Analyzing performance of banking sector in Pakistan:
Conventional Vs Islamic
In the Partial Fulfillment for the Degree of
MS Accounts & Finance
The University of Lahore
LAHORE SCHOOL OF ACCOUNTANCY & FINANCE
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submitted by Mahnaz Mirzaman have been found satisfactory and recommend it for the
evaluation of the External Examiner for the award of degree of MPhil Accounting and
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Copy by University of Lahore, Lahore School of Accountancy ; Finance
The University of Lahore
Lahore School of Accountancy ; Finance
I Mahnaz Mir Zaman declared that the contents of my thesis entitled “Analyzing the financial
performance of Islamic banks and Conventional banks in Pakistan” are based on my own
research findings and have not been taken from any other work except the references and has
not been published before.
I also undertake that I will be responsible for any plagiarism in this thesis.
The toil and sweat of affectionate parents as moral support enshrined and grafted in me
untiring zeal to get higher ideals of life
My respectable Father Mother, Husband
Sweet sisters and brothers for their love, patience, encouragement and support
that inspired me to accomplish this humble effort
May God bless them with his choice bounties in this world and next. It is also dedicated to
my sweet uncles and friends.
I am thankful to Allah Almighty, the most beneficent who enabled me to undertake and
complete this task successfully. At this occasion I pray tribute to the Holy prophet (PBUH),
Whose personality remained a guiding torch to me.
I owe my special gratitude to my supervisor Mr. Amir Iqbal for his indispensable cooperation
and motivated to me to carry out research in a well-organized manner. Without his guidance
and persistent help, this dissertation would not have been possible.
I would like to pay thanks to my husband who encourage me and help me in my work.
In the last I must pay complements to my parents and family members for their love, amiable
attitude, moral support and prayers for my success.
TABLE OF CONTENTS
Chapters Page No.
Copy Right iv
Table of Contents Viii
List of Table X
List of Figures Xi
Chapter One: Introduction
1.1 Background of Study 1
1.2 Gap Analysis 2
1.3 Problem Statement 2
1.4 Objectives 2
1.5 Research Questions 3
1.6 Significance of Study 3
Chapter Two: Literature Review
2.1 Review of Literature 4
2.2 Hypothesis 19
Chapter Three: Methodology ; Data
3.1 Population 20
3.2 Sample Selection 20
3.3 Data Collection Method 20
3.4 Model 20
3.5 Data Analysis 21
3.6 Variable Description 21
3.6.1 Dependent Variable
22.214.171.124 Financial Performance Index
3.6.2 Independent Variable 22
126.96.36.199 Asset Quality
Chapter Four: Empirical Results ; Analysis
4.1 Ranking of Banks on the basis of FPI 23
4.1.1 Construction of Composite FPI 23
4.2 Bank Progress Ratio 26
Chapter Five: Conclusion
5.1 Background 28
5.2 Key Findings 28
5.3 Limitations ; Future Directions 28
LIST OF TABLES
Tables Page No
Table 188.8.131.52 Composite FPI shows the performance of all banks
during 2007- 2016
Table 4.2.1 Progress of Banks 27
Table 4.2.2 Degree of Bank Progress 27
Table Appendix A-1 Overview of weight assigned to parameters 32
Table Appendix A-2 Overview of performance parameters
Table Appendix A-3 Ranking of Banks from 20017-2016 35
LIST OF FIGURES
Figure Page No
Figure-1 FPI for 2016 36
Figure-2 FPI for 2015 36
Figure-3 FPI for 2014 37
Figure-4 FPI for 2013 37
Figure-5 FPI for 2012 38
Figure-6 FPI for 2011 38
Figure-7 FPI for 2010 39
Figure-8 FPI for 2009 39
Figure-9 FPI for 2008 40
Figure-10 FPI for 2007 40
Figure-12 Progress Ratio 41
Figure-13 Composite FPI for Banks 41
Islamic banking is a banking system that is based on the principles of Islamic law, also
referred to as Shariah law, and guided by Islamic economics. Financial transactions within
Islamic banking are a culturally distinct form of ethical investing. On the other
hand, Conventional Banking is an Un-Ethical Banking system based on Man-Made Laws. It is
profit-oriented and its purpose is to make money through interest. This study analyzes the
financial performance of Banking Sector in Pakistan. The aim of this study is to compare the
financial performance of conventional banking sector and Islamic banking sector. For this
purpose all banks in Pakistan selected for this study and most of data has been collected from
financial statements of sampled banks over the period of 2007 to 2016.
CAMEL model is used to analysis the performance of both types of banks in tem of Capital
adequacy, Asset quality, Management and Liquidity. I have constructed the financial
performance index (FPI) which based on CAMEL ratios and banks performance ranked
according to FPI. Result show that Conventional Banks were on the top of list. Progress ratio
showed that Islamic banks had better performance than Conventional Banks in 2016 as
compared to 2007.
In this chapter of my thesis have to introduce the background of the study I have
made, the gap analysis, problem statement, research objectives, research questions, research
hypothesis and the significance of the study.
1.1 Background of the Study
The role of banks in economic development is to remove the deficiency of capital by
stimulating savings and investment. A sound banking system mobilizes the small and
scattered savings of the community, and makes them available for investment in productive
Van Horne, James and Wachowicz, John (2005) told that, “A bank is a corporation
registered with either the central bank or the federal government of the country. They provide
the services of deposits, withdrawals, interest dealing, making loans, discount notes,
investments in financial securities etc depending on bank’s type.
Islamic banking is a banking system that is based on the principles of Islamic law, also
referred to as Shariah law, and guided by Islamic economics. Two basic principles behind
Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the
collection and payment of interest by lenders and investors.
Since this system of banking is grounded in Islamic principles, all the undertakings of
the banks follow Islamic morals. Therefore, it could be said that financial transactions within
Islamic banking are a culturally distinct form of ethical investing.
On the other hand, Conventional Banking is an Un-Ethical Banking system based on Man-
Made Laws. It is profit-oriented and its purpose is to make money through interest”
This sector can perform important role in the overall country’s economic performance. In
Pakistan, the banking sector has always shown notable performance in the past and in the
same way the trend is going on.
