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INTRODUCTION
First step toward Islamic Banking was taken in Egypt in 1963. (El Gamal, 2006) After some decades Islamic Banks has shown the tremendous achievement not only in number but also in term of size of market (Aggarwal and Yousaf 2000). Before 60s, there was only non-Islamic financial system. But now Islamic Banking is practiced in most of the countries. And some Islamic countries like Sudan and Iran had fully converted their financial system according to Islamic Law (Aggarwal and Yousaf 2000). In Pakistan this concept is introduced in 1950 by establishing of a local Islamic financial institution (Rural Cooperative West Pakistan) with very low capital and with so limited operations. Due to low level of capital that step was not fruitful (Mehboob 2007). Then next step is taken in 1970s Ashraf (2011). But that was also failed. In 2002, the private sector has initiated Islamic Banking (Meezan Islamic Bank) and MIB is now pioneer in introducing Islamic Banking in Pakistan (Mehboob 2007). There is difference between conventional banks and Islamic banks. Although both banks get deposits and lend it to needy people, but the mode of collection and lending to people is different. The basic difference is that conventional banks take and lend funds to people is to the contract which creates the relationship between the bank (financial institution) and customers. Conventional banks make the debt contract with their customer so eligibility to earn on principal is finished according to Islam while Islamic banks make the sale or profit and loss base contact which eliminates Riba in financial transactions. In this paper we are going to compare the financial performance of Islamic banks with the conventional banks (interest based) operating in Pakistan. We will compare the financial performance of four Islamic banks with four conventional banks. The secondary data will be used to analysis the performance of financial institutions. To evaluate the financial performance three types of ratios will be used namely a- profitability ratio b- liquidity ratio cefficiency ratio

1.1 Limitations of Study


1- In Pakistan only private sector is operating the Islamic Banks, so we select the conventional banks from private sector to compare the performance.(mehboob, 2007) 2- There are main two type of the performance, a) financial performance b) non financial performance. (G. Barathi 2007) .we will compare the financial performance only. 3- Now there are also non financial resources which may contribute in the financial performance of the organization. (M. Hanif, Mahvish Tariq, A. Tahir, and W. Tariq 2012) in data, we will only use the financial resources impact on the financial performance.

1.2 Implications of Study


This study will be useful for two purposes. A) General purpose B) specific purpose. General purpose is that this study is useful for every one either institution or individual to find out which system is more useful for the overall economy Specific purpose is that it will useful for the investor to decide the better investment decision and for the bank to evaluate its performance as compare to other.

1.3 Organization of Study


The remaining part of our study is arranged in a way that in chapter 2, literature review is mentioned. Research methodology is described n chapter 3 while data analysis and conclusion are discussed in chapter 4 & 5 respectively

2. LITERATURE REVIEW
Asaad et al (2012) made a study on the investigation of Jordanian Islamic and conventional banks stability. The purpose of the paper is to evaluate the Financial Stability of Islamic and conventional banks in Jordan before and after the financial crises. Mortgage sub-prime crises considered as one of the worst crises of the history. This crisis mainly affects the banking system of the world, even-though Gordian banking system considered as one of strong banking system but it is also affected by this crisis. Researchers want to answer two important questions: Do Islamic banks show a relative financial stability comparing with conventional banks during the recent financial crisis in the Jordanian context? And is there a statistical significant difference in financial stability between Islamic and conventional banks pre and post the recent financial crisis? The data (daily share prices) are collected from Amman Stock Exchange (ASE) from period 02/01/2005 to 26/01/2010. Volatility of returns on shares is used as a base to measure the stability of banks. For this purpose researcher used the GARCH method (Generalized Autoregressive Conditional Heteroskedasticity). In order to measure asymmetric reactions of the conditional mean and volatility researchers uses GARCH, E-GARCH and GJR-GARCH.After applying the tests it is found that Islamic banks are more stable than that of conventional banks pre and post recent financial crisis and it is also concluded that Islamic banks seems less affected by bad news. The customers of Islamic banks are more loyal and confident as compared to conventional banks because GARCH Model also shows that Islamic banks are not affected by harmful of crisis. Finally there are some recommendations for both banking systems that conventional banks should open separate branches to deal in Islamic instruments and on the other hand Islamic banks should improve their branch network through-out the country and most importantly launch the advertisement campaign in order to disclose the merits of Islamic banking.

K.K & Pillai (2012) made a comparative study on performance of Islamic banks and conventional banks in GCC region so as to made comparison between conventional banks and Islamic banks performance. For this purpose performance indicators were used. The period of study was 2005-2010 and six conventional and six Islamic banks were selected as sample. Performance indicators included the return on assets, return on equity, operating profit ratio, net profit ratio, operating expense ratio, profit as a percent of customers deposit, customer deposits as a total percent of liability, total equity as a percent of total assets, net
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operating income. During the study period, the results found that Islamic banking was a better performance as compare to conventional banks and it was also found that Islamic banks were equity financed. The ANOVA test was also used, and its results showed that there was significant relationship in selected performance indicators.

Mian & Zia (2011) made a study in Pakistan regarding the performance analysis of Islamic and conventional banks. The purpose of conducting this study was to analyze the performance of Islamic banking and conventional banking in pakistan.for this purpose financial measures were used and for sample two Islamic and two conventional banks were selected. The study covered the time period of 2007-2010.financial measures included the profitability ratio, earnings ratio, liquidity ratio, credit risk analysis and assets utilization activity ratios ware used to compare the performance of Islamic banking and conventional banking system. The results of this study revealed that banking performance of Islamic banks were less effective as compare to conventional banks due to augmented operating cost and inefficiency of management.

