COMPARATIVE PERFORMANCE ANALYSIS BANKS AND CONVENTIONAL BANKS:

OF

ISLAMIC

Conventional Banks

Islamic Banks

1. The functions and operating modes 1. The functions and operating modes of of conventional banks are based on fully Islamic banks are based on the principles of manmade principles. Islamic Shariah. 2. The investor is assured predetermined rate of interest. of a 2. In contrast, it promotes risk sharing between provider of capital (investor) and the user of funds (entrepreneur).

3. It aims at maximizing profit without 3. It also aims at maximizing profit but any restriction. subject to Shariah restrictions. 4. It does not deal with Zakat. 4. In the modern Islamic banking system, it has become one of the service-oriented functions of the Islamic banks to be a Zakat Collection Centre and they also pay out their Zakat.

5. Lending money and getting it back 5. Participation in partnership business is the with compounding interest is the fundamental function of the Islamic banks. So fundamental function of the we have to understand our customers conventional banks. business very well. 6. It can charge additional money 6. The Islamic banks have no provision to (penalty and compounded interest) in charge any extra money from the defaulters. case of defaulters. Only small amount of compensation and these proceeds is given to charity. Rebates are give for early settlement at the Banks discretion. 7. Very often it results in the banks 7. It gives due importance to the public own interest becoming prominent. It interest. Its ultimate aim is to ensure growth makes no effort to ensure growth with with equity. equity. 8. For interest-based commercial banks, 8. For the Islamic banks, it must be based on a borrowing from the money market is Shariah approved underlying transaction. relatively easier.

9. Since income from the advances is 9. Since it shares profit and loss, the Islamic fixed, it gives little importance to banks pay greater attention to developing developing expertise in project project appraisal and evaluations. appraisal and evaluations. 10. The conventional banks give greater 10. The Islamic banks, on the other hand, give emphasis on credit-worthiness of the greater emphasis on the viability of the clients. projects. 11. The status of a conventional bank, 11. The status of Islamic bank in relation to its in relation to its clients, is that of clients is that of partners, investors and creditor and debtors. trader, buyer and seller. 12. A conventional bank guarantee all its deposits. has to 12. Islamic bank can only guarantee deposits for deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds, however if the account is based on the mudarabah concept, client have to share in a loss position..

EXAMPLE OF ISLAMIC BANKS IS MEEZAN BANK AND CONVENTIONAL BANKS IS HABIB BANK LIMITED: Meezan Bank Limited

Public Type Industry Founded Headquarters Products Revenue KSE: MEBL LSE: Islamic Banking Al-Meezan Investment Bank Limited Karachi, Pakistan

Limited

Murabaha, Ijarah, Diminishing Musharakah, ATM/Debit Card, Savings, Consumer Banking etc. 2009 PKR 5.1 billion

Net income Employees Website

PKR 1,025 Million - 2009 3,669 - 2009 www.meezanbank.com

Meezan Bank Limited is a publicly listed company offering Islamic Banking in Pakistan. It was first incorporated on January 27, 1997, starting operations as an Islamic investment bank in August of that year. In January 2002, Meezan Bank was granted Pakistan's first full-fledged commercial banking license dedicated to Islamic Banking, by the State Bank of Pakistan. The Banks main shareholders are financial institutions, including the Pak Kuwait Investment Company, the Islamic Development Bank of Jeddah, and the Shamil Bank of Bahrain.