I am going to examine the financial performance of Islamic and Conventional banks in
Pakistan. I compared the efficiency and effectiveness in operation of both banks conventional
and Islamic banks in terms of Capital adequacy, Asset Quality, Management, Earnings and
1.2 Gap Analysis
Islamic banking is the parallel banking system in Pakistan and almost in every muslim
country. Comparative performance study of both banking systems is conducted by many
researcher in Pakistan and Muslim countries. In Pakistan their in no research conducted by
any researcher since 2012. Banks play a vital role in the economic activities of any country so
there is necessary to analyze the performance of conventional and Islamic banks regularly.
Islamic banking is becoming a famous in the Muslim community day by day so to improve
the performance we must have to study and analyze both banking sector.
1.3 Problem Statement
“Comparative analysis of financial performance of Islamic and conventional banks”.
In Pakistan conventional and Islamic banks are operational parallel. Some conventional banks
also offer Islamic banking system among pure Islamic banks. Islamic banks economical
activities are based on Islamic shariah Law in which both parties’ investor and lender equally
share profit and loss. Conventional banks operations are based on Interest. So how the both
banking sectors are performing in the economic activities with this distinct.
? To conduct a comparative analysis of Islamic bank and conventional banks in
? To find out whether the Islamic bank or conventional banks are operating efficiently.
1.5 Research Questions
? Are Islamic banks performing better than conventional banks in Pakistan?
? Are Conventional banks performing better than Islamic banks in Pakistan?
1.6 Significance of the study
The research will provide assist in comparison of performance of Islamic
banks and conventional banks of Pakistan. This research is relate with whole banking sector
of Pakistan in which Islamic bank and conventional banks are doing their jobs according to
the same rules and regulation of economic, political and social work frame.
As banks play a vital role in economic activities of any country so it’s necessary to
evaluate the performance of banks. This study is useful for all stakeholders and investors in
making right decisions regarding bank capital adequacy, asset quality, management, earning
and liquidity. This study is also important because few researchers have work on this issue in
Pakistan. Investors need safety against safe custody of financial valuables so it’s important to
compare the financial performance analysis of conventional and Islamic banks to take right
In this chapter, I have to review some of the research studies on Islamic and
conventional banking. Let us see what previous studies say about the comparative financial
performance of Islamic banking and conventional banking.
2.1 Review of Literature
Muhammad Imran, Hunjra and Amber (2014) conducted the research on Comparative
financial performance analysis of conventional and Islamic banks in Pakistan. The aim of this
study is to compare financial performance of Islamic and conventional banks to support the
depositors, investors, bank managers and shareholder by providing the clear picture of
financial position of Islamic banks as well as Conventional banks in Pakistan. For this
purpose he used 5 year annual data starting from 2008-2012. He used Ratio analysis technique
to analyse the performance of both banks. Data was collected from financial statements. They
conclude that conventional banks are more profitable, deployed and operationally efficient
while less liquid and more risky as compared to Islamic banks.
Zahoor khan, Muhammad Farooq and M.Fawad (January 2010) conducted the
research on Analysis of the performance of Islamic and banking sector in Pakistan . The aim
of this study to know which banking sector is more viable and profitable. They used sample of
four banks, two from Islamic banks and two from Conventional banks .For this purpose they
used four year data starting from 2006- 2009 collected from State bank of Pakistan. They
used ratio analysis technique to measurethe profitability and earning capacity of both banks
conventional and Islamic banks .They also used comparative analysis techniques to compare
the operations and products of both Islamic and conventional banks. They conclude that
Islamic banks are as profitable as conventional banks although the Islamic banks are infant in
banking industry of Pakistan. Liquidity and solvency ratio show that Islamic banks are batter
then conventional because Islamic banks maintain lower debt and more equity in capital
structure so that it minimize the risk of default. Islamic banks are more efficient in cost but
less efficient in profit and revenue as compared to conventional banks.
Abdul Rasheed, M. khaleeq and Sana jabeen( January 2015) Conducted research on
“Analysing performance Of banks in Pakistan conventional Vs Islamic Banks” . The aim of
this study to analyse the performance of banks .for this Purpose they used Seven year data
starting from 2006-2012. First they construct financial performance index on the bases of
CAML’s ratio and then rank the banks according to the financial performance index.
They used all the Islamic banks and conventional banks (except of few small or public sector
banks). They take 22 banks as a sample and used Secondary data.CAML test and ranking
technique to examine the performance. They Conclude that Conventional banks ware on top
of the list and then Islamic banks Stood after 12th rank in terms of performance. Progress
ratio show that Islamic banks had better in 2012 as compared 2006.
Pir Qasim shah (2012) Conducted research on the performance analysis of related
Islamic banks and conventional Banks of Pakistan through camel Frame work. For this
purpose he used 10 year data starting from (2003-2012).Financial data was collected from
annual reports. He found Meezan bank and NIB bank consistent with Sample requirement.
Various Parameter of CAMEL model and was tested from t test for mean comparison. He
found there is significant difference between Islamic banks and conventional banks in risk
weighted credit exposure, regulatory Capital, advance in portion assets portfolio, long term
debt paying ability.
Sanaullah and Ansari (2010) evaluated the financial performance of Islamic banks and
Conventional banks in Pakistan for the period of 2006 -2009. They estimated financial ratio to
measure the performance in tem of profitability, liquidity risk and solvency, capital adequacy
development and operational efficiency. They used t test and ANOVA to determine
significance of mean difference of these ratios between and among banks. Sample of this
study was Meezanbank, Bank Islami, Dubai Islamic bank selected as Islamic banks and
Askari bank, Atlas bank limited and Samba banks limited was selected as conventional banks.
They conclude that Islamic banks provide more liquid, less risk and operationally efficient
then Islamic banks.
SitiRochmahIka and Norhayati Abdullah (2011) conducted research on A comparative
study of financial performance of Conventional and Islamic banks in Indonesia. The aim of
this study to strengthen the regulatory environment for further growth of Indonesia’s market
Islamic finance.Secondry data was collected from Financial statements of banks for the period
of 2007-2007. Financial performance was measured in term of profitability, liquidity, risk and
solvency and efficiency. They used Mann-Whitney to compare the financial performance of
Islamic and Conventional banks.They conclude there is no major difference in financial
performance between Islamic and conventional banks, expect in term of liquidity.