Bintawim (2011) made a study on the performance analysis of Islamic banking operated in Saudi Arabia. There were two purposes of conducting this study. One is to do comparison of Islamic banks performance operated in Saudia Arab and secondly, to analyze that whether there was any impact of banks internal characteristics on the financial performance or not. For this purpose, eleven banks of Saudi Arabian sector were taken for analysis. This study covered the time period of 2005-2009. A well known ratio analysis was used to compare the performance of Islamic banks, while panel data regression analysis was used to check the

impact of banks internal characteristics on the performance of Islamic banks. The results found that all Saudi banks were performing well so as to maintain the stability of banking sector. The results also found that the large banks were at mature stage, the medium sized banks were trying to attain the mature stage, while small sized banks were facing difficulty in getting growth stage. This was also found by regression analysis that there was negative impact of the size of the bank on the financial performance while at the same time there was a positive impact of assets utilization on profitability of banks

Awan (2009) made a study on the comparison of Islamic and conventional banking in Pakistan. The aim of this paper was to examine and analyze the performance and profitability of newly opened Islamic Banks with the same scale of conventional banks. Economies of world had been hit by many crises in last two decades but subprime mortgage crisis is considering one of the saviors of all. It majorly hits the United States, European countries and slightly Asian countries. The reason for this crisis is vitality of interest rate. The central banks of world try very hard to eliminate the impact of this crisis by reducing interest rate to zero but fail. But here it is important to note that Islamic banks survive to this crisis. Author also discusses the evolution, theoretical and practical difference, ways of investing and financing, goals and values and different products of Islamic & conventional banks. At the time of study there are only six Islamic banks (Al-Baraka Islamic Bank, Bankislami Pakistan Limited, Dawood Islamic Bank Limited, Dubai Islamic Bank Pakistan Limited, Emirates Global Islamic Bank Pakistan Limited and Meezan Bank Limited) are in operational foam and are small in size. Therefore despite of 23 conventional banks only six conventional banks (Askari Commercial Bank Limited, Atlas Bank Limited, Bank of Khyber Limited, KASB Bank Limited, SAMBA Bank Limited and Saudi Pak Commercial Bank Ltd) are considered that are equal in size to the Islamic banks. The span of study ranges from 30-09-2006 to 30-092008. The data are collected from both primary and secondary sources. Primary data are collected through questionnaires and secondary data are obtained from banks annual statements, from state bank site and from different research journals. Ratio analysis technique was used to analyze the efficiency of asset utilization, profitability and earning capability of Islamic and conventional banks. Whereas the interviews are conducted of Islamic and conventional bankers and operational framework of Islamic and conventional banks are compared through analysis technique. The result of the study is very surprising because Islamic banks are much better than the conventional banks in all respects. Whether it is assets, deposits, financing, investments, efficiency, and quality of services and recovery of loans the Islamic banks are far better.

Shah (2009) made a study on the performance of Islamic banking against the commercial banking operated in Malaysia. The purpose of this study was to analyze the accounting performance of Islamic banks over commercial banks and also to examine whether the type and age of banks (Islamic and conventional) had any influence or not. .For this purpose 14
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commercial banks and 4 Islamic banks were selected as sample. This study covered the time period of 1st January 2000 to 31 December 2006. Here in this study, to measure the

Accounting performance only the return on assets ratio and return on equity ratio was used. The study found that there was no significant difference found from the independent t-test on the performance of the Islamic and the conventional banking operated in Malaysia. While on the other hand, through the regression analysis it was that found there was positive impact of the age of banks on the performance of banks. However there was no any influence found of the type of banks on the performance of banks.

Shehzad (2008) made a comparative study on the performance of Islamic banking and conventional banking of pakistan.the purpose of this study was to compare the performance of Islamic bank in pakistan.for this purpose one full fledged first Islamic bank i.e. Meezan Bank Limited was taken against five conventional banks. The time period of this study was 2003 to 2007 .like other studies, this study also used the ratio analysis to evaluate the performance of meezan Islamic bank. The measures of ratios included the return on assets, return on equity, loan to deposit ratio, loan to asset ratio, debt to equity ratio, asset utilization ratio and income to expense ratio. To check the significance relationship-test and F-test was used. The results of the study found that meezan bank limited was less profitable, less efficient and less risky as compare to the average of 5 conventional banks.

Hadeel made a study on answering the question of do Islamic banks perform better than conventional banks?This paper examines the financial performance of Islamic and conventional banks in GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and Arab Emirates) in term of profitability, liquidity and structure. This is done by using different financial ratios (profitability, liquidity, leverage, structure and other measures) and by estimating Logistic model. The data is obtained from Institute of Banking Studies in Kuwait (IBS) and from databases of Islamic and conventional banks of GCC. There are total of 342 semi-annual observations that include 273 and 69 observations of Islamic and conventional banks respectively. The range of data spread from year 2000 to 2005.By applying financial

