A comparison of islamic and conventional banking system

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A Comparison of Islamic and Conventional Banking system

Asset liability managementSources and uses of fundsSimilarities & dissimilarities

Qazi waqas, Zulqarnain , Nouman

2Qazi waqas, Zulqarnain , Nouman

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GROUP # 7

PIONEER BATCHRCIB MBA (IBF)

RIPHAH INTERNATIONAL UNIVERSITY

QAZI MUHAMMAD WAQASZULQARNAIN HAIDERSYED NOUMAN ATHER


Qazi waqas, Zulqarnain , Nouman 4

Outlines:

• Introduction of this Project• Objective of the Project• Companies selected for study• Faysal Bank• MEEZAN BANK LTD• Conceptual Framework for Islamic Asset Liability

Management Deposits• Uses of funds• Similarities & dissimilarities


• “We have created the night as covering and we have created the day for the economic activities.”

Holy Quran:


“Every system can prevail in this world but not the one which is

unjust.”

Hazrat Umar R.A.”, said:


Introduction of this Project

• In this Project our main focus on three main things regarding Islamic Banking system.

• We will discuss the “Comparison of Conventional & Islamic Banking Systems“

• According to these things:• Asset Liability Management,• Sources & Uses of Funds, • Similarities & Dissimilarities


Objective of the Project

• The main objective of our project is to clear the basic differences between Islamic and conventional system

• We will try to discuss the real face of both systems in depth.

• That’s why our discussion will around these things:

– How Islamic Banks manage their assets and liabilities– what is the main sources and uses of funds– what are the main and core similarities & dissimilarities between

Islamic bank and conventional bank.


Companies selected for study

• We selected two banks first is Faysal banks taken as the conventional banks representative and

• Second one is Meezan bank as representative of Islamic banks,


Faysal Bank

• Faysal Bank Limited was incorporated in Pakistan on October 3, 1994, as a public limited company under the Companies Ordinance, 1984.

• Currently, the Bank's shares are listed on the Karachi, Lahore and Islamabad Stock Exchanges

• Faysal Bank is engaged in Commercial, Consumer, Corporate and Islamic Banking activities


Faysal Bank cont…

• The bank is principally engaged in providing consumer, corporate and investment banking services to its customers.

• The bank offers a wide range of consumer banking products and services which include deposit accounts, car loans, home loans and other consumer loans.

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Faysal Bank cont…

• It also provides treasury and capital market services and cash management services to its customers.

• Balance Sheet of Bank

Assets LiabilitiesLoans and advances to customers Customers’ deposits

Cash and cash balances with other banks Due to banks and other financial institutions

Investments in associates, subsidiaries and joint ventures Other liabilities

Financial assets held for trading Sundry creditorsCash and cash balances with the central bank Equity and reserves


MEEZAN BANK LTD

• MEEZAN was established as an Islamic Investment Bank in 1997 as “AL MEEZAN INVESTMENT BANK LTD”.

• First Islamic Commercial Bank’s license was awarded to Al Meezan Investment Bank in year 2002,

• They bought the local operations of “Socite General” (French Bank) 03 branches


MEEZAN BANK LTD cont…

• In 2009, Branch network of six dedicated Islamic banks increases to 480 branches (including sub-branches)

• Meezan Bank having a 42% share of the Islamic Banking branch network in the country .

• 201branches in 54 cities across the country.

• Over 5.5% of the total Banking industry.

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PRINCIPLES BASIS OF ISLAMIC FINANCE

• Prohibition of RIBA• Alkharaj-o-bildhaman (entitlement to profit is associated

with corresponding risk)-Risk Sharing, i.e. No Risk, No Gain.

• Prohibition of sale of goods before acquiring ownership• Prohibition of sale of food stuff before possession• Prohibition of debt for debt• Avoidance of Gharar (uncertainty)• Time value measured only through Price or Rent.• Debt contracts can be made / traded but without discount.• Risk can be distributed through forward Trading /

Contracts by way of Salam & Istisn’a.Qazi waqas, Zulqarnain , Nouman


Asset Liability Management

• Assets liability management is very important phenomena in banks earning strategy even in Islamic banking system, all the investments contributions to this effects to be used even on and off-balance sheet components in ALM. The risk taking is the key determinant for the banks either conventional or Islamic to portfolio or ALM.

