Performance comparison of one Islamic bank with one conventional bank in Pakistan

In order to compare the performance of both Islamic and conventional banking in Pakistan I selected Al Baraka bank (Pakistan) Limited as Islamic bank while Askari bank of Pakistan as a conventional bank.

Al Baraka Bank (Pakistan) Limited:( ABPL) INTRODUCTION:

ABPL is a subsidiary of Al Baraka Group (ABG), a Bahrain joint stock company, listed on Bahrain and NASDAQ Dubai stock exchange. Al Baraka bank (Pakistan) limited is the result of a merger between Al Baraka Islamic Pakistan (AIBP), the branch operations of Al Baraka Islamic Bank (AIB) Bahrain and Emirates Global Islamic Bank (Pakistan).

Askari bank Pakistan(limited): INTRODUCTION:

Askari Bank, one of the leading banks of Pakistan. The bank was founded in 1992, and in the 18 years since, our growth and success patterns have far outgrown industry standards. Askari Bank has expanded into a nationwide presence of 150 branches, and an offshore banking Unit in Bahrain. A shared network of over 1,100 online ATMs covering all major cities in Pakistan supports the delivery channels for customer service. As on December 31, 2007, the bank had equity of PKR 12.27 billion and total assets of PKR 182.17 billion, with over 800,000 banking customers, serviced by 6,808 employe

DIFFERENCES BETWEEN CONVENTIONAL AND ISLAMIC BANKING Conventional banks Islamic banks

vs.

1. The functions and operating modes of conventional banks are based on fully manmade principles.

1. The functions and operating modes of Islamic banks are based on the principles of Islamic Shariah.

2. The investor is assured of a predetermined rate 2. In contrast, it promotes risk sharing between of interest. provider of capital (investor) and the user of funds (entrepreneur). 3. It aims at maximizing profit without any restriction. 4. It does not deal with Zakat. 3. It also aims at maximizing profit but subject to Shariah restrictions. 4. In the modern Islamic banking system, it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat. 5. Lending money and getting it back with of the conventional banks. 5. Participation in partnership business is the have to understand our customer's business very well. 6. It can charge additional money (penalty and compounded interest) in case of defaulters. 6. The Islamic banks have no provision to charge any extra money from the defaulters. Only small amount of compensation and these proceeds is given to charity. Rebates are giving for early settlement at the Bank's discretion. 7. Very often it results in the bank's own interest growth with equity. 8. For interest-based commercial banks, borrowing from the money market is relatively easier. 9. Since income from the advances is fixed, it project appraisal and evaluations. 9. Since it shares profit and loss, the Islamic banks and evaluations. 8. For the Islamic banks, it must be based on a Shariah approved underlying transaction. 7. It gives due importance to the public interest. Its

compounding interest is the fundamental function fundamental function of the Islamic banks. So we

becoming prominent. It makes no effort to ensure ultimate aim is to ensure growth with equity.

gives little importance to developing expertise in pay greater attention to developing project appraisal

10. The conventional banks give greater emphasis 10. The Islamic banks, on the other hand, give on credit-worthiness of the clients. greater emphasis on the viability of the projects.

11. The status of a conventional bank, in relation 11. The status of Islamic bank in relation to its to its clients, is that of creditor and debtors. clients is that of partners, investors and trader, buyer and seller. 12. A conventional bank has to guarantee all its 3

12. Islamic bank can only guarantee deposits for

In order to analyze the performance of the banks we have to calculate various ratios of financial statement of the banks selected for comparison. On this of the basis of analyzing these ratios we will decide which type of bank (conventional or Islamic banks) is performing well.

Financial Statement Analysis (for annual reports 2007 n 2008 ended)

In analyzing Financial Statements for the purpose of granting credit Ratios can be broadly classified into two categories. 1. Liquidity Ratios 2. Profitability Ratios 1. Liquidity Ratios Cash ratio. Calculation (formula) Cash ratio = Cash and cash equivalents / Current Liabilities
Year Name of bank Askaribank lmtd AlBaraka bank lmtd 2007 1.4 0.98 2008 1.5 1.3

Interpretation:

The above table shows cash ratio comparison of Askari Bank lmtd and AlBaraka Bank lmtd for two years i.e. 2007 and 2008 annual reports. This shows that for year 2007 cash ratio is 1.4 and while for year 2008 is 1.5, and for AlBaraka Bank lmtd is 0.98 and 1.3.We see that in both year Askari Bank lmtd has higher cash ratio than AlBaraka Bank lmtd. It can therefore determine if, and how quickly, the company can repay its short-term debt. A strong cash ratio is useful to creditors when deciding how much debt, if any, they would be willing to extend to the asking party.

Current Ratio. Calculation (formula) current ratio = Current

Assets / Current Liabilities Year

Name of bank Askaribank lmtd AlBaraka bank lmtd

2007 14.54 7.2

2008 13.5 9

Interpretation:
The above table shows that Askari Bank lmtd had higher current ratio For both 2007 and 2008 financial years as compared to AlBaraka Bank lmtd. The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations.

Working capital (net working capital) = Current Assets - Current Liabilities

Year Name of bank Askaribank lmtd AlBaraka bank lmtd 2007 10118330 80331049 2008 12101105 11223456

Interpretation:
Positive working capital means that the company is able to pay off its shortterm liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory). Also known as "net working capital", or the "working capital ratio" Here both the banks had positive value and we see that Askari Bank had advantage over AlBaraka bank 2. Profitability Ratios Return on Assets = (Net Profit / Total Assets) x 100
Year Name of bank Askaribank lmtd AlBaraka bank lmtd 2007 1.47 1.3 2008 0.18 1.6

Interpretation:

Return on assets managed is calculated by taking operating profits and dividing it by assets (which could include accounts receivable and inventory). Asset turnover and operating margin are the two main drivers in returns on assets managed. In the above table we see that Askari Bank ratio is decreased from 1.47 to 0.18 (2007 to 2008). While there is increase in the AlBaraka Bank return in asset ratio that is increased from 1.3 to 1.6 in period 2007 to the end of 2008.

Return on Equity or Net Worth

= (Net Profit / Net Worth or Owners Equity) x 100

Year Name of bank Askaribank lmtd AlBaraka bank lmtd 2007 1.34 1.2 2008 1.47 1.3

Interpretation:
It pays to invest in companies that generate profits more efficiently than their rivals. Return on equity (ROE) can help investors distinguish between companies that are profit creators and those that are profit burners. On the other hand, ROE might not necessarily tell the whole story about a company, and therefore must be used carefully. So on the basis of above ratio values given in the table we suggest that Askari Bank position is better than the AlBaraka Bank lmtd.

Return on Capital Fund

=net mark up received/ capital fund

Year Name of bank Askaribank lmtd AlBaraka bank lmtd 2007 58.6% 40.5% 2008 53.37% 50.30%

Interpretation:
The above values shows that Askaribank lmtd had high percentage values as compared to AlBaraka bank lmtd Investors should be careful when using the ratio since capital assets, such as a refinery, can be depreciated over time. If the same amount of profit is made from an asset each period, the asset depreciating will make ROACE increase because it is less valuable. This makes it look as if the company is making good use of capital, though it is really not making any additional investments.

Conclusion:
By comparing various ratios calculated for both the Banks selected that is Askaribank lmtd and AlBaraka bank lmtd..We can say that Askaribank lmtd has clear edge over AlBaraka bank lmtd regarding various field of performance.