LETTER OF TRANSMITTAL

10th March, 2015

Raad Mozib Lalon
Lecturer
Department of Banking & Insurance
University of Dhaka
Subject: Submission of the Internship Report.
Sir,
It gives me immense pleasure to submit my report on Retail Banking Operations of
Commercial Banks in Bangladesh: A Comparative Study between Agrani Bank Ltd and AlArafah Islami Bank Ltd which was assigned to me as a fulfillment of the course Bachelor of
Business Administration.
While making this report I come across many hurdles and pleasant experience. But valuable
experiences I have gained during the period will undoubtedly benefit me in the years ahead. This
report attempts to describe my observations, learnings and experienced gained in Agrani Bank
Limited. Despite the several constraints, I gave my all efforts to make this report a meaning
one.
I have tried sincerely to comprehend and translate my knowledge in writing this report. My effort
will be rewarded only if it adds value to the research literature. I enjoyed this project work and
gladly attend any of you calls to clarify on my point, if necessary.

Your Sincerely
Osman Iqbal
ID# 17005
Department of Banking & Insurance

University of Dhaka

SUPERVISORS CERTIFICATE
This is to certify that the Internship Report on Retail Banking Operations of Commercial
Banks in Bangladesh: A Comparative Study between Agrani Bank Ltd and Al-Arafah Islami
Bank Ltd in the bona fide record at the report is done by Osman Iqbal, ID# 17005, as a partial
fulfillment of the requirement of Bachelor of Business Administration (BBA) degree from the
Department of Banking and Insurance, University of Dhaka.
The Report has been prepared under my guidance and is a record of the bona fide work carried
out successfully.

Raad Mozib Lalon

Lecturer
Department of Banking and Insurance

DECLARATION
I do hereby solemnly declare that the work presented in this Internship report has been
carried

out

by

me

and

has

not

been

previously

submitted

to

any

other

University/College/Organization for an academic qualification/certificate/diploma or degree.

The work I have presented does not breach any existing copyright and no portion of this report
is copied from any work done earlier for a degree or otherwise.

I further undertake to indemnify the Department against any loss or damage arising from
breach of the foregoing obligations.

........................................
Osman Iqbal
ID# 17005
Department of Banking & Insurance
University of Dhaka

ACKNOWLEDGEMENT
At the very beginning I would like to express my deepest gratitude to the almighty ALLAH for
giving me the strength and the composure to finish the task within the scheduled time.
I would like to pay my gratitude to our course instructor Raad Mozib Lalon, Lecturer,
Department of Banking & Insurance, University of Dhaka, who has assigned me this task and
instructed in the right way and given me proper guidelines for preparing this report.
I am indebted to The Principle officer Md. Bashir Ahmed of New Market Branch of Agrani
Bank Limited who helped me to do my internship. I also like to thank all officers of New Market
Branch for giving me suggestions and facilitating my internship report.
I am grateful to my beloved Parents, friends and well-wishers for their inspiration that lead me to
go ahead.

Finally, I thank all the persons who have directly or indirectly contributed in preparing this
report.

This Report is not free from limitation. There might still be some minor mistakes including
typing errors despite utmost care, we apologize for these.

Osman Iqbal
------------------

EXECUTIVE SUMMARY
With the development of modern banking, banking industry is facing a new evergoing affiliation
called Islami Banking which has earned enormous popularity in recent times. Noticing the
popularity and lower default rate of islami banking, many conventional banks has started to open
their respective Islami Banking department. Consequently the competition become extensive
with growing popularity. Islami Banking operation is conducted under Shariaah Rule which is
directly supervised by Shariaah Committee. Products and services of Islami Bank or Branches
operated under Islami Shariaah are different than that of conventional banks. Usually Islami bank
provide loan (known as invest in Islami Shariaah) under profit/loss sharing or profit sharing, loss
bearing principle rather interest on principle amount basis. On the other hand conventional banks
offer loan and advance either paid after the expiration of fixed date in a lump sum or under the
agreement of installment payment. In case of deposit offering basic deposit of Islami banking can
be categorized as Mudarabah, Musharakah etc. while it can be categorized as Current account,
Savings account and fixed deposit account for Conventional banking.
As basic tools are different so their performance are also different from each other. Usually
banks operated under Islami shariaah principle faces lower default rate than that of conventional
banks because Islami banks require to provide close and extensive supervision of their
investments. Noticing this attractive lower rate of default, conventional banks are now moving to
Islami Banking.