Dr,WageedAkhtar, Ali Raza, Muhammad Akram and Orangzaib (2011) Conducted a
research on Efficiency and Performance of Islamic Banking: The Case of Pakistan. The
purpose of this study is to get results of efficiency and performance of interest free banking.
For this purpose they used five year data starting from 2006-2010, Secondary data was
collected from the financial statements of banks.In which one Islamic bank and two
commercial banks (Government and Private) were selected. They used financial ratios
measure the performance of banks in term of Profitability, Liquidity Risk and Credit Risk
Trend Analysis is also used to check the trends of balance sheet and Income statements. They
conclude there is no significant difference between Islamic and conventional banks in respect
of profitability. While this paper discovered the divergence in liquidity and credit
performance.The trend analysis reveals the good trend of balance sheet of Islamic bank while
in income statements there is no meaningful difference.
Rami Zeitun(2012) conducted research on Determinants of Islamic and Conventional
Banks Performance in GCC Countries Using Panel Data Analysis. The aim of this study to
investigate influential factors on islamic banks and conventional banks. For this purpose he
used cross-sectional and time-series relating to the banks in (GCC) countries. Data was taken
from Bank scope database for the period 2002-2009. OLS regression was used in this study.
Two sample ware used in this study. The first sample contains 38 conventional banks and the
second sample contains 13 conventional banks, the conclude that bank’s equity is important in
explaining and increasing conventional bank profitability, while it is not for islamic bank. The
cost-income was found to have a negative and significant impact on banks performance for
Islamic and conventional banks. It is important for Islamic and conventional banks to
RehanaKouser,IrumSaba (2012) conducted research on Gauging the Financial
Performance of Banking Sector using CAMEL Model: Comparison of Conventional, Mixed
and Pure Islamic Banks in Pakistan. For this purpose they used five year data starting from
2006-2010 .They used primary and secondary data to make study more comprehensive.
Primary data was obtained from Interview and Secondary data was obtained from financial
statements. Six banks was selected from Islamic Branches of Conventional Banks , Four
banks from full-fledge islamic banks and four banks from conventional banks.Two categories
of tests are employed. First category is based on the comparison of the means in three
categories of banks. Secondly they used the trend analysis for graphical comparison and
trends in CAMEL ratios. Tests were performed using SPSS. They conclude that there are
significant differences in the mean CAMEL ratios of three bank types. The performance
measurements of Islamic banking in Pakistan are different in comparison to the results drawn
from the similar studies done in other parts of the world. The difference in results is largely
due to the fact that Islamic banking has longer history in these countries as compared to
Pakistan where full-fledged Islamic banking started merely few years back. Moreover,
conventional banking has a longer history, deeper roots, vast experience of learning from the
financial markets mechanisms, and larger share in the Pakistan financial sector. They found
that Islamic bank have adequate capital and Good asset management as compared to Islamic
branches of Conventional banks and Conventional banks. Islamic banks in general have good
management competency in comparison to conventional banks. The earnings of Islamic
branches of conventional banks are greater than full-fledge Islamic banks and conventional
K.K. Siraj and P. SudarsananPillai (2012) Conducted research on “Comparative Study
on performance of Islamic Banks and Conventional Banks in GCC region” for this purpose
they used six years data starting from 2005-2010. Secondary data was collected from the
financial statements. The study selected six Islamic banks and six conventional banks. They
used financial ratios to measure the performance and use ANOVA. They conclude that
Islamic banks are more equity financed than conventional banks.
Dr.Shahid Jan Kakakhe ,FaryalRaheem, and Dr. Muhammad Tariq Conducted
research on,”A Study of Performance Comparison between Conventional and Islamic
Banking in Pakistan.” The aim of this study was to examine and evaluate the performance of
Islamic and Conventional banks. For this purpose data was collected from the financial
statements of Banks for the period of 2008 to 2010. Financial ratio analysis techniques are
used to measure the performance of bank. They concluded that Conventional Banks are more
profitable than Islamic banks. Islamic bank have better Current ratio cash debit to asset and
asset turnover ratio while conventional banks are good in other remaining ratios.
Conventional banks are more efficient than Islamic banks in Pakistan.
Md. DulalMiah and KashfiaSharmeenconducted a research on Relationship between
capital, risk and efficiency: A comparative study between Islamic and conventional banks of
Bangladesh. Purpose of this study was to investigate the relationship between Capital risk and
efficiency of Islamic and conventional operating in Bangladesh. For this purpose, they used
eleven years data starting from 2001 to 2011. They assembled data from financial statement
of Islamic and Conventional banks. Stochastic frontier approach was used to measure the
efficiency and Seemingly Unrelated Regression approach for assessing the relationship
between Capital Risk and efficiency. They conclude that Conventional Banks are more
efficient in managing Cost than Islamic banks and relationship between Capital and risk was
also bidirectional but positive for Islamic banks.
Raja Irfan Sabir , Naeem Akhtar ,Osama Ghafoor ,Iqra Hafeez, Anjuman Chaudhri
And Asad Ur Rehman ( 2014) Conducted research on Difference Between Islamic Banks and
Commercial Banks Performance In Pakistan . Objective of this was study to identify the
difference between operations of Islamic banks and Non Islamic Banks In Pakistan, and how
it effects the depositors. For this purpose, they used the samples of three Islamic banks and
three Non Islamic banks. Secondary data was taken from financial statements of banks to find
the difference of Islamic and Conventional banks performances. Ratio analysis was used for
analyzing the performance of Islamic and commercial banks. They concluded that
conventional banks performance is better and Highly Profitable in term of ROA because
conventional banks have greater hold on our whole economy for many years .
By Muhammad Jaffar, IrfanManarvi conducted research on Performance comparison
of Islamic and Conventional banks in Pakistan. For This purpose they used samples of five
Islamic Banks and Five conventional banks for five year Period starting from 2005 to 2009.
