.(2015), conventional banking system is concerned towards effective debtor-creditor relationship and applies interest on loans. So, from the literature review and annual report analysis, it can be analysed that both banking systems have different perspectives and they are contradictory to each other. In like manner, both the banking system has their positive and negative aspects.

From the ratio analysis, it can be interpreted easily that there are few banks which are facing issue to sustain in to competitive environment of banking industry. In concern to it, United Bank which is a conventional bank, performing well in maintaining its liquidity and profitability position in the market. But at the same time, each bank is increasing their liquidity and profitability and solvency situation as analysed from last three years. In year 2014, all banks are at declining phase but in other years like 2015 & 2016, situation of banks is changed rapidly.  However, united bank limited is only bank which is significantly managing its liquidity and solvency position.

Chapter 5: Conclusion and Recommendations

5.1 Conclusion

The above study remained highly assistive to provide deep understanding regarding the financial performance of the banks, especially in the context of Islamic and conventional banks of Pakistan. This study has also supported to achieve the research objectives. From the above research, it can be concluded that the rules, regulations, norms and the process of the banking system directly impacts the financial performance. This dissertation is based on secondary data analysis and has used quantitative data approach. Secondary data collection method has supported to collect the facts and figures of current assets, current liabilities and profit after tax from the annual report which has assisted to conclude the study effectively. From the above study following can be concluded:

  • To define the Islamic and conventional banking system

This study has supported to offer detailed understanding regarding Islamic and conventional banking system and about its development in Pakistan. It has defined the terms which are used in Islamic banking system, such as riba, haram, gharar etc. and also highlightOIC (Organisation of the Islamic Conference), profit and loss sharing (PLS) and other principles.

  • To analyse the difference between Islamic and conventional banking system especially in Pakistan

This study has supported to understand the major difference between the Islamic and conventional banking system while definingSharia law and the parameters related to it for Islamic banking such as Riba. At the same time, this study has supported to analyse the positive as well as negative aspects of both banking system which has supported to conduct comparative analysis in an effective manner. To achieve this objective, I have focused towards critical analysis as it assist to analyse the difference between both types of banking system while focusing towards the point of views of different authors. At the same time, case study analysis has supported to increase the reliability of the study and to analyse the difference on the basis of ten years performance of six Islamic and six conventional banks.

  • To evaluate the limitations of Islamic and conventional banking system in Pakistan

From the above study, it is also analysed that Islamic as well as conventional banks have their own limitations. In the context of Islamic banking system, it is concluded that Islamic banking is stick to Islamic rules and regulations.Moreover, the labour force under Islamic bankinglacks adequate knowledge and skills to resolve any complicated issues. So there is a need for improving the service standard by providing necessary training to employees before induction. On the other hand, in the context of conventional banking, it is analysed that conventional banks are less stable and get affected directly in the situation of financial crisis while Islamic banks were found to be performing well under financial crisis. It can be noted that conventional banks are less stable financial sector in comparison of Islamic banks.

To recommend the ways to improve Islamic and conventional banking system in Pakistan

This study has recommended the ways for the banking system of Pakistan to improve its financial performance.It has offered the recommendations for Islamic as well as conventional banks, which will support to improve the banking system and to eliminate its limitations.

5.2 Recommendations

Above study has supported to understand the financial performance of conventional as well as Islamic banks. From the study, it is clear that the financial performance of conventional bank is better as compared to Islamic banks. However there are few shortfalls of conventional banking system and few shortfalls of Islamic banking system. So, there is a need for eliminating the shortfalls to improve the performance.Due to this reason, fewrecommendations are provided to improve the financial performance of both banking systems.

The recommendations for conventional banksto improve the financial performance are as follow:

  • Pakistani conventional banks need to focus towards society welfare which will supportto attract the customers as well as enable to uplift the society in which the bank is dealing.It will support to gain the trust of the clients and will enable to deal the changing market in an effective manner.
  • There is a need to give attention to develop better strategies to handle the situation of financial crisis in order to increase the firm’s stability. It will support to decrease the risk over the firm and will enable to increase the positive aspects.
  • There isalso a need of decreasing the risk for the clients so that they can invest money or take loan without any worries and hesitation evenin the situation of financial crisis too. It will support to build strong relationship with the stakeholders and will enable to increase the market share of the bank.

The recommendations for Islamic banks to improve the financial performance are as follow:

  • There is a need of offering adequate training to the employees, so that they come to know about the standardised rules and regulations of Islamic banking system and can handle the issues in a well-defined manner.Moreover, if any amendments are made in the rules, regulations and policies, then all the branches should be made aware about this. There is also a need of creating uniformity in the rules, regulations and policies in the Islamic banks all over the world so that any confusion could be minimised and Islamic banking would beable to gain the trust of the clients. At the same time, it will enable to increase its presence in the global market.
  • Islamic banks need to leave the trend of rigidity and should increase flexibility in the context of rules, regulations and policies. It will support to accept the positive aspects of other rules and regulations and will eliminate the situation of client dissatisfaction. In like manner, it will support to eliminate the thinking of religion based banking system so that people related to other religions will also show willingness to join the Islamic banking system. It will increase the clientele of the Islamic banks in Pakistan.

Above recommendations will remain supportive for the Islamic as well as conventional banks to improve their financial performance in Pakistan and will enable to increase the profit margin of the firms.At the same time, it will enable to increase the satisfaction level of the stakeholders while running the banking system in a structural manner.

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