CHAPETR-1: INTRODUCTION OF THE REPORT

1.1 INTRODUCTION:
Banking sector in our country can be categorized from different dimensions. Its mode of
operation is one of them. Based on this dimensions Banks can be classified in two categories;
Islamic Banks and Conventional Banks. The objective of preparing this report is to have a clear
idea about the operation of these two banks and to make a comparison of its retail banking
services. Usually retail banking services includes all the general banking activities of a bank. It
does not include government banking, foreign exchange operation, underwriting etc. Among this
vast scope i choose here to concentrate only the loan and deposit services of these banks. For
these purpose i have selected two banks; Agrani Bank Ltd which is a state owned conventional
bank and the other is Al-Arafah Islmai Bank Ltd which is an Islamic bank. I have tried to show
the strength of these two banks how efficiently the can generate loan from their collected deposit.
To measure the strength i have conducted ratio analysis, regression analysis and hypothesis
analysis. Ratio analysis showed me the various factors which are related with loan and deposit
while through regression analysis and hypothesis analysis i have found the relationship between
collection and loan generation. Finally after finishing all the mathematical calculation I have
tried to make a valid comparison based on calculated parameters
1.2 BACKGROUND OF THE STUDY:
The internship paper will be conducted under close supervision of my academic supervisor. The
supervisor will monitor my progress time to time and will provide me required suggestion or
recommendation to make the report a good one and to rectify the error occurred already. This
report will be prepared to know the basic differences between conventional banking practices
and Islamic banking practices and analyzing its performances. Causes of the different
performance of the banks are also tried to be found in this report.
Required data will be collected from annual report of selected banks, published and online
journal, research paper, newspaper and from article. Primary data through physical inspection of
bank premises will be collected if deems fit.

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1.3 PROBLEM STATEMENT:

Islami bank conduct their operation through a complete different principle than that of
conventional banking. Because of the underlying differences, its year end performance are
different form each other. Amazingly, performance of Islami banks are quite stable and higher
than that of conventional bank. Recent performance of islami banks are showing more upward
trend from conventional banks. To compare between these two types of banks, accounting ratios
and their growth of couple of financial year may be helpful.
1.4 LITERATURE REVIEW:
The main difference between the Islamic banks and the contemporary banks is that while the
latter is based on the conventional interest-based principle, while the former follows the principle
of interest-free and profit and loss sharing (PLS) in performing their business as intermediaries
(Ariff 1988). Under the term of Islamic PLS, the relationship between borrower, lender and
intermediary are rooted on financial trust and partnership. Dar (2003) classifies four types of
financing used as alternatives of interest; investment-based, sale-based, rent-based and servicebased.
Despite considerable development of Islamic banking sector, there are still limited studies
focusing on the efficiency of Islamic banks. Several studies that have been devoted to assess the
performance of Islamic banks generally examine the relationship between profitability and
banking characteristics. Bashir (1999) and Bashir (2001) perform regression analyses to
determine the underlying determinants of Islamic performance by employing bank level data in
the Middle East. His results indicate that the performance of banks, in terms of profits, is mostly
generated from overhead, customer short term funding, and non-interest earning assets.
Furthermore, Bashir (2001) claims that since deposits in Islamic banks are treated as shares,
reserves held by banks exert negative impacts such as reducing the amount of funds available for
investment.
Samad and Hassan (1999) apply financial ratio analysis to see the performance of a Malaysian
Islamic bank over the period 1984-1997 and generally find that bankers lack of knowledge was
the main reason for slow growth of loans under profit sharing. The Islamic bank was found to
perform better than conventional banks in terms of liquidity and risk measurement (less risky).
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Although this study is based only upon one Islamic bank in Malaysia, the result has given some
insight on the example from outside the Middle East area. Similarly, utilizing Banking Efficiency
Model, Sarker (1999) claims that Islamic banks can survive even within a conventional banking
architecture in which PLS modes of financing is less dominated. Using Bangladesh as a case
study, Sarker (1999) argues further that Islamic products have different risk characteristics and
consequently different prudential regulation should be applied.
1.5 OBJECTIVE OF THE STUDY:
Principal objective of preparing this report is to compare the performance between islami banks
and conventional banks. To fulfil this objective, I will select few (five) of islami and few (five) of
conventional banks. Besides this objective my report will cover following objectives:

Applying theoretical banking principal in practical banking viewpoint.

Analyzing theoretical discussion from an institutions point of view.
Know the basic retail banking activities of both conventional banks and islami banks
Know underlying differences between the activities of these two types of banks.
Analyze mathematical performance of Islami Banks.
Analyze mathematical performance of Conventional Banks.
Comparing the mathematical performance of these two types of banks.
Finding the reason behind upward or downward performance (if found).
Finding and estimating future growth and potential of islami banking operation.
Finding the limitation and drawbacks of these two types of banking operations.