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BALANCE SHEET STRUCTURE OF ISLAMIC BANK.



Objectives of ALM To manage the portfolio in a manner consistent with the

banks investment policy.

To obtain the desired earning while holding risk at acceptable levels.

To maintain adequate liquidity at a cost consistent with earnings goals.

On and Off-balance sheet investments are considered in ALM.


• Matching Techniques.

• Swap Techniques.

• Futures as a Hedging Technique.

• Options as Hedging Techniques.

• Effective Portfolio Management.

Techniques of ALM.


• ALM Information Systems.– MIS– Information availability– Accuracy– Adequacy– Expediency

• ALM Organization.– Structure and responsibilities– Level of top management involvement

• ALM Process.– Risk Parameters– Risk Identification– Risk Measurement– Risk Management

ALM - Pillars

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Current Ratio:

• The current ratio highlights the firm ability to cover short term liabilities with its current assets.

• Current Ratio = Current Assets / Current Liabilities

• Interpretation:• The current ratio of Faysal bank

& Meezan Bank for the year 2007, 2008 & 2009 is, 2.36, 2.06 & 1.64, 1.79, 1.61 & 1.56 respectively, compared to standard ratio 2:1 this of Meezan Bank ratio is then

Faysal Bank

Current Ratio

2.36

2.06

1.641.79

1.61 1.56

0.00

0.50

1.00

1.50

2.00

2.50

2007 2008 2009

Rat

io

Faysal Bank

Mezaan Bank

Particulars

Faysal Bank Meezan Bank

2007 2008 2009 2007 2008 2009

Current Assets

138,762,462

135,594,508

176,797,878

66,145,596

83,395,555

121,561,187

Current Liabilities

58,877,320

65,763,583

108,009,079

36,967,002

51,844,228

77,699,058

Current Ratio 2.36 2.06 1.64 1.79 1.61 1.56


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Sales to Working Capital = Sales / Working Capital

• In this ratio we compare the working capital or net current assets with sales which are part of the revenue.

• Interpretation:• The average turnover in working

capital of Faysal Bank is 19% & Meezan Bank have 20% this shows the profitability of working capital of Meezan Bank is slightly high then Faysal Bank.

Sales To Working Capital Ratio

0.15

0.19

0.25

0.16

0.22 0.23

0.00

0.05

0.10

0.15

0.20

0.25

0.30

2007 2008 2009

Ra

tio Faysal Bank

Mezaan Bank

Particulars


2007 2008 2009 2007 2008 2009

Sales 11,610,781

13,404,132

16,957,875

4,573,752

6,803,213

10,102,060

Working Capital

79,885,142

69,830,925

68,788,799

29,178,594

31,551,327

43,862,129

Sales To Working Capital 0.15 0.19 0.25 0.16 0.22 0.23


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Working Capital = Current Assets – Current Liabilities

• Arithmetically it is the difference of Current Assets

and Current Liabilities. • Interpretation:• The working capital ratio of

Faysal Bank limited is higher which indicates that Faysal bank has have sufficient resources to meets its current obligations as compare to

Meezan Bank Limited.

Working Capital Ratio

0.00

20000000.00

40000000.00

60000000.00

80000000.00

100000000.00

2007 2008 2009

Rat

io

Faysal Bank

Mezaan Bank

Particulars


2007 2008 2009 2007 2008 2009

Current Assets

138,762,462

135,594,508

176,797,878

66,145,596

83,395,555

121,561,187

Current Liabilities

58,877,320

65,763,583

108,009,079

36,967,002

51,844,228

77,699,058

Working Capital

79885142

69830925

68788799

29178594

31551327

43862129


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Balance Sheet Meezan Bank Limited