Secondary data was collected from SBP website. To measure the financial performance
CAMEL analysis was used. They concluded that Islamic Banks performed better in
possessing adequate capital and better liquidity position while Conventional banks pioneered
in management quality and earning ability and asset quality was almost same for both mode
AbidUsman and Muhmmad and Muhammad Kashif Khan (2012) conducted research
on Evaluating the Financial Performance of Islamic and Conventional Banks of Pakistan: A
Comparative Analysis. For this purpose three Islamic and three conventional banks were
selected as samples on the Basis of equal weight of invested capital and number of existing
branches . Data was collected from financial statements of both type banks for the period of
three years starting from 2007 To2009. To make the Comparative Study profitability and
liquidity ratio were used. They found that Islamic banks were more profitable than
conventional banks and also had high liquidity power over conventional banks.
MasudRana, Md. Kamal Hossain and Rebeka Sultana Rekha (2016) Conducted
research on Profitability and liquidity of conventional banking and Islamic banking in
Bangladesh: A comparative study. The aim of this study was to focus on Islamic Banking
system and conventional Banking System performance. For this Purpose, they used secondary
data Collected from Published Material, annual reports of banks, internet and journals for the
period of three years starting from 2013 to 2014. They selected four Islamic Banks and four
conventional Banks of Bangladesh. They used the Ratio analysis techniques to measure the
performance of banks. They classified the ratios in term of profitability, Liquidity, Risk and
solvency, operational ratios and Capital adequacy ratio. They conclude that performance of
Islamic banks in business development, profitability, liquidity and solvency is better than the
conventional banks of Bangladesh.
By Imtiaz .P. Merchant conducted research on Empirical Study of Islamic Banks
Versus Conventional Banks of GCC. The objective of research was to analyze the
performance of Islamic banks and conventional banks based in the Gulf Cooperation Council
(GCC) .He used five years data starting from 2008 to 2012. Data was gathered from financial
statements of banks. CAMEL approach was used to measure the performances of both types
of banks. He found that Islamic banks perform better than conventional banks.
Suzanna El Massah and Ola Al-Sayed conducted research on banking sector
performance: Islamic and conventional banks in the UAE. For this purpose they selected
samples of eleven Conventional banks and five Islamic banks. They collected data from
annual reports of banks for the period of seven year starting from 2008 to 2014. They used
Ratio analysis technique to measure the performance of Islamic banks and Conventional
Banks. Performances of banks measured in respect of Profitability, Liquidity, Solvency and
Credit risk. They found that conventional banks perform better than islamic banks in term of
profitability, credit risk management as well as solvency.
Sanaullah Ansari1, Khalil-ur-Rehman (2011) conducted research on Comparative
Financial Performance of existing Islamic Banks and Contemporary Conventional Banks in
Pakistan. The Objective of this research was to examine the financial performance of Islamic
banks and conventional banks of Pakistan. For this purpose, they used samples of five Islamic
banks and five conventional banks. Data was collected from the financial reports of the banks
for the period of 2005 to 2009. To measure the performances of banks, they used ratio
analysis approach and descriptive study. They found that Islamic banks were much superior
than the conventional banks. And they have the capacity to increase their market share by
generating new activities in Pakistan.
AbdusSamad (2004) Conducted research on the Performance of interest- free Islamic
Banks Vis-A-vis interest based Conventional Banks of Bahrain. The aim of this study was to
analyze the comparative performance of Bahrain’s Islamic banks and Conventional banks
during the Post-Gulf war period. For this purpose data was collected for the period of ten
years starting from 1991 to 2001. To measure the performance he used profitability ratio,
liquidity ratio, and credit risk. In the light of Ratio analysis he conclude that there is no major
difference in performances between Islamic banks and conventional banks with respect to
profitability and liquidity ratio. Islamic banks exposed less credit risk compared to the
HaseebShahid ,RamizurRehman, GhulamShabbir Khan Niazi and AwaisRaoof (2010)
Conducted research on Efficiencies Comparison of Islamic and Conventional Banks of
Pakistan.The objective of this study was to investigate the efficiency of Islamic banks and
conventional banks. For this purpose they took five Islamic banks and five conventional
banks samples for the period of 2005 to 2009. Data Envelopment Analysis (DEA) model was
used to measure the efficiency of both types of banks under the approach Constant Return to
Scale (CRS) and Variable Return to Scale (VRS). In the light of analysis they concluded that
technical efficiency of Conventional banks was much better than Islamic banks .The statistics
Show that there is no significant difference in mean efficiency of conventional and Islamic
RummanaZaheer and HafsaJamil (2016) conducted research on the Performance
Comparison Analysis of Islamic and Conventional. Banks – Case Study of Pakistan. For this
purpose, they collected data of five Islamic banks and five conventional banks for the period
of nine years starting from 2006 to 2014. To measure the performance ratio, analysis
technique was used. In the light of analysis, they concluded that conventional banks have
dominant position in banking sector and Islamic banks need to grow.
Muhammad ShehzadMoin (2013) conducted research on Financial Performances of
Islamic Banking and Conventional Banking in Pakistan: A Comparative Study .The aim of
this study was to examine and evaluate the financial performances of conventional and
Islamic banks in Pakistan. He compared the Meezan Bank Ltd. and five conventional banks
for the period of five years starting from 2003 to 2007. He collected data from the income
statement and balance sheet. He used ratio analysis to measure the financial performance. T
test and F test were used to determine the significant of performances of both banks. He
concluded that MBL is less profitable and less risky and less efficient than Conventional
Mona Esam Fayed (2013) conducted research on Comparative Performance Study of
Conventional and Islamic Banking in Egypt. The aim of this study was to examine, which one
of banking sector performs better. For this purpose, three Islamic banks and six conventional
banks were selected to make comparison for the period of three year starting from 2008 to
2010.Data was collected from financial statements of banks. Ratio Analysis technique was
used to gauge profitability liquidity and credit risk, and model Bank-O-metre was used to
gauge the solvency .He conclude that conventional banks perform better in term of
profitability, liquidity, credit risk and solvency.
AymanAbdal-Majeed Ahmad Al-smadi, FaizulHamdan and Mahmoud Khalid
Almsafir (2015) conducted research on Islamic banking Vs conventional banking, during the
Global financial Crises: Malaysia as a case, the objective of this research was to examine the
impact and performance of conventional and Islamic banking in Malaysia . For this purpose,
banks of Malaysia, Iran, Iraq, Turkey, UAE and Kuwait were used for the comparison on the
performance. They study the research articles from 1997 to 2011 on the performance. They
used financial ratio analysis to evaluate the performance of banks. They concluded that
Islamic banks perform better than conventional banks in term of profit, operation, efficiency,
liquidity and business growth.