History:
During 1997, Al-Meezan Investment Bank is established as the first Islamic bank of Pakistan. Mr. Irfan Siddiqui appointed as first and founding Chief Executive Officer. During 2002, the Shariah Supervisory Board is established at Al-Meezan Investment Bank led by Justice (Retd.) Muhammad Taqi Usmani as chairman. State Bank sets criteria for establishment of Islamic commercial banks in private sector and subsidiaries and standalone branches by existing commercial banks to conduct Islamic banking in the country. During 2003, A Musharaka-based Export Refinance Scheme has been designed by the State Bank in coordination with Meezan Bank Limited, in order to provide export finance to eligible exporters on the basis of Islamic modes of financing. Efforts are underway to develop Islamic money market instruments like Ijarah Sukuk to facilitate the banks in respect of liquidity and SLR management. Pakistans first Shariah-compliant Mortgage facility is launched by Meezan Bank. Approved by the Shariah Supervisory Board, the product enables home purchase, home construction, renovation, as well as replacement of any existing mortgage. Al Meezan Investment Management Limited (AMIM), a group company of Meezan Bank, introduces Meezan Islamic Fund (MIF). MIF is an open-end mutual fund that is Shariah compliant. Meezan Banks asset management arm, Al Meezan Investment Management Limited (AMIM), launches the Meezan Balance Fund (MBF). In March 2005, a dedicated Product Development & Shariah Compliance (PDSC) department was formally setup. The role of this research department is centralization of Product development activities, new product research, Islamic banking training and Shariah Compliance functions. The department works under the guidance & supervision of banks Shariah Advisor Dr. Muhammad Imran Usmani and the Shariah Supervisory Board of the

Bank. PDSC now plays a central role at the bank by actively supporting new product development activities, refining existing products menu, preparing product policies & standardize agreements, imparting Islamic banking knowledge at various levels to new & existing staff members, corporate customers and general public, coordinating with banks Shariah Board, and conducting regular Shariah audits & reviews. During 2005, Meezan Bank launches the Meezan Islamic Institution Deposit Account (MIIDA), a product tailored for Islamic Financial Institutions (IFIs). The facility is the first of its kind in Pakistan, whereby Islamic Banks now have the opportunity to manage excess liquidity by maintaining a checking account with Meezan Bank specifically designed for this purpose. Meezan Bank becomes the first customer of Islamic Insurance (Takaful) by signing the first Memorandum of Understanding MoU with Pak Kuwait Takaful Company Limited (PKTCL).

Functions:
Service:

Personal Banking and Finance Corporate Finance Commercial Finance Syndicated & Structured finance Project Financing Islamic Financial Advisory Services Treasury Car Ijarah - Car Financing Home Financing Asset Management

Product Development & Shariah Compliance (PDSC) Department:

Product Development & Shariah Compliance (PDSC) is one of the important departments of the bank that reflects strong commitment of the towards Islamic banking and research. PDSC works directly under the supervision of banks Shariah Advisor Dr. Muhammad Imran Usmani and is managed by Mr. Ahmed Ali Siddiqui. The function is vital in ensuring strict Shariah Compliance in all area of banks operations. PDSC's role is manifold and comprises facilitating new Product Development activities, refining existing products & procedures, providing Islamic Banking training to new recruits and existing staff members, conducting regular Shariah Audit & reviews of branches & departments, coordinating with Banks Shariah Board and providing Islamic Banking Advisory Services to both local and foreign financial institutions.

In the area of Product Development, the bank has initiated several new structured Islamic Sukuk transaction, developed a new investment avenue of local Commodity Murabaha to manage excess liquidity of the bank is a Shariah compliant manner. The bank is also conducting research on several new Islamic products in the areas of consumer, corporate & retail banking level. Meezan Bank has also provided Product Development Islamic Financial Advisory services to different financial institutions interested in offering Islamic Banking products & services around the world via its research wing. The bank has a dedicated Islamic Financial Advisory Services function with the objective to help financial institutions develop Islamic Banking Products by sharing the accumulated experience, research & success stories. The bank has successfully provided Islamic financial advisory to local and International clients.The Islamic financial advisory function of Meezan Bank works with a diverse range of clients, including Governmental bodies and entities that regulate the banking and investment industry,Stock Exchanges,Islamic Insurance Companies (Takaful), and Islamic Reinsurance Companies,Islamic Windows in Traditional banks,Traditional Banks and Insurance Companies aiming to convert to Islamic modes,Traditional and Islamic Investment Companies, Traditional and Islamic Hire Purchase/Rental Companies,Traditional and Islamic Real Estate Companies,Islamic Investment Funds,Entities issuing Islamic Bonds (Sukuk),and Funds and Wealth Management Companies.

Internet banking:
Meezan Bank provides a full featured Internet Banking system.