1.6 METHODOLOGY:
1.6.1 Research Type:
This research is a descriptive research which might involve some quantitative techniques to some
techniques. Thus the study requires both qualitative and quantitative techniques.
1.6.2 Types of Data:
To conduct the research, secondary sources of data will be appropriate. But in some extent, to
know differences between banking operation theory and actual practices in real world physical
visit of bank premises may be required. Then, this data will be considered as primary sources of
data.
Secondary sources of data will be as follows:
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Annual Report of selected banks.

Official website of selected banks.
Published Journal, article, research paper about related field.
Physical inspection of bank premises, if needed.
1.6.3 Data analysis tools:

While necessary data are being collected, I will use gathered data to find the performance of
these two types of banks. Comparison between performances will be done to reach in a
conclusion.
Accounting Ratio analysis tools will be used to measure and compare performance of these two
types of banks.

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CHAPTER-2: COMPANY OVERVIEW

AL-ARAFAH ISLAMI BANK LIMITED
2.1 HISTORY & ESTABLISHMENT:
Al-Arafah Islami Bank Limited was established in 1995 with a vision to be emerged as a leading
Islamic bank in our country by the hands of some religious personalities of commerce and
industries in the country. To segregate the banking services from Haram (Not Permitted in Islam)
Riba or interest and to contribute in the national economy, the bank designed all of its product
and services in compliance with the Islami Shariaah (Islami Law). A prudent and sophisticated
Shariaah Board is formulated by the wise Islamic Scholar and the economist of the country to
asses, scrutinize banks activities and products before starting to offer in the market.
Al-Arafah Islami Bank Ltd was registered as Private Limited Company under the Bank
Company Act in 18th June, 1995. Inauguration ceremony was held in 27th September, 1995 and
the bank commenced its business thereafter.
2.2 CORPORATE INFORMATION AT A GLANCE:
Table-2.A: Corporate Overview: Al-Arafah Islami Bank Limited
Al-Arafah Islami Bank Limited
Date of the Registration

18th June 1995

Name of the Company

Al-Arafah Islami Bank Limited

Nature of the Company

Private Limited Company

Authorized Capital

15,000.00 Million

Paid Up Capital

8343.25 Million

Equity Capital

14,478.06 Million

Deposit

1,40,980.55 Million

Investment

1,25,715.39 Million

Number of Branches

119 including 23 AD branches throughout the country.

Number of Shareholders

58,466

***Sources: Annual Report of Al-Arafah Islami Bank Ltd

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Not only providing banking services, Al-Arafah Islami Bank has made a unique paradigm in case
of CSR activities. Al-Arafah Islamic International School & College and Al-Arafah Islami Bank
Library has been established patronized by the bank.
AGRANI BANK LIMITED
2.3 HISTORY & ESTABLISHMENT:
To provide international quality services in public sector and to maintain highest quality of
customer services, Agrani Bank Ltd was established in 1972 immediately after the independence
of Bangladesh. It is a state owned bank and formed by the composition of ex Habib Bank Ltd
and Ex-Commerce Bank Ltd. it was treated as a nationalized commercial bank from its
inception. But in 2007, it emerged as State Owned Commercial Bank and Private Limited has
been added to latter of its name. To be a public limited company, it took over the business, asset,
right and obligations of then Agrani Bank Ltd.
2.4 CORPORATE PROFILE AT A GLANCE:
Table 2.B: Corporate Overview: Agrani Bank Limited
Agrani Bank Limited
Date of the Registration

17th May 2007

Name of the Company

Agrani Bank Limited Company

Nature of the Company

Private Limited Company

Authorized Capital

2500.00 Crore

Paid Up Capital

991.29 Crore

Operating Profit

1006.74 Crore

Deposit

34,868.00 Crore

Investment

17,6869.00 Crore

Number of Branches

889

Number of Employees

13,890 (including 9917 officers & 3973 staffs)

***Sources: Annual Report of Agrani Bank Limitd

Agrani Bank Limited wants to be a pioneer bank among the state owned bank. To fulfil this
objectives, the bank already took initiatives to commence online banking throughout the country.
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CHAPTER-3: THEORETICAL DISCUSSION

Before proceeding for analyzing quantitative data, it is essential to discuss theoretical concepts of
basic Islamic banking operation. Because seeking any deficiency between Islamic banking
principle and Islamic banking practices is one of the crucial objectives of preparing this report. I
have collected data of different time horizon so that a valid comparison of performance of these
two banking operations can be made. Consequently it is very important to have a clear
understanding about the tools used by the Islamic banks in Bangladesh to understand its
numerical impact over profitability or performance.
This report is an endeavor to compare the performance of Islamic banks with that of
conventional banks which are conducting business in Bangladesh through establishing
relationship between profitability or sales and their deposit or loan. So it is important to know
about Islamic banks deposit offering and investment tools.
3.1 DEPOSIT OFFERED BY ISLAMIC BANKS IN BANGLADESH:
Like any other conventional banks, Islamic banks collect fund through offering multidimensional deposits which are synonymously known as accounts. Basic deposit offering by
Islamic banks are:

Al-Wadiah Current Deposit Account.

