Table 1

Banks Included in the Sample S No. 1 2 3 4 5 6 Islamic Banks Albaraka Bank (Pakistan) Ltd (ABPL) Bank Alfalha (BA) Bank Islami Pakistan Limited (BIP) Burj bank (BB) Dubai Islamic bank (DIB) Mezan Bank (MB) Conventional Banks Allied Bank Limited (ABL) Askari Bank limited (ASBL) Bank Alfalha Commercial (BAC) KASB Bank (KASBB) Muslim Commercial Bank (MCB) Standard Chartered Bank (SCB)

GROWTH OF ISLAMIC BANKING INDUSTRY IN PAKISTAN: 2003-071 1. From 2003 to 2007, average numbers of full fledge Islamic Banks in Pakistan was 3.8. This appears to be a substantial growth due to the fact that the total number of scheduled banks in Pakistan is around 44. This number will continue to decrease owing to mergers and acquisition of banks as inspired by SBP for consolidation of banking in Pakistan. 2. As per research regarding the progress of Islamic banking industry in Pakistan from 2003-07 was as follow: A. Full fledge Islamic Banks: 6 times B. Branches of Islamic Banks: 19 times C. Conventional Banks with Islamic Banking branches: 4 times D. Branches of conventional Banks: 15 times E. Total Islamic Banking institutions: 4.5 times F. Total number of branches: 17 times 3 Trends in Islamic Banking from June 2004 to June 2008 are reported below: A. Deposits: 12.5 times B. Financing & investment: 12.5 times C. Total assets: 12.5 times

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1

Prof. Dr. Kawaka Ajman Saied, Founder Principal, Hailey College of Banking & Finance, University of the Punjab, Lahore Pakistan; A Review on Islamic Banking in Pakistan

Table 2 Average Annual Growth Rates of Some Key Variables: 2009-12 BANKS Total Deposits Total Assets Total Total Revenue Total Equity Investment Islamic Banks 144.32 1476.83 149.25 121.50 157.03 200.20 31.50 -4.39 36.14 186.15 -7.84 21.05 121.02 466.55 105.98 91.77 175.91 328.48 64.86 26.74 126.88 531.64 68.75 51.33 55.02 53.28 56.42 51.67 31.97 11.02 40.87 17.22 47.30 79.14 31.87 42.28 47.35 -58.39 28.45 46.20

ABPL BIP DIB MB BB Average Standard deviation ABL ASBL MCB BAL KASBB Average Stnd Deviation

168.32 231.53 37.43 124.91 273.68 167.17 82.59 35.68 58.09 38.96 27.78 53.26 42.75 11.26

48.76 483.35 Conventional Banks 37.68 103.48 53.48 214.48 40.66 184.30 29.32 87.11 36.60 114.61 39.55 140.80 7.90 49.56

CHART: 1

600 500 400 300 200 100 0 Total deposit Total Assets Total Total Investment Revenue Total Equity

Islamic Banks Conventional Banks

Total Deposits: During period of 2003-07, trend in Islamic banking was in growing up process which is still growing as we see in chart 1. The key variable, total deposit of Islamic banks was grown up to 12.5 times of the last five years. Whereas, the Islamic banks have an average growth rate of 167.17 during 2008-12. This growth rate of Islamic banks is almost 4 times of the conventional banks during the same period. Total Asset: It is an important key variable which is the worth of any corporation. Total asset of Islamic banks during 2008-12 have also been a growing trend which has value of 126.88 on average. The asset of the Islamic banks comprises 3 times of the conventional banks in this period. Total Investment: Since trend of the people to deposit their saving in the Islamic banks is increased which result in huge pool of deposits. That is why investment of the banks has grown substantially as compared to conventional banks. The growth rate of Islamic banks is 531.64 percent which comprises almost 3.8 times of the conventional banks. Total Revenue: Chart 1 shows that growth rate of total revenue of Islamic banks have increased from period 2008 to 2012. Total Equity: Growth rate of Islamic banks as compared to conventional banks has increased to 1.8 times greater. Table 3 Period Averages for Some Key Ratios: 2008 -12 Bank Cap/Asst Ratio Deployment Deployment Ratio 1 Ratio 2 Islamic Banks 9.12 25.03 30.17 30.41 14.37 4.08 5.14 21.24 11.72 15.95 31.47 34.35 21.70 13.14 35.15 41.14 6.74 12.17 45.40 43.92 12.73 14.07 29.47 34.21 5.16 13.562 8.78 6.75 Liquidity Ratio Cost/Income Ratio 71.60 50.79 54.26 62.82 50.26 57.95 8.17 ROA ROE