Mukdad Ibrahim (2016) conducted research on A Comparative Study of Financial
Performance between Conventional and Islamic Banking in United Arab Emirates. The main
Objective of the study was to compare the financial performance of Islamic banks and
Conventional banks .To measure the financial performance and made a comparison between
Dubai Islamic bank and bank of Sharjah. For this purpose he used five years data starting
from 2002 to 2006. Financial ratio was used to measure the banks performances. The main
ratio was Liquidity, profitability, management capacity, Capital structure and share
performances.The descriptive measurements were used to measure the performance and the
stability-variability of these ratios. He concluded that there was no significant difference in
between the financial performance of both banks, but the banks in Sharjah have high degree
of liquidity, profitability and capital structure. Dubai Islamic bank was better in relation to
share indicators performance and in terms of overall stability.
MuhamadRidho Chandra Sena and TaufikFaturohman (2016) conducted research on
the profitability comparison between Islamic banks and conventional banks in Indonesia from
2004 to 2014. The main objective of this study was to make comparison between islamic
banks and conventional banks. For this purpose they collected data of all the banks of
Indonesia for the period of eleven years starting from 2004 to 2014. To analyse the data they
used financial ratios, Descriptive statistics and Mean Whitney test. In the light of analysis
they found that there was difference between Islamic banks and conventional banks in each
Sujan Chandra Paul1, Probir Kumar Bhowmik, Mohammad Rakibul Islam, Md. Abdul
Kaium and Abdullah Al MasudConducted research on Profitability and Liquidity of
Conventional Banking and Islamic Banking in Bangladesh. A Comparative Study. The main
objective of this study was to examine and evaluate the performance of Islamic banking and
conventional banking in term of profitability and liquidity for the period of 2008 to 2012.
They collected data from financial reports of five Islamic banks and five conventional banks
.The Sample was selected on the basis of their asset sizes. They used financial ratios to
measure the profitability and liquidity and T test and F test to determine the significance of
differential performance of both types of banks. They found that Islamic banks are less
profitable than Conventional banks but there was no significant difference in liquidity of both
types of banks.
Muhammad AzeemQureshi and MadeehaShaikhConducted research on Efficiency of
Islamic and Conventional Banks in Pakistan: A Non-parametric Approach. The main
objective of this study was analysing the comparative efficiency of banks in Pakistan. For this
purpose they used ratio analysis method and data Envelopment analysis method to compare
the efficiency of both types of banks For the period of six years starting from 2003 to 2008.
They found that Islamic banks were most cost efficient and less revenue efficient.
Chan KokThim, Yap VoonChoong, Yong Gun Fie, Lam WoonHar conducted research
on Assessing Financial Performance of Malaysian Islamic and Conventional Commercial
Banks, Using Financial Ratios. The objective was to assess the overall performance of Islamic
banks as well as conventional banks in Malaysia using financial ratios. For this purpose they
compared the five Islamic banks and five Conventional banks for the period of 2006 to 2010.
They collected data from journals and published reports.They used financial ratios to measure
performance in term of liquidity, profitability, risk and solvency and efficiency ratio. They
concluded that conventional banks were better financial ratio than Islamic banks in Malaysia
during the period of 2006-2010.
Muhammad Bilal and Sohail Abbas conducted research on Comparison of Islamic
banking and conventional banking: an empirical review. The aim of the research was to make
efficient comparison of Islamic banking and Conventional banking.For this purpose they used
stochastic Frontier approach and traditional financial approach. They found higher rate of
return for Islamic banking as compared to conventional banking.
Ishaq AB, Karim A, Ahmed S and Zaheer Aconducted research on evaluating
performances of commercial banks in Pakistan. An application of camel model. For this
purpose they used seven years data starting from 2007-2013. Data was collected from
articles, papers, the World Wide Web and pervious papers. CAMEL approach was used to
evaluate the execution of financial accuracy of conventional banks in Pakistan. They took
capital adequacy, asset quality, management efficiency, earning and liquidity as independent
variables and earnings per share is dependent variable. They concluded that total deposit to
equity, non-performing loan to gross advances, non-performing loan to equity. Admin
expenses to interest income ratio and gross advances to total deposits ratio was negatively
correlated with banks performance. The return on asset and return on equity positively
correlated to banks performance.
Muhammad FarhanAkhtar, Khizer Ali, ShamaSadaqatconducted research on Liquidity
Risk Management: A comparative study between Conventional and Islamic Banks of
Pakistan.The main objective of this study was to evaluate the liquidity risk management in
conventional and Isamic banks of Pakistan. For this purpose they used sample of six Islamic
banks and six conventional banks. Data was collected from annual reports of the banks for the
period of 2006 to 2009. They used liquidity risk as dependent variable and size of bank,
Return on asset, networking Capital, return on equity, and capital adequacy ratio as
independent variable. Descriptive statistics, correlation and regression analysis was used to
compare the effect of independent variable on the dependent variable. They concluded that
there was positive relationship of size of banks and networking capital to net assets with
liquidity risk in both models. In addition capital adequacy ratio in conventional banks and
return on asset in Islamic banks were found positive and significant.
NormaizatulAkmaSaidi, AnnuarMd Nassir, Mohamed HishamYahya and Amalina
Abdullah (2011) Conducted research on Islamic and Conventional banks: An empirical study
of liquidity risk. The aim of this study was to examine the liquidity risk for Islamic and
conventional banks in south Asia. For this purpose they obtained data of all Islamic and
conventional banks of four countries of south Asia for the period of Five years starting from
2010 to 2014. Data was collected from income statements and balance sheet. They used
liquidity ratio to measure the liquidity risk and descriptive statistics was used to compare the
liquidity risk between conventional banks and Islamic banks. They found that Islamic banks
exposed to higher liquidity risk than conventional banks.
BEN MBAREK Hassene and BEN MBAREK Kais (2016) conducted research on the
performance of islamic bank and Conventional banks in Malaysia considering crises period.