Mudarabah Savings Deposit Account.
Mudarabah Term Deposit Account.
Mudarabah Notice Deposit Account.
Foreign Currency Account.
Mudarabah Monthly Profit Deposit
Account.

Mudarabah

Accounts.
Mudarabah Education Savings Scheme

Accounts.
Mudarabah Special Savings (Pension)

Scheme Account.
Mudarabah Millionaire Scheme Account

Hajj/Umrah

Savings

etc.

Those are the very common deposit offering used throughout the banks operated under Islami
Shariah in Bangladesh. While analyzing these accounts, it is obvious that Islamic banks
mobilize its deposit mainly by three categories of deposit accounts:

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3.1.1 CURRENT ACCOUNT UNDER AL-WADIAAH PRINCIPLE:

Alike Demand deposit of any other conventional bank, Islamic banks offer Current Account
under Al-Wadiaah principle. According to this principle, banks collect deposits with the
promise to repay them on demand without any prior notice. With the permission of customer,
banks use this fund at its own risk and hence depositors of such accounts are not allowed to
reap any share in profit earned by the banks.

3.1.2 SAVINGS ACCOUNT UNDER AL-WADIAAH/AL-MUDARABAH PRINCIPLE:

Savings Account in Islamic Banks are conducted under Al-Wadiaah and Al-Mudarabah
principle. Al-Wadiaah means trusteeship where bank acts as a trustee for its customer.
According to Al-Wadiaah principle, the bank is given authorization to use the fund at its own
risk by the depositor. It is almost similar to Current Account or Demand Deposit except that
the bank guarantees full return of deposited fund with any profit voluntarily.

Mudarabah savings deposits give the banks exclusive rights to manage the deposits. The
profit or loss from the use of such deposit is shared between the banks and the depositors at a
pre agreed-upon ratio. Following this Mudarabah principle, two types of savings deposits
can be seen:
Savings under profit and loss sharing agreement (trustee profit sharing).
Savings under investment account.

The word Al-Mudaraba originates from the word Mudarib and means The Manager of
the fund. The bank in this case acts as a manager of customers funds. The depositors on the
other hand are known as Sahib-Al-Mal meaning the owner of the fund. Deposits accepted
on savings under the Profit and Loss sharing agreement is invested by the bank at its own
risk. Customers give authorization to the bank to invest funds and share profit or loss on
agreed proportions. Account holders of this type of account are required to maintain a
minimum balance in the account. The saving account under the Investment Account is also
known as a participatory account or a Profit or Loss Sharing (PLS) account. Depositors of
this type of account receive share of profit to the agreed ratio from their funds invested by the
bank. The profit and loss sharing also depends on the total amount deposited and the length
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of period the money is held by the bank. Depositors of an Investment Account are required to
give prior notice to the bank if they withdraw their invested funds under any special
circumstance. In such a case no share of profit is given for the amount withdrawn.

3.1.3 SAVING DEPOSIT AS QUARD E HASAN:

Islamic banks accept savings from customers as Quard E hasan interchangeably which can
be said as Benevolent loan from the customers. Depositors of this sort of savings deposits
receive financial or non-financial benefits from the bank.

3.2 DEPOSITS OFFERED BY CONVENTIONAL BANKS IN BANGLADESH:

With the ongoing improvement of modern banking, conventional banks started to offer
different multipurpose deposit accounts for customer. Modern banking are now far more
sophisticated than which can actually be seen in primary stages of bank evolvement. List of
most popular bank accounts in Bangladesh is shown below:

Table 3.A: Most Popular Bank Account in Bangladesh

Deposit Accounts
Current Account
Savings Deposit Account
Savings Deposit Account
Current Deposit Account
Savings Account
Mudarabah Savings Account
Ezee Account
Triple Benefit Savings Account
Salary Account
Savings Bank Deposit Account

***Sources: http://bankinfobd.com

Basically deposits offered by conventional banks, can be categorized into three major group:

Name of the Bank

The City Bank Ltd.
Trust Bank Ltd
Dutch-Bangla Bank Ltd.
Dutch-Bangla Bank Ltd.
One Bank Ltd.
Islami Bank Bangladesh Ltd.
BRAC Bank Ltd.
BRAC Bank Ltd.
Dhaka Bank Ltd.
National Credit & Commerce Bank Ltd.

i. Current Account.
ii. Savings Deposit.
iii. Fixed Deposit.