ratios and logistic model we find that there is no difference in term of profitability in conventional and Islamic banks of GCC but in some countries like Kuwait, Saudi Arabia, Qatar and Bahrain, Islamic banks are seems more profitable because here customers like the products of Islamic banks and interested to become part of it. If we look at the liquidity ratios we would find that Islamic banks relatively high liquidity as compared to conventional banks, that is because Islamic banks does not take loans from central banks and other financial institutions who lend money on interest basis. On the other hand conventional banks totally rely on borrowings from central bank and other financial institutions. Debt to Asset, Deposit to equity, Deposit to Asset and Investment and Equity to Asset ratios favors conventional banks whereas Loans/Receivable to Asset and Fixed Asset to Asset ratios favours Islamic banks. Islamic banking is emerging very fast in all over the world especially in South-East Asia and Middle East. Profitability of conventional and Islamic banks is not contradictory but Islamic banks are better in term of liquidity. Finally internal growth of both banking systems is not significantly different. That suggests that growth of such banks depends on management and general performance. Ali (2012) the performance of Islamic banks and conventional banks are compared operating in Pakistan in the period of financial crises.4 Islamic banks and 4 conventional banks are selected to do this analysis. The data was taken from 2006-2009.four ratios are applied to reach the conclusion .ratios were profitability.liquidity,risk and solvency and efficiency ratio.t-test and f-test were used to determined the significance of the performance two groups. All ratios represented that the conventional banks have positive sign but with decreasing trend. M.M (1997) made a study on the differences between the financial characteristics of interest free banking and conventional banking. In different countries, there is dual banking system. It means two different systems are running side by side. One is interest free and second one is interest based. Interest free banking system is regulated under the Islamic jurisdiction in which any financial interest on capital (the capital based on debt agreement) is prohibited. They operate on the basis of profit and loss sharing (PLS) concept. so main aim of this paper is to find out the structural differences due to PLS agreement in both banking systems. First country where the dual system was introduced is the United Arab Emirate (UAE) in 1973, where Dubai Islamic Bank was established with $14 million capital. Now more than 100 interest free banks are operating in 45 countries including UK, USA etc. To see the differences three analyses are used namely Logit model analysis, probit model analysis and
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the discriminate analysis. From 30 banks for three years (1992-1994) the financial data is collected to make the analysis. In total half of them is interest free banks and half are conventional banks to represent the fair conclusion of the research. There are five ways to financial analysis given by wood and parter (1979) namely liquidity, leverage, credit risk, profitability, efficiency. Findings are that interest free banks more rely on equity financing than conventional banks. As compare to conventional banks, an Interest free bank faces more problems to attract the deposits which are main source for banking sector to run their total operations. There is lackness of investment opportunity for interest free banks than conventional banks, so their liquidity ratio is higher. Due to PLS, interest free banks have too low amount in personal loans. But both sectors are offering same rate of return to their clients and their profitability and efficiency ratios are also same. On the basis of that we can conclude that interest free banks has more emphasized on mark-up based contact such as MURABAHA and IJARA which are more likely to interest based agreement concept.

Siddique (2008) made a study on the financial contracts, risk and performance of Islamic banking. In Islamic banking system (interest free banking) there different types of modes of financing are used which are mostly based on profit and loss sharing. Banking system is main source of the flow of financial resources. There are some risks related to every financial system. This paper has worked on to describe the modes of financing used in Islamic banking and examined their risks by literature review. And also two Islamic banks operating in Pakistan are analyse by different financial indicators and copared with conventional banking. In mid 2004 Islamic financial market had 265 banks with asset of more than $ 262 billion and investments by Islamic banks are approximately $400 billion. The financing modes (financial instrument) are murabaha, ijarah, mudarbah, musharka, Salam, istisna. as compare to conventional system, there is enough financial instruments to survive in the competition but there is shortage to cover the risk related to the system arises by the using of these instruments. In conventional banking they have different financial derivatives to hedge the financial risk. Due to the presence of the interest (riba), uncertainty (gharar), and gambling these risk mitigation instruments cannot be used. And other issue is related to the relationship with central bank. There is legal requirement for every bank to put some portion of the total reserve with central bank. On that base, every bank has two main relations with central bank. First one is to take interest on that reserve and second is to take loan as a last resort, from
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central bank and central bank charges interest on that loan. So due to the involment of interest Islamic bank can not avail both opportunity. At the result Islamic bank has to sacrifice the profit on reserve and face liquidity issue in case of the shortage of the liquidity. In conclusion we can say that Islamic bank has problems in money market operations. So central bank has to make some other regulation for Islamic banks to provide a safe way (no invoment of any prohibited thing) for money market operation. In Pakistan Islamic banking was introduced in 1979. In 2004 there was 25 branches of Islamic banks operating in Pakistan. This paper examined two Islamic banks namely Meezan Bank and Al Baraka Bank. Analysis of financial statement of 2003 and 2004 showed the results that more than 75% of total investment of both banks has in mark-up contracts that are murabaha and ijarah which makes not much difference between both conflicting systems.

Samad (2004) made a comparative study on the performance of interest-free Islamic banks and the interest-based conventional banks of Bahrain. The purpose of this study was to examine the performance of Islamic banks and conventional banks of Bahrain during the post Gulf war. The study covered the time period during the post Gulf War i.e. 1991-2001.this study have also used the ratio analysis to measure the performances. These included the profitability ratio, liquidity risk ratio, and credit risk ratio. Like other studies, these studies have also used the t-test and f-test to financial ratios for the significant relationship. The results of the study found that there was a significant difference of credit performance

between the Islamic bank and conventional banks. While in terms of liquidity and profitability there was no significant difference found.

Kader (2007) made a study on the performance of Islamic banks in UAE. The researcher has chosen 3 Islamic banks and 5 conventional banks. The researcher has used the balance sheets and income statements for data gathering. The study covered the time period of 2000 to

2004. To analyse the performance of Islamic banks, financial measures were used. These included the profitability ratio, liquidity ratio, risk and solvency ratio, and efficiency ratio. The results of the study found that Islamic banks were more profitable in profitability ratio, less liquid in liquidity ratio, less risky in risk and solvency, and more efficient in efficiency ratio as compare to UAE conventional banks.
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Saleh (2006) made a case study of Jordan on Islamic banking performance in the Middle East. The purpose of this study was to examine the Islamic banks performance in the

Middle East. According to Saleh and Rami as there was limited study on this region regarding Islamic banking. So the objective of this study was to examine and analyze the experience with Islamic banking of two banks, and these two banks was Jordan Islamic

Bank for Finance and Investment (JIBFI), and Islamic International Arab Bank (IIAB) in Jordon. So to evaluate the performance of these two banks profit maximization ratio, capital structure ratio and liquidity ratio were used. The study revealed that the domestic and global challenges were faced by Islamic banking sector. The results of the study found that there was increase in the efficiency of both banks as well as both banks have expanded their investment. However the results found that Jordon Islamic bank of finance and investment was in higher profitability as compare to Islamic international Arab bank.