Horizontal Analysis

2007 2008 2009 2007 2008 2009

ASSETS Rs.In ,000 Rs.In ,000

Cash and balances with treasury banks

5,644,028

5,763,710

8,387,432

100

102.12

148.61

Balances with other banks 3,729,549

1,344,974

5,260,467

100

36.06

141.05

Due from financial institutions

8,850,000

18,108,000

34,499,500

100

204.61

389.82

Investments 10,535,186

14,286,949

23,290,309

100

135.61

221.07

Financings 34,576,339

39,768,481

44,188,066

100

115.02

127.80

Operating fixed assets 1,032,963

1,880,515

2,416,375

100

182.05

233.93

Deferred tax asset -

-

204,172

- - #DIV/0!

Other assets 2,810,494

4,123,441

5,935,413

100

146.72

211.19

67,178,559

85,276,070

124,181,734

100

126.94

184.85

LIABILITIES

Bills payable 1,192,160

1,057,017

1,249,210

100

88.66

104.79

Due to financial institutions 2,415,606

4,008,496

8,468,425

100

165.94

350.57

Deposits and other accounts

54,582,353

70,233,875

100,333,051

100

128.68

183.82

Sub-ordinate loan -

-

-

- - -

Liabilities against assets subject to finance leases

-

-

-

- - -

Deferred tax liabilities 430,377

453,038

-

100

105.27 -

Other liabilities 2,851,407

3,548,666

4,946,589

100

124.45

173.48

61,471,903

79,301,092

114,997,275

100

129.00

187.07

NET ASSETS 5,706,656

5,974,978

9,184,459

100

104.70

160.94



REPRESENTED BY

Share capital 3,779,897

4,925,961

6,650,048

100

130.32

175.93

Reserves 720,785

845,022

1,050,092

100

117.24

145.69

Unappropriated profit

1,219,228

570,114

1,390,395

100

46.76

114.04

5,719,910

6,341,097

9,090,535

100

110.86

158.93

Deficit on revaluation of investments

(13,254)

(366,119)

93,924

100

2,762.33

(708.65)

5,706,656

5,974,978

9,184,459

100

104.70

160.94

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Balance Sheet Faysal Bank Limited Horizontal Analysis

2007 2008 2009 2007 2008 2009

ASSETS Rs.In ,000

Cash and balances with treasury banks 6,872,032 8,927,524 8,427,202 100 129.91 122.63

Balances with other banks 3,708,451 876,780 508,795 100 23.64 13.72

Lending's to financial institutions 7,078,102 2,861,401 15,017,826 100 40.43 212.17

Investments 31,553,108 30,186,168 56,531,338 100 95.67 179.16

Advances 87,346,401 89,758,789 91,346,001 100 102.76 104.58

Operating fixed assets 2,514,959 2,646,978 2,787,617 100 105.25 110.84

Deferred tax assets - net - - 1,279,918 - - 100.00

Other assets 2,204,368 2,983,846 4,966,716 100 135.36 225.31

141,277,421 138,241,486 180,865,413 100 97.85 128.02

LIABILITIES

Bills payable 2,406,927 1,536,517 1,465,451 100 63.84 60.88

Borrowings from financial institutions 9,995,855 13,027,468 34,985,766 100 130.33 350.00

Deposits and other accounts 102,067,422 102,776,793 123,655,188 100 100.70 121.15

Sub-ordinated loans 1,000,000 999,600 999,200 100 99.96 99.92

Liabilities against assets subject to finance lease 7,827 4,103 - 100 52.42 -

Deferred tax liabilities - net 2,691,466 2,483,355 - 100 92.27 -

Other liabilities 6,951,421 6,641,542 6,977,069 100 95.54 100.37

125,120,918 127,469,378 168,082,674 100 101.88 134.34



NET ASSETS

16,156,503

10,772,108

12,782,739

100

66.67

79.12

REPRESENTED BY

Share capital 5,296,445

5,296,445

6,090,911

100

100.00

115.00

Reserves 3,567,033

3,790,023

4,030,056

100

106.25

112.98

Unappropriated profit

1,481,668

1,049,519

1,215,179

100

70.83

82.01

10,345,146

10,135,987

11,336,146

100

97.98

109.58

Surplus on revaluation of assets

5,811,357

636,121

1,446,593

100

10.95

24.89

16,156,503

10,772,108

12,782,739

100

66.67

79.12


Conclusion/Findings• Liquidity position of Faysal Bank Limited is higher then

Meezan Bank Limited this indicates that Meezan Bank Limited has higher leverage. Both financial institutes should improve their current ratio & working capital position in financial year 2011. The analysis shows that its lower down gradually.