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Current account are evolved to facilitate frequent cash requirement which are generally
offered to businessmen. Amount deposited under current account, interest is not given.
Account holder can withdraw money anytime by writing cheque over bank and thus it is
sometime called checkable deposit. Savings account, another type of checkable account
encourage people to save money from their income. Alike current account, this account
enable the account holder to withdraw money by writing checque. But bank put a limit on
frequency of withdrawal for a certain period. Usually this restriction is two (2) times in a
week. Interest is offered over the outstanding amount of deposit to the depositor. On the other
hand, fixed deposit ensures future constant earning who has large amount of idle money.
Banks require the depositors to withdraw the money at once when the term of deposit is
matured. Depositor will get back his deposited amount along with accumulated deposit.
Usually depositors are not allowed to withdraw money before maturity but if customer are in
need of withdrawing money, the customer will have sacrifice stipulated interest. As customer
are not allowed to withdraw money before maturity, sometimes it is called as Term
Deposit.

Observing banking industry of Bangladesh, these types of deposit can be seen:

Farmers Account.
Student Account.
Max Saver.
Smart Saver.
Deposit Double Scheme (DDS).
Monthly Savings Deposit Scheme

(MSDS).
Millionaire Scheme Account (MSA).
Savings Account for Worker Women.

Savings Account for Housewife.

Marriage Savings Scheme.
Education Savings Scheme.
Short Notice Deposit Scheme

(SND).
Ezee Account.
Salary Account.
Freedom Fixed Deposit.

3.3 INVESTMENT ACTIVITIES OF ISLAMIC BANKS IN BANGLADESH:

As the bank cannot earn interest by lending the money, therefore the Islamic banks have
to undertake investment to earn profit not only for the bank itself but also for the

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depositors in the investment account. Below are the investment procedures on the Islamic
principles:

3.3.1 MUSHARAKAH (EQUITY PARTICIPATION, JOINT VENTURE):

A joint venture based on musharaka involves a partnership in which both the bank and its
customer-client contribute to entrepreneurship and capital.

The banks and their clients agree to join in a temporary participation (slight similar to
join ventrue) for effecting a certain operation within an agreed period of time. Both
parties contribute to the capital of the operation (assets and managerial expertise working
capital etc.) in varying degrees and agree to divide the net profit in proportions agreed
upon in advance. There is no set formula for profit sharing and each case is dealt with on
its own merits.

3.3.2 MUDARABAH OR QIRADH (AGENCIES):

It is a partnership in profit whereby one party provides capital (rab al-maal-the bank) and
the other party provides the know how/labor (Mudharib).

In this procedure of investment, bank contributes all the financing (and customer
contributes only his managerial efforts or labor) and gets again an agreed proportion of
the profit actually realized. In both mudarabah and musharakah, both sides are entitled to
reap any profit depending on the actual performance of the operation. In the mudarabah
contract however, the mudarib (the partner offering his efforts) will lose nothing but his
labor (as the principle capital is not his) in case of financial loss resulting from normal
business conditions. The bank that has financed the capital bears all the finance risks.
This financial risk justifies the bank to claim his share in the profit. The client is however
held responsible for loss of capital, whether it be the result of his negligence or willful
act. To guard against the loss, the bank may require a security from the customer.

3.3.3 MURABAHAH (MARK-UP SALE):

This is a procedure where a partner approaches the bank that certain items (commodity or
otherwise) be bought for him and he agrees to pay the bank later on, upon the fulfillment
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of the actual buying, an agreed percentage of profit. Until the partner fulfills his original
promise of rebuying the commodity, the risk remains with the bank which justifies the
profit. Banks can for a promise that the client has to satisfy the promise of rebuying the
commodities or to indemnify the damage arises from breaking the promise without
excuse. It is permissible for banks to take any cash or collateral security to guarantee the
implementation of the promise or to indemnify the damages.

3.3.4 BAI SALAM (POST-DELIVERY SALE):

The bank buys certain goods on post-delivery and pays the cost immediately or sells
certain goods on post-delivery and receives its cost immediately. In this sale, cost of
goods is fixed and paid in advance but the delivery of the sold items is postponed or
delayed up to a certain period. Similarly, the place of delivery, its expenses and quantities
of the sold goods should also be fixed and defined as they are conditions for such a sale.

3.3.5 IJARAH (LEASE, RENT):

Ijarah practice is very much similar to lease financing while Islamic banks conduct Ijarah
as interest free practices. During the life of the asset, the risk of ownership remains with
the bank, while the lessee is liable for misuse of the asset.