The aim of this study was to make comparison of efficiency of Islamic banks and
conventional banks. For this purpose they used sample of 34 banks in which seventeen was
Islamic banks and seventeen was conventional banks. They collected data from annual reports
for the period of fifteen years starting from 2000 to 2015. To evaluate and examine the
performance they used they used three financial ratios. Profitability ratio, efficiency ratio, and
performance ratio. They found that Islamic banks were more profitable than conventional
Youssef Latif, Ali Abbas, Muhammad NadeemAkram, ShahidManzoor and Saeed
Ahmad (2016) conducted research on performance comparison between Islamic and
Conventional banks of Pakistan. The aim of this study was to evaluate the comparison of
Islamic banks and conventional banks of Pakistan. For this purpose they used sample of 10
banks in which five were Islamic banks and five were Conventional banks. They collected
data from financial statements of banks for the period of five year starting from 2006 to 2010.
They used financial ratio analysis to measure the financial performance of banks. For
comparison they used trend analysis. They concluded that Islamic bankswere less risky more
solvent and efficient than conventional banks. Trend analysis balance sheet and income
statement of Islamic banks showed positive trend as compared to conventional banks.
Onakoya, AdegbemiBabatunde and Onakoya, AdekolaOlaitan (2013) Conducted
research on The Performance of Conventional and Islamic Banks in the United Kingdom: A
Comparative Analysis. The aim of this study was to evaluate performance efficiency of
Islamic bank and conventional banks in United Kingdom. For this purpose they selected top
four Islamic banks and five conventional banks. Secondary data was collected from financial
statements. They used financial ratio analysis technique to measure the performance. They
found that Islamic banks expose less risk more efficient and cost effective than conventional
banks because conventional banks depend upon external sources for funding.
AzamShafique, Muhammad AsimFaheem,Iqra Abdullah (2012) conducted research
on Impact of Global Financial Crises on the Islamic Banking System. The main objective of
this study was to examine which banking system performs better during the financial crises of
2008. For testing this view they used descriptive study. They concluded that Islamic banks
were also badly affected by financial Crises but their performance was better than Islamic
banks during global financial crises.
Mohamed H. Rashwan (2012) conducted research on How did listed Islamic and
Traditional Banks Performed: pre and post the 2008 financial crisis. The aim of this study to
examine and compare the performance of Islamic banks and conventional banks pre and post
the 2008 financial crises. he selected research period 2007 and 2008.He used these year as a
dependent variable. He applied MANOVA technique to analyse the financial secondary data.
He concluded that there was a significant difference between two sectors in 2007 and 2009
and there were no significant difference in 2008. An Islamic bank was better performed in
2007 than traditional banks. And traditional banks outperform in 2009.
Dr. Said Jaouadi, Rachida Ben Jazia and AzzaZiadi (2014) conducted research on
Examining the Efficiency and the Effectiveness of Islamic and Conventional Banking:
Evidence from Indonesia. The aim of this study was to identify the financial factor that affects
Islamic bank profitability and assess the efficiency and effectiveness of Islamic bank in
Indonesia. They used time series and OLS method to estimate the pattern. They used data for
research starting from March 2010 to July 2011. They concluded that Indonesian conventional
banks were not operating with efficiency and effectiveness as compared to Islamic banks of
On the basis of the above literature review, the study has following hypotheses:
H1: Islamic Banks are performing better than conventional Banks in Pakistan.
H0: Conventional Banks are performing better than Islamic Banks in Pakistan.
METHODOLOGY ; DATA
This chapter explain the framework of the research, sources and approaches of data collection,
techniques of data analysis, model description and description of variables.
All Islamic and conventional banks operating in Pakistan.
3.2 Sample Selection
All Islamic banks and conventional banks are selected except for few small or public
3.3 Data collection Method
Secondary data was collected from the annual reports of sampled banks which are obtained
from state bank website for the period 2007 – 2016.
Financial performance index for banks is calculated by following Model.
Where is prescribed for weight for bank for time T. , , , , and
are the CAMEL performance parameters for bank at time T.
After that banks are ranked according to FPI values and then banks progress is calculated by
It shows the progress of particular bank with respect to its base year. All CAMEL ratios are
averaged to get Component value and finally averaged all component value to get Composite
value of bank.
Component Value is calculated as
? ( ) ( )
Composite Value is calculated as
Here is Component value of each category in CMELS ratio. Is weight assigned to
individual ratio in each component of CAMEL.
R is Value of each ratio in CAMELS
LL Is Lower Limit (minimum Ratio in All banks)
UL is upper limit (maximum ratio in all banks)
All performance parameters are ranked according to prescribed weight
3.5 Data Analysis Technique
Data of banks is analyzed by applying CAMELS test and ranking techniques to
examine banks performance. After calculating the ratio, construct the financial performance
index by using CAMELS parameters. Each parameter is assigned a particular weight. Equal
weights are assigned to CAMELS parameters including asset quality, earning, Capital
adequacy and sensitivity to risk because three factor help in growth, efficiency and survival of
banks, lesser weight assigned to management and liquidity because high liquidity reduce bank
profitability of banks.
3.6 Variable Description
The purpose of this study is to examine the financial performance of Islamic banks
and conventional banks in Pakistan during the period 2007-2016. Therefore the variables are
divided into two categories dependent variables and independent variables.
By keeping in view the research question and objectives, it is decided that financial
performance index is dependent variable and Capital Adequacy, Asset Quality, Management,
Earning and liquidity are independent variables.
3.6.1 Dependent Variable
184.108.40.206 Financial Performance Index
Financial Performance index is used to measure the financial performance of any
3.6.2 Independent Variables
220.127.116.11 Capital Adequacy
Described that how banks can meet unexpected losses with their funds and Capital.
Bank can avoid Bankruptcy issue by having much capital.
18.104.22.168 Asset Quality
Described how bank can use their advances to generate income.
This parameter is used to examine the management and efficiency of banks. How bank
can maximize profit and business activities
Describe how banks earn and sustain their earning in the future. It show the growth of
bank in term of profit.