Bashir (2000) made a study on assessing the performance of Islamic banks. The purpose of this study was to examine the determinants of Islamic banks performance. This performance was examined across eight Middle Eastern countries that took the time period of 1993 to 1998.in this study, the data was collected from 14 Islamic banks. As there were eight Middle Eastern countries so researcher has used the cross-country bank-level data. The researcher has explained that if economic and financial structure were controlled then the results have shown that profitability ratios were positively related with increased capital and loan ratio. In this study it was also found that what the reason for banks such profit is, and this reason was due to the non-interest earnings assets and overheads.

Kamal Naser et al (1999).In global economy the competition is increasing in every field of economy. As competition increase there are less ways to race the competitors. In this case the customer preference is the main factor to increase the performance. And customers priority is mainly depending on his/her satisfaction. Satisfaction may rely on different reason. One of them is quality of good. This study is about the banking sector. Product of these sectors is intangibles. So it is very difficult to assess the quality of intangible goods. In this study author is made to assess the awareness of the customer about Islamic banking and their satisfaction
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toward the Islamic bank and their products. This study is conducted in Jordan (Middle East country). Primary data is collected by sample of 300 questioners. Out of 300, 206 respondents replied. Results show that there is more confidence of the Islamic banking customers on their bank than conventional banks, on the basis of that we can easily say that they are more satisfied.

Ridh Ladhari et al (2011).Banking sector is the service provider sector. In service sector, for the long term survival in the competitive business environment, service provider sector has to build positive image in the mind of their customer. To built the positive image banks have to provide better service quality as service quality is increased the customer satisfaction on banks also increase which lead to more profitability. In this study perception of customer of the bank about service quality among two (Canadian, Tunisian) countries which have different economical and cultural environment is compared service quality make the greatest contribution to overall customer satisfaction service quality is measured by five SERVQUAL dimension model given by Parasuraman et al (1988). Convenience way is adopted to collect the sample of 250 from Canada and 222 from Tunisia.ANOVA, linear regression analysis and confirmatory factor analysis is used. Result shows that perception of the customer about the banking services depend upon the satisfaction on the services which is driven by the service quality. In Canada most important factor for the prediction of the satisfaction are empathy and reliability. Manager of the Canadian banks has to use customer oriented strategy. In Tunisia reliability and responsiveness are the important factor. Manager should focus on the fulfilling of the promised service.

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3. RESAERCH METHODOLOGY
The purpose of our study is to compare financial performance of both sectors (Islamic banking and conventional banking) in Pakistan. We are going to use the financial data of 4 Islamic banks and 4 conventional banks for our study. The time period of our study is from 2006-2011. Data for each year have been collected from the income statements and balance sheets of these two sets of banks. Using accounting ratios is one of tool to measure performance, (Shezad 2008) financial ratios have been used quite commonly and extensively in the literature. In order to see how Islamic bank has performed in comparison with the conventional banks over 5 years, the study uses 9 financial ratios for the banks performance. These ratios are broadly categorized into three groups: (a) profitability ratios; (b) liquidity ratios; (c) efficiency ratios.

There are dual banking systems in Pakistan. (M.M.Metwally, 1997) in Pakistan there is three main categories of the companies. A) Government sector, B) private sector, C) semi Government. In Pakistan all Islamic banks are under private sector.(Mehboob 2007) so for our we selected the privates banks only in both( conventional and Islamic banks). there are four conventional banks in a group to compare with 4 Islamic banks, so we first calculated ratio in each year for each bank and then calculated average of five year answer of each ratio for each bank (phalpoto L.A 2012).now to compare the two sector we will take average ratios of all banks to ease the better understanding of analysis. Using financial information we evaluate the performance of the banks and then compare both sectors. We have three types of financial statements. A) Balance sheet B) Income statement C) cash flow statement. We will use the information of first two statements.

3.1 Balance sheet


It provides a financial position at a given point in time. It is also called as a snapshot because by analyzing it, one can see the whole picture of financial position of a firm in a specific point in time. But it does not help to understand how firm reached at that point. For this purpose another statement is used that is income statement.(ibp) balance sheet is also seen as the financial output in asset side and financial input in liability side.(commercial bank management)

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3.2 Income statement


It tells a financial performance of a firm in a period. This period is from one balance sheet to second balance sheet.(ibp) as balance sheet describe the input and output of the firm, income statement explain that how much we get using inputs in the form of revenue and how much we give for that revenue in the form of expenses. By subtracting these two we get the final result which can be the profit or loss.(CBM)

3.3 Before evaluation of the performance


What should be analysed to see the performance? Before analyzing performance of a firm, one should take to be considered that what the objective of the firm is because management do work to achieve their objectives. Every firm has different objectives. So there will be different strategies. For example one firm want to grow faster and can take any risk, they will give more loan (advances) to earn profit. On the other side, bank want stability and less risk in its path to grow, it will give only secure loans. So considering the objective of the firm(bank) performance should be evaluated.(CBM) But the limitation of time we are assuming that every bank has same objective.

3.4 Types of analysis


There are three types of analysis that can be used in evaluation of the firm. 1) Horizontal analysis 2) Vertical analysis 3) Ratio analysis

3.4.1 Horizontal analysis


In this analysis focus on to analysis the changing in the items of the financial statement by converting each item into percentage by taking one year as a base.