3.3.6 ISTISNAA:

Istisnaa is a contract whereby a party undertakes to produce a specific thing which is

possible to be made according to certain agreed-upon specifications at a determined price
and for a fixed date of delivery. This undertaking of production includes any process of
manufacturing, construction, assembling or packing.

The Arabic word Istisnaa means asking someone to manufacture. It may be further
defined and elaborated as a sale contract between the seller and the buyer for the sale of
an asset described in the sale contract and transacted before it comes into existence. To
fulfill its obligation, the seller can either manufacture/construct it by itself or can get it
manufactured/constructed by someone else to deliver it to the buyer on the date described
in the sale contract. The buyer can pay the sale price in lump sum at the time of signing

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the contract or later in different stages as the manufacturing/construction process

proceeds.

3.4 LOANS & ADVANCES OF CONVENTIONAL BANKS IN BANGLADESH:

Banks generate profit by offering loans and advances to deficit unit. The discrepancy
between interest rate charged on loan and interest rate offered on deposit is the income
for banks. Like deposit scheme, loan and advances can be categorized from different
dimensions. Loan can be classified by its maturity, the amount of loan granted, loan
covenants, the nature of payment etc. Basic form of loan and advances are discussed
below:

3.4.1 FUNDED CREDIT:

Any type of credit facility which involves direct outflow of banks fund on account of
borrower refers to funded credit facility. Funded credit facilities may be classified into
two forms; Loan and advances.

3.4.2 NON-FUNDED CREDIT:

Though these types of credit facilities are primarily non-funded in nature but at any times
it may turn into funded facilities. These non-funded facilities are termed as contingent
liabilities. Major categories of these types of credit are; Letter of credit (L/C), Back to
Back L/C, Bid bond, Performance bond.

3.4.3 DEMAND LOAN:

Demand loans are repayable on demand by the bank and no fixed installments are laid
down. It belongs to the short-term loan.

3.4.4 TERM LOAN:

Term loan are granted for a specific period (2/5 years or over) and repayment is made in
installments. The term loan can also be repayable on demand if default occurs in
repayment of some eventualities, as listed in the agreement take place.

3.4.5 OVERDRAFT:
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The overdraft is a kind of advance meaning over-drafting in particular account like

current account. In some cases overdraft is permitted is savings bank account and also for
salaried class person. The customer may be sanctioned a certain limit upon which he can
overdraw from his current account within a stipulated period. Basically it is an agreement
between a banker and its customer in which the latter is allowed to withdraw over and
above his credit balance in current account.

3.4.6 DISCOUNTING OF BILLS:

Banks provide short-term finance by discounting bills, which is making payment of the
amount before the due date of the bills after deducting a certain rate of discount. The
party gets the funds without waiting for the date of maturity of the bills. In case any bill is
dishonored on the due date, the bank can recover the amount from the customer.

Most popular loan and advances services of conventional banks are shown below:

Table 3.B: Most Popular Loan & Advance Services in Bangladesh

Loans & Advances

Auto Loan
Education Line
Any Purpose Loan
Advance Against Salary
Marriage Line
Student Loan

Name of the Bank

Standard Chartered Bank Ltd.
Dutch-Bangla Bank Ltd.
Prime Bank Ltd.
Prime Bank Ltd.
Dutch-Bangla Bank Ltd.
Hong Kong Sanghai
Banking

Home Line
Auto Loan
City Scholar
Home Loan Scheme

Corporation
Dutch-Bangla Bank Ltd
AB Bank Ltd.
The City Bank Ltd
Mercantile Bank Ltd

***Sources: http://bankinfobd.com

Alongside above mentioned basic categories of loan, in Bangladesh following types of

loans are notable:

Home Loan
Car Loan

CNG Conversion Loan

Loan Against Salary
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Travel Loan
Executive Loan
Education Finance Pack

Govt. Primary School Teacher Loan

Lifestyle Plus Loan
Household Durable Loan

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3.5 DIFFERENCE

BETWEEN

ISLAMIC BANKING & CONVENTIONAL BANKING: A

DISCUSSION OF RETAIL BANKING:

Establishing direct distinction between retail banking practices Islamic bank and
conventional bank too, will not be a prudent decision; as they are competing in extremely
different platform and various multidimensional perspective can be presented here to
distinguish. Key difference is that Islamic banks are based on Islami Shariah which
prohibits Riba or interes completely while conventional banks earn their profit from
interest.

However, Islami Shariah is taken as a foundation of formulating policy for Islamic

banking policy. Amongst the governing principle of Islamic bank are:

The absence of interestbased (riba) transactions;

The avoidance of economic activities involving oppression (zulm);
The avoidance of economic activities involving speculation (gharar);
The introduction of an Islamic tax, zakat;
The discouragement of the production of goods and services which contradict the Islamic
value (haram).