Branches:
Meezan Bank has 203 branches in 54 cities across Pakistan:

Shariah Supervisory Board:

The letter and spirit of Islamic Banking rest upon absolute adherence to the Shariah. The foundations of a strong Shariah underpinning at Meezan Bank were laid from the beginning. A world renowned Shariah Supervisory Board and a highly qualified and experienced in house Shariah Advisor are fundamental aspects of the Bank's core USP. The primary role of this board is to maintain and further strengthen this commitment and to ensure strict Shariah compliance in all the Bank's operations. The members of the Shariah Supervisory Board of Meezan Bank are Internationally-renowned scholars, serving on the boards of many Islamic banks operating in different countries.

HABIB BANK LIMITED:

HBL

Type

Public Limited Company (KSE: HBL) Banking Industry Capital Markets Founded Bombay (now Mumbai), in 1941. Headquarters Habib Bank Plaza, Karachi, Pakistan Products Loans, credit cards, Savings, Consumer Banking etc. Revenue PKR 76.08 bn (USD 903.07 million) - 2009 Net income PKR 13.4 bn (USD 159.07 mln) - 2009 Website Habib Bank Limited HBL (formerly Habib Bank Limited) now referred to as "HBL Pakistan" and headquartered in Habib Bank Plaza, Karachi, Pakistan, is the largest bank in Pakistan. The bank has a network of over 1450 branches in Pakistan and 55 branches worldwide. It has a domestic market share of over 40%. It continues to dominate the commercial banking sector with a major market share in inward foreign remittances (55%) and loans to small industries, traders and farmers.

History:
Mohammed Ali Jinnah, Pakistan's founding father, realized the importance of financial intermediation while he was campaigning for the creation of a separate homeland for the Muslims of India. He persuaded the Habib family to establish a commercial bank that could serve the Indian Muslim community. His initiative resulted in the creation of Habib Bank in 1941, with HO in Bombay (now Mumbai), and fixed capital of 25,000 rupees. The bank played an important role in mobilizing funds from the Muslim community to finance the All-India Muslim League's campaign for the establishment of Pakistan. Habib Bank also played an important role in channeling relief funds to Muslims hurt in the communal riots and violence that preceded the departure of the British from India. After Pakistan was born in 1947, Habib Bank, at the urging of Governor-General Jinnah, moved its headquarters to Karachi, Pakistan's first capital. This gave Karachi its first commercial bank of the newly formed Pakistan. The Habib family owned and managed the bank until the Pakistan government nationalized it on 1 January 1974. In 2004, management of the Bank was handed over to Aga Khan Fund for Economic Development (AKFED).

HBL was the first commercial bank to be established in Pakistan in 1947. Over the years, HBL has grown its branch network and become the largest private sector bank with over 1,450 branches across the country and a customer base exceeding five million relationships. The Government of Pakistan privatized HBL in 2004 through which AKFED acquired 51% of the Bank's shareholding and management control. HBL is majority owned (51%) by the Aga Khan Fund for Economic Development, 42.5% of the shareholding is retained by the Government of Pakistan (GOP), whilst 7.5% is owned by the general public i.e. over 170,000 shareholders following the public listing that took place in July 2007. With a presence in 25 countries, subsidiaries in Hong Kong and the UK, affiliates in Nepal, Nigeria, Kenya and Kyrgyzstan and rep offices in Iran and China, HBL is also the largest domestic multinational. The Bank is expanding its presence in principal international markets including the UK, UAE, South and Central Asia, Africa and the Far East. Key areas of operations encompass product offerings and services in Retail and Consumer Banking. HBL has the largest Corporate Banking portfolio in the country with an active Investment Banking arm. SME and Agriculture lending programs and banking services are offered in urban and rural centers.