3.4.2Vertical analysis
In this analysis, analyst focus on analysis the changing in financial components of financial firm.(IbP)

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3.5 Ratio analysis


This analysis tells the relationship between two items in the financial statement.{IBP) We will use this ratio in our study.

3.5.1 Types of ratio


In our study we will use the three types of ratios. 1- Profitability ratio 2- Liquidity ratio 3- Efficiency ratio

3.5.1.1 Profitability Ratio


This ratio analysis explains that how well firm is able to generate profits. Three ratio are used in our study. A) Return on Asset (ROA) This is the relationship between return and asset. This explains that how much management of the bank is efficient to generate return. ROA = (Net Profit after Tax/ Total Asset) % B) Return on Equity (ROE) It is important ratio for the perspective of investor to analysis the performance of a firm. It tells how much a firm is able to positively utilize of the investment from the shareholder (sole owner of the firm) (investropedia) ROE = (NPAT/Total equity) % C) Earnings per Share (EPS) This ratio tells the amount of profit for each share which can be given to common stock holder on the basis of decision taken by board of director on the behalh of shareholder. EPS = (NPAT/Common Stock equity)

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3.5.1.2 Liquidity ratio


It tells the ability of the firm to meet its short term obligation.(Ready ratio)in this analysis we use three ratios. A) Cash & Cash equivalent to total asset (CCE/TA) This is most liquid ratio. If we see the balance sheet of the bank, we will that in current asset of the bank there are four items. 1- Cash in Bank & with SBP, 2- Cash with other Bank, 3Investments, and 4- others. In this ratio first two items are used to divide by total asset. This tells the liquidity ability of the bank. CCE = (CCE/ T.A) % B) Advances to Deposit (A/D) This is the relationship between advances (loans given to customers) in asset side and deposits (borrowing of the bank from customers) in liability side. This ratio may be used for the indicator to see that what type of strategy bank hold to get its objective. Itf it is 100%, it means that bank is taking risk to generate income and there may be a liquidity problem for the bank. A/D = (Advances/ Total Deposits) % C) Investment to Total Asset (I/T) This ratio is the relationship between the investment and total asset. It tells that how much portion of the total asset in the form of the investments. In the balance sheet of the banks investment refers as the investment in different securities. This investment may for two purposes. A) For liquidity B) in case of economic downturn, for the purpose of generating secure income. I/T = (Investment/ T.A) %

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3.5.1.3 Efficiency ratio


Efficiency of the management means the effectiveness of the management to control the expenses and improve the productivity of its employee. These ratios help to measure the bank management ability to turn the resources into revenues. A) Administrative Expenses to Profit before tax (Adm. Exp. / PBT)

This ratio explains the relationship between the administration expenses and income. This ratio is low; it is good for the bank = Adm. Exp / PBT (Answer will be in times)

B) Net Interest Income after Provision to Total Asset

This ratio is more useful for the financial institution itself because it tells about the efficiency of the managing in core working of the financial institution which is earning of the interest earning. Net Int Income to Asset = (NII / A)%

C) Spread Ratio

This ratio is the relationship between the earning and expense. It means that how much interest is earned and how much is paid. Nomary this is in the form of times. To present in percentage we divide the net interest income by total interest income. = (net interest income / interest income) %

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4. DATA ANALYSIS
Results & Discussion

ALBARAKA BANK(PAKISTAN) LIMITED 4.1 PROFITABILITY RATIO


RETURN ON ASSETS (ROA) RETURN ON EQUITYROE) EARNIG PER SHARE(EPS)

2007
-0.64% -2.0% -0.19

2008
-1.5% -6.4% -0.58

2009
-2.8% -16.1% -1.25

2010
-1.71% -15.1% -1.16

2011 AVERAGE
0.57% 5.63% 0.48 -1.24% -6.82% -0.54

BANK ISLAMI PAKISTAN LIMITED


RETURN ON ASSETS (ROA) RETURN ON EQUITYROE) EARNIG PER SHARE(EPS) -0.28% -1.17% -0.12 -.28% -1.0% -0.1 -1.41% -10.3% -0.92 0.09% 0.87% 0.08 0.69% 7.90% 0.77 -0.24% -0.75% -0.058

BURJ BANK LIMITED


RETURN ON ASSETS (ROA) RETURN ON EQUITYROE) EARNIG PER SHARE(EPS) 0.74% 0.35% 1.40% 0.85% 0.14 0.08 -2.25% -6.09% -0.58 -3.03% -12.5% -1.07 -1.04% -4.99% -0.39 -1.05% -4.28% -0.364

MEEZAN BANK LIMITED


RETURN ON ASSETS (ROA) RETURN ON EQUITYROE) EARNIG PER SHARE(EPS) 1.43% 0.73% 1.34% 1.20% 1.51% 16.84% 9.80% 17.08% 16.17% 21.81% 2.55 1.26 2.52 2.72 3.79 1.24% 16.34% 2.568

4.1.1 Albaraka bank


If We look at the Profitability ratio of Albaraka bank it would be clear that ROA is negative from 2007 to 2010 and ROA is positive only in 2011 just by 0.57% similarly return on equity is also negative in all years except 2011.earning per share is also negative from 2007 -2010 and only positive in 2011 by just 0.48.the overall average of return on asset, return on equity and earnings per share is -1.24%,-6.82 % and -0.54 respectively.therfore we can conclude that overall profitability of Albaraka bank is negative.