On the other hand, conventional banking is essentially based on the debtorcreditor

relationship between the depositors and the bank on one hand, and between the borrowers
and the bank on the other. Interest is considered to be the price of credit, reflecting the
opportunity cost of money.

Though multidimensional distinction can be shown here, I will concentrate to limit my

discussion only on retail banking here.

By opening a deposit account in a conventional bank or by taking loan from a bank, a

customer builds debtor-creditor or creditor-debtor relationship with bank. It is the basic
starting point in case of conventional banking retail services. On the contrary Islamic law
considers a loan to be given or taken, free of charge, to meet any contingency. Thus in
Islamic Banking, the creditor should not take advantage of the borrower. When money is
lent out on the basis of interest, more often that it leads to some kind of injustice. The
first Islamic principle underlying for such kind of transactions is "deal not unjustly, and

ye shall not be dealt with unjustly" [2:279] which explain why commercial banking in an
Islamic framework is not based on the debtorcreditor relationship.

The other principle pertaining to financial transactions in Islam is that there should not be
any reward without taking a risk. This principle is applicable to both labor and capital. As
no payment is allowed for labor, unless it is applied to work, there is no reward for capital
unless it is exposed to business risk. Thus, financial intermediation in an Islamic
framework has been developed on the basis of the above-mentioned principles.
Consequently financial relationships in Islam have been participatory in nature. But in
conventional banking financial relationship is debtor-creditor in nature.

Key differences between these types of banking are discussed below in a nut shell:

Table 3.C: Difference between Conventional Banking and Islamic Banking in terms of
Retail Banking Services

Conventional Banking
The investor is assured of
a predetermined rate of

provider of capital (investor) and the user of funds

interest.
It aims at maximizing

(entrepreneur).
It also aims at maximizing profit but subject to

profit

it

back

any
and

Shariah restrictions.

Participation in partnership business is the

with

fundamental function of the Islamic banks. So

compounding interest is

understanding customers business is very crucial

the fundamental function

for Islamic banks.

of the conventional banks.

It can charge additional
money

without

restriction.
Lending
money
getting

Islamic Banking
In contrast, it promotes risk sharing between

(penalty

The Islamic banks have no provision to charge

and

any extra money from the defaulters. Only small

compounded interest) in

amount of compensation and these proceeds is

case of defaulters.

given to charity. Rebates are given for early

A conventional bank has

settlement at the Bank's discretion.

Islamic bank can only guarantee deposits for

to guarantee al its deposits.

deposit account, which is based on the principle

of alwadiah, thus the depositors are guaranteed
repayment of their funds, however if the account
is based on the mudarabah concept, client have to

Time value is the basis for

charging

interest

on

capital.
While disbursing

cash

share in a loss position

Profit on trade of goods or charging on providing
service is the basis for earning profit.

The execution of agreements for the exchange of

finance, running finance or

goods & services is a must, while disbursing

working capital finance,

funds under Murabaha, Salam & Istisna contracts.

no agreement for exchange

of goods & services is

made.
No such beautiful loan
exists

in

conventional

banking. Only one motive

works

behind

Qaurd-Al-Hasan or Beautiful loan is offered by

Islamic banks where loan is granted only with the
hope of the return thereafter.

granting

loan is that gaining interest

income.

***Sources: Hasan, Zulfiqar, and Ayesha Saimun. Principles of Islamic Economics. Dhaka: University Publications, 2012.

 CHAPTER-4: RATIO ANALYSIS

4.1 RATIO ANALYSIS CONCEPT:

Ratio analysis is a strong accounting tool used to determine company performance from
multidimensional perspective.

Broadly ratio analysis is the process of systematically manipulating figures from the
financial statements of a company to produce information that are used as part of
investment decision making process. It is the application of arithmetic on financial
information that is contained in the annual report of a business entity.

4.2 WHY THIS MEASURE IS NECESSARY:

Almost every research about financial statement analysis or comparing performance

between two or more financial bodies, ratio analysis must be conducted by the researcher
because of its enormous importance.

It provide meanings to absolute figures: Most numbers that are found in the financial
statements of companies will be vague and meaningless if a scientific method of ratio
analysis is not performed on the figures.

For example, PS of 2.30 will not make much if there is no information on what EPS was
for last year or what the earnings per share of companies of similar sizes are.

Accurate planning and forecasting for managers: Through ratio analysis one can find a
trend and based on that trend, a manager can project and have an idea about future ups
and downs. A manager can take a contingency position for coping with upcoming
downfall.

As a basis of decision making: The output of ratio analysis can be used as a basis for
making investment decision making. An investor who can find himself more suitable to
make decision whether to invest in a particular project or not, only after conducting ratio
analysis.