Is more important parameter of banks. It indicates how banks can meet their
EMPIRICAL RESULTS AND ANALYSIS
This Chapter of the study, I have discussed the analysis and interpretation of data used in this
study. There are two main part of this section – the first part covers the ranking of banks on
the basis of financial performance index (FPI) and second part covers the banks progress
ratios. CAMEL model is used in this study. The data used in this study is secondary data
collected from website of State bank of Pakistan. The data was collected for these variables:
Capital Adequacy, Asset quality, Management, Earning and liquidity. The period covered was
from 2007 to 2016.
4.1 Ranking of banks on the basis of FPI
Banks were ranked according to the composite value of Bank. On the basis of this
ranking bank al Habib is ranked at first position in 2007, 2009 and 2010. Muslim Commercial
Bank is ranked at top position from 2010 to 2011, after that its performance decrease in 2012.
But it continuously improves performance and remained at top position again from 2013 to
On the other hand Habib bank limited, united bank limited, standard chartered and National
bank remain at second and third position in 2012 to 2016.
Islamic banks are lower position in term of performance than conventional banks during
sample time span. Meezan bank and Dubai Islamic Bank remain at sixth and seven positions
during 2008 to 2016. Other Islamic banks are also remained in bottom.
4.1.1 Construction of Composite FPI
Composite FPI shows the average performance of all banks from 2007 to 2016. Composite
FPI is calculated by average of all year’s value.
According to the ranking of banks on the basis of composite FPI, MCB was at 1st position,
Fysal bank is ranked at 2nd position, silk bank at 3rd position, bank AL habib at the 4th ranked,
HBL is ranked at 5th position and UBL is ranked at 6th position.
On the other hand, Islamic Banks such as Meezan Bank, Dubai Islamic bank, Albaraka bank
stood at 13th, 14th and 8th position, respectively. So we can say that Conventional banks are
performing well in all CAMEL parameters. Such as Capital Adequacy, Asset Quality,
Management, Earning and Liquidity.
Table 22.214.171.124: Composite FPI shows the performance of all banks during the 2007-2016
Sr# Banks 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
FPI R Type
1 MCB 0.22 0.21 0.21 0.20 0.20 0.20 0.19 0.19 2.67 0.18 0.45 1 CB
2 Faysal Bank 0.18 0.18 0.17 0.16 0.16 0.17 2.11 0.17 0.17 0.17 0.36 2 CB
3 Silk bank -0.10 0.10 1.80 0.12 0.15 0.15 0.15 0.17 0.17 0.16 0.29 3 CB
Habib 0.20 0.19 0.19 0.19 0.20 0.19 0.19 0.20 0.23 0.37 0.21 4 CB
5 HBL 0.19 0.19 0.19 0.19 0.19 0.18 0.18 0.18 0.17 0.18 0.19 5 CB
6 UBL 0.21 0.19 0.19 0.19 0.19 0.19 0.19 0.18 0.18 0.18 0.19 6 CB
7 NBP 0.21 0.21 0.19 0.18 0.18 0.18 0.17 0.18 0.18 0.18 0.19 7 CB
Bank 0.19 0.18 0.18 0.16 0.19 0.17 0.10 0.19 0.11 0.28 0.18 8 IB
9 Allied bank 0.19 0.18 0.19 0.19 0.19 0.18 0.18 0.17 0.17 0.17 0.18 9 CB
Charted 0.17 0.19 0.18 0.18 0.19 0.19 0.19 0.19 0.18 0.18 0.18 10 CB
Metropolitan 0.19 0.19 0.18 0.17 0.18 0.17 0.17 0.18 0.20 0.22 0.18 11 CB
Bank 0.13 0.15 0.15 0.17 0.18 0.19 0.19 0.19 0.20 0.22 0.18 12 CB
Bank 0.17 0.16 0.17 0.18 0.19 0.19 0.17 0.17 0.17 0.20 0.18 13 CB
14 DIB 0.15 0.15 0.15 0.15 0.16 0.16 0.15 0.16 0.18 0.40 0.18 14 IB
15 Askari bank 0.19 0.17 0.18 0.17 0.17 0.16 0.12 0.18 0.17 0.18 0.17 15 IB
16 NIB 0.22 0.16 0.20 0.08 0.21 0.22 0.18 0.17 0.16 0.15 0.17 16 CB
Falah 0.18 0.17 0.15 0.16 0.18 0.17 0.17 0.16 0.15 0.15 0.16 17 CB
18 JS bank 0.14 0.15 0.14 0.14 0.17 0.16 0.16 0.16 0.17 0.18 0.16 18 IB
19 Sonari Bank 0.17 0.17 0.15 0.15 0.16 0.17 0.16 0.16 0.16 0.17 0.16 19 CB
Bank 0.17 0.16 0.09 0.07 0.15 0.08 0.03 0.22 0.23 0.16 0.14 20 CB
4.2 Bank progress ratio:
Progress of the bank is calculated through bank progress ratio. It show performance of
one bank in 2016 with respect to the base year 2007.Progress ratio indicate that Conventional
banks performed best in 2016, comparing their performance to the base year 2007.
Among the conventional banks, the bank Al Habib, MCB, HBL, UBL, Askari bank, Habib
Metropolitan, Fysal bank, NBP and summit bank performing better than other remaing
Conventional bank . Silk bank Performance remained medium and SAMBA bank progress is
On the other hand, Islamic bank are also performing well in 2016. Meezan bank,
Dubai Islamic bank and bank Al Falah showed good progress. Whereas AL Baraka Bank
showed average performance.
Table 4.2.1: Progress of Banks
SR.# BankS Progress Ratio Remarks
1 Bank Al Habib 1.0422 VG
2 MCB 0.9265 VG
3 Bank Al Falah 1.1253 VG
4 HBL 1.0462 VG
5 UBL 1.0498 VG
6 Allied bank 0.952 VG
7 Standerd Charted 0.8748 VG
8 Askari bank 1.0368 VG
9 JS bank 0.9732 VG
10 Silk bank 0.4888 M
11 Al Baraka Bank 0.0496 AVG
12 NBP 0.9985 VG
13 Habib Metropolitan 1.2620 VG
14 Faysal Bank 1.0864 VG
15 Sonari Bank 1.1372 VG
16 SAMBA Bank 0.5252 AVG
17 Meezan Bank 0.8716 VG
18 DIB 0.9403 VG
19 NIB 1.7504 VG
20 Summit Bank 1.8300 VG
Note: VG= Very Good, AVG= Average, M= Medium
Table 4.2.2: Degree of Banks’ Progress
Definition of banks’ progress Category
Progress ratio less than m-0.842 s Very bad progress
Progress ratio between m-0.842 S and m –
Progress ratio between m-0.253 s and m +
Progress ratio between m+0.253 s and m
Progress Ratio greater than m +0.842 Very good progress
Note: S – standard Deviation , m – Mean of
The performance of Islamic and conventional banks was compared by using CAMEL
model. Performance was evaluating such as Capital adequacy, Asset quality, Management
and Liquidity. In this study FPI was constructed to measure the performance of banks that
was based on CAMEL model. CAMEL Model as a tool is very effective and accurate to be
used as performance evaluate in banking Sector. It suggest to measure to improve the
weakness of banks.