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4.1.2 Bank Islami


If We look at the Profitability ratio of Bank islami limited it would be clear that ROA is negative from 2007 to 2009 and ROA is positive in 2010 & 2011.similarly return on equity is also negative in all years except 2010 & 2011..earning per share is also negative from 2007 2009 and only positive in 2010 & 2011 by just 0.87% and 7.90% respectively. The overall average of return on asset, return on equity and earnings per share is -0.24%,-0.75 % and 0.08 respectively.therfore we can conclude that overall profitability of Bank islami is negative

4.1.3 Burj bank limited


Return on asset of Burj bank is positive in 2007 & 2008 while it is negative in rest of the years. Where as we see the exactly same trend in case of return on equity ratio as well as earning per share ratio. The overall profitability ratio of bank islami is negative.

4.1.4 Meezan bank limited


If we look at the overall profitability ratio of meezan bank it would be found that all the ratios (ROA, ROE, EPS) are in positive figure. So in all Islamic bank which we consider, it is only meezan bank who earns profit in all the years from 2007 to 2011.as a result the overall average of profitability ratios are positive.

CONVENTIONAL BANKS JS BANK LIMITED PROFITABILITY RATIO


RETURN ON ASSETS (ROA) RETURN ON EQUITYROE) EARNIG PER SHARE(EPS) RETURN ON ASSETS (ROA) RETURN ON EQUITYROE) EARNIG PER SHARE(EPS) RETURN ON ASSETS (ROA) RETURN ON EQUITYROE)

2007
0.17% 0.69% 0.07 -5.67% -276.3% -6.08 1.27% 3.64%

2008
0.26% 0.96% 0.1 -3.62% -65.2% -2.24 -0.77% -3.12%

2009 2010 2011


-1.81% -10.58% -0.97 -4.23% -1474.3% -3.22 -5.41% -50.83% -1.03% -5.63% -0.5 -1.56% -8.42% -0.42 -4.20% -87.7% 0.66% 3.83% 0.36 0.77% 3.70% 0.26 -1.26% -27.7% -0.35% -2.15% -0.188 -2.86% -364.09% -2.34 -2.07% -33.18% 18

SILKBANK LIMITED

SUMMIT BANK LIMITED

EARNIG PER SHARE(EPS) RETURN ON ASSETS (ROA) RETURN ON EQUITYROE) EARNIG PER SHARE(EPS)

0.51

-0.38

-4.13 -2.50% -12.54% -0.68

-4.18 -0.39% -1.51% -0.08

-1.4 0.75% 2.89% 0.16

-1.916 -2.61% -3.78% -0.592

SAMBA BANK LIMITED


-6.40% -4.50% -21.27% 13.55% -1.51 -0.85

4.1.5 Js Bank Limited


Return on asset of JS bank is positive in first two years of research i.e2007 & 2008 and then it is negative in 2009-2010 while in 2011 it is positive. The same trend is observed in rest of the profitability ratios. The overall average of return on asset, return on equity and earnings per share is -0.35%,-2.15 % and -0.188 respectively.therfore we can conclude that overall profitability of JS bank is negative.

4.1.6 SILK Bank limited


Return on asset, return on equity and earnings per share of silk bank is negative in all years except in 2011.as a result the overall average of profitability ratio for Silk is negative.

4.1.7 Summit Bank


Return on asset, return on equity and earnings per share of Summit bank is positive in year 2007 but is negative in rest of the years. As a result the overall average of profitability ratio for Summit bank is negative

4.1.8 Samba Bank Limited


Return on asset, return on equity and earnings per share of Samba bank is negative from year 2007 t0 2010 and only positive in 2011.the overall profitability of Samba bank is negative.

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ALBARAKA BANK(PAKISTAN) LIMITED

4.2 liquidity ratio


cash and cash equivalent to total assets gross advances to deposits= investment to total assets 15.78% 57.63% 25.44%

2007
6.68% 71.50% 16.67%

2008
11.62% 64.72% 16.99%

2009
19.53% 58.43% 25.70%

2010
15.88% 48.09% 36.09%

2011
13.90% 60.07% 24.18%

BANK ISLAMI PAKISTAN LIMITED


cash and cash equivalent to total assets gross advances to deposits= investment to total assets 27.78% 40.19% 26.75% 22.98% 53.59% 26.30% 18.38% 38.36% 19.46% 8.02% 44.61% 30.18% 8.91% 40.54% 35.58% 17.21% 43.46% 27.65%

BURJ BANK LIMITED


cash and cash equivalent to total assets gross advances to deposits= investment to total assets 8.29% 128.97% 19.25% 7.12% 111.50% 21.57% 9.63% 73.72% 22.00% 9.78% 49.36% 28.58% 13.01% 55.53% 36.11% 9.57% 83.82% 25.50%

MEEZAN BANK LIMITED


cash and cash equivalent to total assets gross advances to deposits= investment to total assets 13.95% 64.58% 15.685 8.34% 57.85% 17.03% 10.88% 44.09% 19.42% 14.32% 44.13% 31.81% 9.42% 37.80% 49.54% 11.38% 49.69% 3.3726

4.2.1 Albaraka bank limited


The average of Cash and cash equivalent to total assets, gross advances to deposits and investment to total assets of Albaraka bank is 13.90%, 60.07% and 24.18% respectively.

4.2.2 Bank Islami


The average of Cash and cash equivalent to total assets, gross advances to deposits and investment to total assets of bank islami is 17.21%,43.46% and 27.65% respectively.

4.2.3 Burj bank limited


The average of Cash and cash equivalent to total assets, gross advances to deposits and investment to total assets of Burj bank is 9.57%, 83.82% and 25.50 % respectively.