• Net profit margin of Meezan Bank Limited is higher then

Faysal Bank Limited. • Gross profit margin of Meezan Bank Limited is higher then

Faysal Bank Limited so we would like to suggest Faysal Bank should improve its Gross Profit margin to meet the expenses efficiently and set a sight profit for shares holders.

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Conclusion/Findings

The Operating income margin of Faysal Bank Limited is higher then Meezan Bank Limited which indicates that Faysal Bank Limited generates higher income by its own operation as compare to Meezan Bank Limited.

The Long Term debt to long term liabilities ratio of Meezan Bank Limited is higher then Faysal Bank Limited because Faysal bank limited employed its funds in short term activities more then Meezan Bank Limited

Meezan Bank Limited has a good market perception due to continuous declaration of dividends but on the other hand Faysal Bank limited did not declared dividend in financial year 2009.

The three years average price / earning ratio of Meezan Bank Limited 13.97 while the Faysal Bank Limited has 7.78 % this indicates the Meezan Bank Limited has much potential in stock as compare to Faysal Bank Limited.

The operating cash flow to total debt ratio of Meezan Bank Limited is little higher then Faysal Bank Limited



Recommendations With the assistance analyses of financial reports we would like to

recommend both financial institutes should over come their pit falls, flaws and deficiencies. Meezan Bank limited should improve its current ratio. The Meezan Bank Limited Net Profit Margin is higher then Faysal Bank Limited. The Faysal Bank Limited should improve its profitability ratio by efficiently use its resources. Similarly the price earning ratio & dividend payout ratio of Meezan Bank Limited is higher then Faysal Bank this highlights good return on investment as well good market perception. Faysal should also pay dividend consistently through generate the profit by improving its operation. We would also like to recommend that financial institute should much promote the business activities and provide financial assistance to industry which will be reduce the un employment, inflation and increase productivity of Pakistan


SIMILARITIES & DISSIMILARITIES

• There are two major difference between Islamic Banking and Conventional Banking:

• Conventional banking practices are concerned with "elimination of risk" where as Islamic banks "bear the risk" when involve in any transaction.

• When Conventional banks involve in transaction with consumer they do not take the liability only get the benefit from consumer in form of interest whereas Islamic banks bear all the liability when involve in transaction with consumer. Getting out any benefit without bearing its liability is declared Haram in Islam.

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Differences between Islamic and Banking System Conventional System Islamic System

Money is a product besides medium of exchange and store of value.

Real Asset is a product. Money is just a medium of exchange.

Time value is the basis for charging interest on capital. Profit on exchange of goods & services is the basis for earning profit.

Interest is charged even in case, the organization suffers losses. Thus no concept of sharing loss.

Loss is shared when the organization suffers loss.

While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods & services is made.

The execution of agreements for the exchange of goods & services is must, while disbursing funds under Murabaha, Salam & Istisna contracts.

Due to non existence of goods & services behind the money while disbursing funds, the expansion of money takes place, which creates inflation.

Due to existence of goods & services no expansion of money takes place and thus no inflation is created.

Due to inflation the entrepreneur increases prices of his goods & services, due to incorporating inflationary effect into cost of product.

Due to control over inflation, no extra price is charged by the entrepreneur.

Bridge financing and long term loans lending is not made on the basis of existence of capital goods. Rather, they are disbursed on the basis of Windo Dressed project feasibility and credibility of the entrepreneur.

Musharakah & Diminishing Musharakah agreements are made after making sure the existence of capital good before disbursing funds for a capital project.


Education

A comparison of islamic and conventional banking system