5.2 Key Findings
In the ranking conventional banks remained top of the list. Top Five performing banks
in all parameters of CAMEL are MCB, Faysal bank, Bank Al Habib, UBL and HBL. The
worst three performers are summit bank, Silk bank and JS bank.
Whereas, most of the Islamic banks stood after the 10th rank. A reason could be shorter age
and experience because they start their business in Pakistan from 2003.
Bank progress ratio shows the performance one bank in 2016 with respect to base year 2007.
Progress ratio indicates that Conventional banks are performing better in 2016 as compared to
the base year 2007. On the other hand, Islamic bank also performed well in 2016.
In the light of empirical result, it is found that during the year 2007-2016 Conventional banks
performed better than Islamic bank in term of financial performance index, whereas Islamic
banks and Conventional banks both are performed well in term of progress ratio.
5.3 Limitation & Future Direction
This Study is limited to the banks operating in Pakistan only for the time period of 2007-
2016. The finding of this study cannot be generalized for all Islamic and Conventional banks
outside the Pakistan. The intent of this study is restricted to the capital adequacy, asset
quality, management, earnings and Liquidity. In future, the research can be done on the
comparative analysis of Islamic and Conventional banks by incorporating the market risk.
Further researcher can also continue research on this issue from 2016.
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Table A.1: Overview of weight assigned to parameters
Composite Weight Parameters
1. Capital adequacy
2. Leverage ratio
3. Coverage Ratio
loan to gross
2. Provisions against
NPLs to gross
2. Asset Utilization
3. Earning Asset to
1. Return on Asset
2. Return on equity
3. Spread to total
1. Liquid asset to
2. investment to total
3. Net loan to total
Note: Weight is assigned according to the gain earned by bank and importance of the
parameters in CAMEL Model by following the paper of Dr.Abdul Rasheed (2012).
Table A.2: Overview of performance parameters description
Performance Parameters Description Parameter Characteristics
Capital Adequacy Capital adequacy describes
that how bank can meet
unexpected loss with their
funds and capital.
Higher value Shows the
better financial health and
depicts less chance of losses.
1. Capital adequacy
2. Leverage ratio
3. Coverage Ratio
Asset Quality Asset quality describes how a
bank can use their advances
in generating income.
Higher value shows the banks
have high performing assets.
1. Non-performing loan
to gross advances
2. Provisions against
NPLs to gross
Management This parameter is used to
examine the management and
efficiency of banks. It
indicates how banks
maximize their profit and
High ratio shows the
effectiveness of banks. It
depicts the ability of banks to
convert its deposits on high
1. Total advances/Total
2. Asset Utilization
3. Earning Asset to Total
Earnings Earning describes how banks
earn and sustain their earning
in the future. It also shows
the growth of bank in term of
Higher value shows that bank
has earned high value on
assets and bank is efficient in
generating income on
1. Return on Asset
2. Return on equity
3. Spread to total Asset
Liquidity Liquidity is most important
parameters for any bank. It
indicates how banks meet its
obligation. Among all asset,
cash and investment are most
liquid assets. Higher value
depict the banks have more
1. Liquid asset to total
2. investment to total
3. Net loan to total asset
TableA.3: Ranking of banks from 2007 to 2016
# Banks 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007
1 MCB 1 1 1 1 2 1 1 2 1 4
2 Faysal Bank 5 3 5 5 6 5 3 4 5 6
3 Silk bank 10 7 8 8 7 7 5 4 5 7
4 Bank Al Habib 3 2 3 2 2 3 1 1 2 1
5 HBL 4 2 3 2 3 4 2 3 5 5
6 UBL 2 2 3 2 3 3 1 3 4 5
7 NBP 2 1 3 3 4 4 3 3 4 5
Bank 4 3 4 5 3 5 7 2 8 2
9 Allied bank 4 3 3 2 3 4 2 4 5 6
Charted 6 2 4 3 3 3 1 2 4 4
Metropolitan 4 2 4 4 4 5 3 3 3 3
12 SAMBA Bank 9 6 6 4 4 3 1 2 3 3
13 Meezan Bank 6 5 5 3 3 3 3 4 5 4
14 DIB 7 6 6 6 6 6 5 5 4 5
15 Askari bank 4 4 4 4 5 6 6 3 5 5
16 NIB 1 5 2 9 1 2 2 4 6 8
17 Bank Al Falah 5 4 6 5 4 5 3 5 7 8
18 JS bank 7 6 7 7 5 6 4 5 5 5
19 Sonari Bank 6 4 6 6 6 5 4 5 6 6
20 Summit Bank 6 5 9 10 7 8 8 6 2 7
FPI for all banks for the period 2007-2016
Figure 1 : FPI for 2016
Figure 2: FPI for 2015
Bank Al Habib
Al Baraka Bank
Standerd ChartedHabib Metropolitan
SAMBA BankMeezan Bank
Bank Al Falah
Sonari BankSummit Bank
Figure 3: FPI for 2014
Figure 4: FPI for 2013
Figure 5: FPI for 2012
Figure 6: FPI for 2011
Figure 7: FPI for 2010
Figure 8: FPI for 2009
Figure 9: FPI for 2008
Figure 10: FPI for 2007
Figure 11: Progress of banks
Figure 12: Composite FPI
Bank Al Habib
Bank Al Falah
JS bankSilk bank
Al Baraka Bank
Faysal BankSonari BankSAMBA BankMeezan Bank