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4.2.4 Meezan bank limited


The average of Cash and cash equivalent to total assets, gross advances to deposits and investment to total assets of Meezan bank is 11.38%, 49.69% and 26.69% respectively.

liquidity ratio
cash and cash equivalent to total assets gross advances to deposits= investment to total assets

CONVENTIONAL BANKS JS BANK LIMITED 2007 2008 2009 2010


6.06% 48.20% 30.06% 6.25% 95.94% 33.28% 9.06% 64.14% 23.76% 5.80% 92.11% 21.59% 10.91% 67.09% 28.99% 4.77% 97.43% 29.39% 8.17% 65.20% 34.79% 4.82% 93.35% 18.15%

2011
7.42% 46.16% 42.03% 5.00% 93.78% 19.35% 8.32% 58.16% 31.93% 5.33% 94.52% 24.35%

liquidity ratio
cash and cash equivalent to total assets gross advances to deposits= investment to total assets

SILKBANK LIMITED

liquidity ratio
cash and cash equivalent to total assets gross advances to deposits= investment to total assets 4.45% 86.19% 29.85% 5.17% 56.19% 19.11%

SUMMIT BANK LIMITED


5.71% 99.63% 20.54% 6.71% 87.28% 23.23% 6.94% 67.31% 32.60% 7.03% 98.58% 24.47% 6.13% 72.28% 28.00% 6.31% 76.31% 30.19% 5.91% 80.34% 28.24% 6.36% 89.04% 26.80%

liquidity ratio
cash and cash equivalent to total assets gross advances to deposits= investment to total assets

SAMBA BANK LIMITED


8.02% 4.86% 99.16% 103.99% 36.35% 30.84%

4.2.5 Js Bank Limited


The average of Cash and cash equivalent to total assets, gross advances to deposits and investment to total assets of JS bank is 8.32%, 58.16% and 31.93% respectively.SILK bank The average of Cash and cash equivalent to total assets, gross advances to deposits and investment to total assets of Silk bank is 5.33%, 94.52% and 24.35% respectively.

4.2.6 Samba Bank Limited


The average of Cash and cash equivalent to total assets, gross advances to deposits and investment to total assets of Samba bank is 6.36%, 89.04%and 26.80 % respectively.

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4.2.7 Summit Bank limited


The average of Cash and cash equivalent to total assets, gross advances to deposits and investment to total assets of Summit bank is 5.91%, 80.34% and 28.24% respectively.

4.3 EFFICIENCY RATIOS


spread ratio admin. Exp to non-markup income(TIMES) Net Int. Income To Asset

ALBARAKA BANK(PAKISTAN) LIMITED 2007 2008 2009 2010 2011 AVG


67.20% 6.2 2.78% 43.60% 9.98 2.81% 35.49% 4.67 1.70% 24.57% 6.11 -0.37% 25.35% 3.96 2.65% 39.24% 6.184 1.91%

BANK ISLAMI PAKISTAN LIMITED


spread ratio admin. Exp to non-markup income(TIMES) Net Int. Income To Asset 49.53% 3.5 1.87% 50.33% 5.24 3.19% 44.31% 0.54 2.50% 46.21% 9.16 3.91% 47.81% 9.5 4.44% 47.64% 5.588 3.18%

BURJ BANK LIMITED


spread ratio= admin. Exp to non-markup income(TIMES) Net Int. Income To Asset 76.82% 18.78 2.77% 52.83% 0.88 4.73% 42.51% 12.07 1.72% 42.51% 15.35 0.74% 40.09% 6.52 2.54% 50.95% 10.72 2.50%

MEEZAN BANK LIMITED


spread ratio= admin. Exp to non-markup income(TIMES) Net Int. Income To Asset 46.39% 1.3 2.51% 54.60% 3.71 3.52% 50.82% 2.16 2.87% 46.22% 1.73 2.63% 51.88% 2.72 3.80% 49.98% 2.324 3.07%

4.3.1 Albaraka bank limited


The average of spread ratio, admin expense to non-mark-up income (times) and netmarkup/interest income (after provision) to total assets is 39.24%, 6.184 and 1.91% respectively.

4.3.2 Bank islami limited


The average of spread ratio, admin expense to non-mark-up income (times) and netmarkup/interest income (after provision) to total assets is 47.64%, 5.588 and 3.18% respectively
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4.3.3 Burj bank limited


The average of spread ratio, admin expense to non-mark-up income (times) and netmarkup/interest income (after provision) to total asstes is 50.95%, 10.72% and 2.50%.

4.3.4 Meezan bank


The average of spread ratio, admin expense to non-mark-up income (times) and netmarkup/interest income (after provision) to total assets is 49.98%, 2.324 and 3.07% respectively

EFFICIENCY RATIOS
spread ratio admin. Exp to non-markup income(TIMES) Net Int. Income To Asset spread ratio admin. Exp to non-markup income(TIMES) Net Int. Income To Asset spread ratio admin. Exp to non-markup income(TIMES) Net Int. Income To Asset

JS BANK LIMITED 2007 2008 2009


23.46% 1.76 1.26% 7.49% 1.64 -5.17% 59.16% 1.11 2.02% 31.08% 2 2.78% 8.05% 5.03 -2.29% 35.85% 4.65 1.06% 28.51% 5.11 -0.16% 0.98% 4.15 -3.28% 18.11% 0.88 -3.68%

2010
31.66% 5.56 2.31% 12.53% 2.66 0.85% 13.70% 4.48 1.75%

2011 AVG
40.19% 2.74 3.46% 22.31% 4.48 4.96% 5.33% 4.96 0.12% 30.98% 3.43 1.93% 10.27% 3.592 -0.99% 26.43% 3.216 0.25%

SILKBANK LIMITED

SUMMIT BANK LIMITED

SAMBA BANK LIMITED


spread ratio admin. Exp to non-markup income(TIMES) Net Int. Income To Asset 29.17% 6.94 -2.81% 39.06% 11.65 2.27% 35.65% 15.35 1.81% 43.37% 4.54 3.33% 42.01% 9.14 4.64% 37.85% 9.524 1.85%

4.3.5 Js bank limited


The average of spread ratio, admin expense to non-mark-up income (times) and netmarkup/interest income (after provision) to total assets is 30.98%, 3.434 and 1.93% respectively

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4.3.6 Silk bank limited


The average of spread ratio, admin expense to non-mark-up income (times) and netmarkup/interest income (after provision) to total asstes is 10.27%, 3.592 and -0.99% respectively

4.3.7 Summit bank limited


The average of spread ratio, admin expense to non-mark-up income (times) and netmarkup/interest income (after provision) to total asstes is 26.43%, 3.216 and 0.25% respectively.