ABIP DIB BIP BB MB Average Standard Deviation ABL

7.48 6.21 4.68 8.02 8.23

82.35 43.41 34.13 37.22 125.61 6.92 64.55 1.32 35.11 27.8

13.29 8.06 Conventional Banks 36.92 35.14 42.96

1.808

Askari BL MCB BAL KASBB Average Standard Deviation

10.886 20.31 5.46 6.23 11.29 5.41

13.52 11.52 17.55 12.42 12.76 2.86

37.00 47.32 32.96 36.11 38.06 4.86

34.84 47.04 31.65 31.22 35.98 5.76

63.27 29.72 62.84 93.15

0.372 3.22 9.026 8.07 58.39 4.50 21.50 3.44

6.67 26.36 165.467 129.54 71.17 63.79

CHART 2

80 70 60 50 40 30 20 10 0 Islamic Banks Conventional Banks

Capital Asset Ratio This is perhaps the most important ratio especially for financial firms. This reflects the strength of a bank and its ability to meet its obligations in a crisis situation. There are three major reasons for a bank to watch its capital asset ratio. First, regulatory authorities require a minimum amount of bank capital. Second, the size of the bank capital has some safety implications as it provides some cushioning, albeit limited, against the possibility that the bank cannot satisfy its obligations to its creditors. Third, the amount of capital affects the rate of return to the bank equity holders. Growth in Capital asset ratio of Islamic banks as per chart 2 is little bit increase as compared to conventional banks. Liquidity Ratio:

This ratio measures the ability of a firm to meet its current liabilities. In the case of banks, the current liabilities are the demand deposits. Therefore, In the case of banks, the equivalent of what is known as "Current Ratio9 in financial statement analysis would be the ratio of liquid assets to demand deposits. However, since time deposits could also be of short maturity and in many cases, withdrawals from such accounts are possible by means of a short advance notice of withdrawal; we have calculated the liquidity ratio as follows: Liquidity Ratio= Cash and Accounts with Banks/Total Deposits Liquidity of Islamic banks is not as efficient as conventional banking, because there are various types of accounts in conventional banks that are not in Islamic banks. Secondly, the conventional banks are too much large banking network across the world and thus have large source of cash and account. But still Islamic banks have better capital asset ratio. Deployment Ratio: Another aspect of performance evaluation is to see how best a bank is using its resources. For this purpose we have calculated two ratios. The first, Deployment Ratio 1 is defined as follows: Deployment Ratio 1 = Total Investment/Total Equity + Total Deposits Though the ratio is less than conventional banks ratio, yet the deployment ratio of Islamic banks is competing their ratio. It shows that Islamic banks up to what degree exploit their customers deposits and how efficiently they invest their deposits amount. Realizing that for short periods of time, 'margin' deposits and the depositors share of profits also remain with the banks in addition to customer deposits and equity, a second deployment ratio was calculated as follows: Deployment Ratio 2 = Total Investment/Total Liabilities This of course is a much more stringent test of efficiency in the use of resources at the disposal of banks because it includes the use of amounts deposited for short periods of time and that too not for return. It turns out that Islamic banks are doing a fairly good job in the utilization of their resources. Since both possess nearly the same ratio of 34 to 35 percent for Islamic and conventional respectively.

Cost to Income Ratio: This is a measure of overall efficiency. Theoretically, no standard for these ratios are available in the literature. However, The Banker magazine, which publishes a list of Top 1000 banks in the World every year, is reporting this ratio for the last three years. We calculated the average ratios for the 1000 banks for these years and they came out to be 62.1, 60.5 and 62.0 respectively for 1996, 1997 and 1998. We should also point out here that several studies have shown that there are economies of scale in the banking business just like other lines of business. Considering this evidence and the fact that Islamic banks are generally of a smaller size, we can use65 percent as the "benchmark" for this ratio. Against this standard, the overall cost/income ratio for the Islamic banks during 2008-12 was 57 percent which is not an alarming situation.

Profitability Ratios There are several ratios, which are used to measure the profitability of firms. The two most often used are Rate of Return on Assets (ROA) and the Rate of Return on Equity (ROE). We will now analyze the profitability of Islamic banks on the basis of these two ratios. Rate of return on assets (ROA): The average return on asset for Islamic banks during 2008-12 was 6.92 percent as compared to conventional banks which have 4.50 percent. It shows that the Islamic banks are utilizing their resource better. Islamic banks have different resource of investment and products etc.

Rate of return on equity (ROE): During period of 2008-12, return on equity of Islamic banks have less percentage of 64.55 as compared to conventional banks that have 71.17 percent. This is because, reserve portion of conventional banks is large than share capital issued.