PRODUCT AND SERVICES OF HBL: PRODUCTS:

o o o O o HBL Muhafiz Rupee Travellers Cheques HBL Auto Finance HBL Flexi Loans for salaried personnel HBL LifeStyles Financing Scheme HBL i-Card

o o o o o

HBL House Financing Loans HBL Easy Access HBL Fast Transfer Haryali Agricultural Loans HBL E-Bank

SERVICES:

o Retail Banking The Retail Banking network, with 1425 branches, is the core strength of Habib Bank. The network provides HBL with the largest diversified low cost deposit base of any bank in Pakistan, and forms the basis for many of our other business lines: corporate and investment banking and treasury activities. The network provides HBL with the largest diversified low cost deposit base of any bank in Pakistan, and forms the basis for many of our other business lines: corporate and investment banking and treasury activities. o Commercial Banking: Enterprises operating in the middle market contribute significantly to the economy of a country. During FY-2000 HBLs management decided to address this issue. On November 1, 2000 Commercial Banking came into being. The objjectt ivies of stetting-up Commercial Banking was twofold:: First tto sttop tthe erosiion of markett share iin tthe miiddlle markett;; Second, to regain the lost market share Commercial Banking is making headway with improvement not only in terms of the business figures but also in its ambiance. Renovation of is being carried out in order to give a professional look to all the Commercial Banking Centers. o Corporate Banking: The Corporate Banking Group serves large institutional customers who require sophisticated products in an environment of intense competition. HBL Corporate & Investment Banking Group is now recognized as a market leader and regularly arranges and participates in most large structured finance deals. o International Operations: HBLs ability to operate successfully in diversified markets and cultures is a function opened in 1951. The Banks branches in financial centers continue to provide efficient tradesettlement and reimbursement services to the entire network and business with other banks.

RATIOS OF MEEZAN BANK AND HABIB BANK LIMITED: (1) LIQUIDITY RATIO:
(A) CURRENT RATIO

MEAN 2007 2008 0.335 0.28 2009 0.437 0.1 2010 0.239 1.4 2011 0.126 1.05 0.2474 0.738

MEEZAN BANK HBL

0.100 0.86

(B) ADVANCE TO DOPOSIT RATIO

MEAN 2007 2008 56.62% 76.42% 2009 41.57% 66.6% 2010 41.35% 61.52% 2011 46.28% 34.97% 65.17% 48.99%

MEEZAN BANK HBL

56.9% 72.31%

(C) CASH RATIO

MEAN 0.0868 0. 266

2007

2008 0.077 0.02

2009 0.076 0.11

2010 0.092 0.10

2011 0.092 0.10

MEEZAN BANK HBL

0.097 1

LIQUIDITY RATIOS
0.8 0.7 0.6 0.5 RATIO 0.4 0.3 0.2 0.1 0

CURRENT RATIO ADVANCE TO DOPOSIT RATIO CASH RATIO MEEZAN BANK BANK HBL

INTERPTATION: Higher the liquidity ratio the most favorable it is. Therefore, HBL is favorable because all ratios are higher as compared to Meezan Bank.

(2) LEVERAGE RATIOS:

(A).DEBT-TO-EQUITY RATIO
2007 2008 13.741% 2009 14.933% 2010 17.1794% 2011 18.513% MEAN 15.60%

MEEZAN BANK

13.657%

(B) DET-T0-TOTAL ASSETS 2007 MEEZAN BANK HBL

0.915

2008
0.9 30

2009
0.856

2010 0.9 28 0.90

2011 0.931 0.90

MEAN 0.912 0.948

0.91

1.03

1.00

INTERPRETATION: In the case of both debt to total assets and debt to equity ratios
the MEEZAN BANK is favourable because less figure is favourable.

(3) PROFITABILITY RATIOS:

(A) RETURN ON EQUITY (ROE)
2007 18.39 % 18.31 % 2008 % 10.3 2009 9% 13.2 2010 .64% 16 2011 8.18% 21.70% 2 MEAN .36% 17

MEEZAN BANK HBL

21.90%

17.83%

18.86%

19.72%

(B) RETURN ON ASSETS (ROA) MEEZAN BANK HBL 2007 % 1.7 % 0.65 2008 0.82 1.20 2009 0.98 0.12 2010 1.18 1.90 2011 1.91 2.16 MEAN 1.318 1.206

INTERPRETATION: In the case of RETURN ON ASSETS the MEEZAN BANK

favourable while in case of RETURN ON EQUAITY the HBL is favourable because high figure is favourable in both the cases.

CONCLUSION:
On the basis of above ratio analysis we can conclude that the performance of HBL is better tan the Meezan Bank. HBL is a very large bank and was established before the independence of Pakistan. While Meezan Bank is relatively small and the new comer in the market was established in 1997.