4.3.8 Samba bank limited


The average of spread ratio, admin expense to non-mark-up income (times) and netmarkup/interest income (after provision) to total assets is 37.85%, 9.524 and 1.85% respectively.

4.4 COMPARATIVE DISCUSSION


PROFITIBILITY RATIO ROA
ROE EPS C&CE

LIQUIDITY RATIO
A/D I/A

EFFICIENCY RATIO
AD. SPREAD EX NII/A

ISLAMIC BANKS
ALBARAKA ISLAMI BURJ MEEZAN -1.24% -0.24% -1.05% 1.24% -6.82% -0.75% -4.82% 16.34% 0.54 -0.058 -0.364 2.568 13.90% 17.21% 9.57% 11.38% 60.07% 43.46% 83.82% 49.69% 24.18% 27.65% 25.50% 3.37% 39.24% 47.64% 50.95% 49.98% 6.18 5.59 10.72 2.32 1.91% 3.18% 2.50% 3.07%

-0.3%
JS SILK SUMMIT SAMBA -0.35% -2.86% -2.07% -2.61%

0.99%
-2.15% -364.09% -33.18% -3.78%

0.67 13.02% 59.26% 20.18% 46.95%


-0.188 -2.34 -1.916 -0.592 8.32% 5.33% 5.19% 6.36% 58.16% 94.52% 80.34% 89.04% 31.93% 24.35% 28.24% 26.80% 30.98% 10.27% 26.43% 37.85%

6.20 2.67%
3.34 3.59 3.61 9.52 1.93% -0.9% 0.25% 1.85%

CONVENTIONAL BANKS

-1.9%

-100.8%

-1.2590

6.30% 80.52% 27.83% 26.38%

5.02 0.76%

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The net result indicates that the overall return on asset of Islamic bank is better than conventional banks. Although both Islamic and conventional banks shows negative return on asset i.e. -0.32% and -1.97% respectively but in comparison Islamic banks have better ROA. Return on equity of Islamic bank is 0.99% whereas return on equity of conventional banks is -100.80%. as we clearly see that return on equity of Islamic banks are for better than conventional banks but one thing that we should note that the reason of such declining of ROE(conventional bank) is due to Silk bank. Similarly earning per share of Islamic banks i.e. 0.67 is better than the conventional banks which is -0.125. Now if we analyze the liquidity ratio then it would be found that cash & cash equivalent ratio of Islamic bank is 13.02% which is better than the conventional bank i.e. 6.30%. It means that the Islamic banks are more protected against liquidation than the conventional banks. Conventional bank utilize almost 80% of its deposits as advances, where as Islamic banks utilized almost 60% of its deposits. Conventional bank invested almost 28% of its assets as a investment in different marketable securities, while on the other hand Islamic banks invested 20% of its assets as investment. Islamic banks charge almost 47% more interest on advances against deposits whereas conventional banks charge 26.38%.islamic bank bear more administrative expenses then that of commercial banks. As compare to conventional bank the interest income (profit) of the Islamic bank is much better which shows that the recovery of the principal amount and return on it is better i.e. 2.67% while the interest income of the conventional bank on average is 0.67%.

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5. CONCLUSION:
Our empirical analysis of profitability measures shows that Islamic banks have performed better than conventional banks. However in case of ROE, Islamic banks outperform conventional banks. Examination of liquidity ratio reveals that Islamic banks liquidity is better than conventional banks. However Islamic banks are not efficient enough to convert deposits into advances due to fewer opportunities for investment. Similarly Islamic banks have less opportunity for investment in marketable securities. Islamic banks earns far better than the conventional banks on advances but have some issues on the part of administrative expenses.

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Riadh Ladhari, Ines Ladhari, Miguel Morales, (2011),"Bank service quality: comparing Canadian and Tunisian customer perceptions", International Journal of Bank Marketing, Vol. 29 Iss: 3 pp. 224 - 246 Siddiqui A. (2008). Financial contracts, risk and performance of Islamic Banking, Managerial Finance,Emerald Article Vol. 34 Iss: 10 pp. 680 - 694 , Samad, Abdus (2004), Performance of Interest-free Islamic banks vis--vis Interest-based Conventional Banks of Bahrain. IIUM Journal of Economics and Management 12, no.2: 115. Saleh, A. S. and Z. Rami (2006), Islamic Banking Performance in the Middle East: A Case Study of Jordan. Working Paper 06-21, Department of Economics, University of Wollongong. Shehzad (2008).Performance of IslamicBanking and Conventional Banking in Pakistan,A Comparative Study Unpublished master degree project in finance Shah Alam .(2009), The Performance Of Islamic Banking Among The Commercial Banks In MalaysiaUnpublished project BOOKS: Handbook of Islamic banking products and services:By Islamic banking department,SBP Institute of Bankers Pakistan,Accounting for financial services(2011) for ratio pp 203-205 part 9,for difference I.B/commercial bank pp 188,part 7,ch 1 Rose P.S,commercial Bank Mnagement,edi. 5th, for ratio pp 150-170,for size pp 172 SBP,Financial statement of analysis of financial sector 2007-2011

http://www.sbp.org.pk/f_links/index.asp, for banks types

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