To compare results and performance: By calculating ratios, an insight of how

management are doing can be obtained. To make a valid comparison between two
business entitiesor between two business opportunities, a manager must look for ratio
analysis technique. Note that ratio analysis is predominantly financial factors. Other
nonfinancial factors needs to be considered, the use of a balanced scorecard for example
will do just in performance measurement matters.

For analyzing strengths and weakness: Through ratio analysis, management can find out
department or division that is not relatively doing well and then take some corrective
actions.

To analyze change in the form of trend: Professional investors always say that the trend
is your friend. This trend is found using ratios and ratio analysis.

In spite of having notable significance, ratio analysis technique is not free from limitation
like any other mathematical analysis tools. This limitation has degraded its area of
application to some extent. A researcher must keep it mind while interpreting calculated
ratios. He must be more careful before making a decision based on ratio analysis as it
cannot triumph over some drawbacks.

4.3 LIMITATION OF RATIO ANALYSIS:

Ratios deal mainly in numbers they dont address issues like product quality, customer
service, employee morale and so on (though those factors play an important role in
financial performance).

Ratios largely look at the past, not the future. However, investment analysts will make
assumptions about future performance using ratios.

Ratios are most useful when they are used to compare performance over a long period of
time or against comparable businesses and an industry this information is not always
available.

Financial information can be massaged in several ways to make the figures used for
ratios more attractive. For example, many businesses delay payments to trade creditors at

the end of the financial year to make the cash balance higher than normal and the creditor
days figure higher too.

Different companies operate in different industries each having different environmental

conditions such as regulation, market structure, etc. Such factors are so significant that a
comparison of two companies from different industries might be misleading.

Financial accounting information is affected by estimates and assumptions. Accounting

standards allow different accounting policies, which impairs comparability and hence
ratio analysis is less useful in such situations.

In my report I will calculate profitability ratio, liquidity analysis ratio, activity analysis
ratio, capital structure ratio and capital market analysis ratio. All the categories have
some similar ratios under its respective headings:

Table 4.A: Ratios and Formulas:

ROA=

Net Income
Average Total Asset

ROCE =

Profitability Ratio

Net Income
Average Common Shareholders Equity

Profit Margin =

Net Income
Sales

Earnings Per Share=

Capital Adequacy Ratio

Debt to Equity=

Tier-I

Net Income
No of Commonshare Outstanding
Total Debt
Total Stockholders Equity

Capital

Ratio

( Total EquityRevaluation Reserve )

Risk Weighted Asset
Tier-II

Capital

Ratio

Supplementary Bank Asset

Risk Weighted Asset

Capital Market Analysis

Ratio

Price Earning Ratio=

Current Ratio =

Market Price of Common Stock

EPS

Current Asset
Current Liabilities

Liquidity Analysis Ratio

***Sources: https://www.cpaclass.com

4.4 FINDINGS OF THE RATIOS:

As per the discussion of my report, I am interested here to show a comparison between

Agrani Bank Ltd and Al-Arafah Islami Bank Ltd based on accounting ratio analysis. To
fulfil this objective a comparative study on ratio analysis of these two banks are discussed
below. Mainly strength of retail banking services and capital adequacy of these two banks
are emphasized here.

To make a valid comparison, I have collected data from the year of 2009 to 2013. I have
calculated ratios for both banks in same numerical unit.

CURRENT RATIO:

We all know current ratio measures the ability to fulfil most liquidity demand of a bank.
It is calculated through dividing current asset by current liabilities of a bank. Both current
asset and current liabilities includes the most current asset and debt of a bank which must
be matured within one year.

Figure 4.A: Current Ratios

Current Ratio
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
2009

2010
Agrani Bank Ltd

2011

2012

2013

Al-Arafah Islami Bank Ltd

***Sources: Annual Report

From the above graph, we get a clear indication about the liquidity position of these two
banks. We can see here that Agrani had a steady growth rate during five years time
period while Al-Arafah Islami Bank faced a significance fluctuation between 2009 and
2010. Current ratio of Agrani Bank Ltd grows on an average 4% growth rate though it
had slight downfall in 2010 and 2012. On the other hand Al-Arafah Islami Bank faced a
peculiar type of growth between the year of 2009 and 2010because in that year the bank
possessed significantly lower amount of current liabilities. If we do not consider the
unusual change of 2010, we got average 18% growth for the rest of three years. But it
would not be valid conclusion comparing between these two ratios of these two banks
because intentionally data of one year is omitted. But if we consider the change of 2010,
we get almost 110% growth for Al-Arafah Islami Bank Ltd. But we do not conclude
based on that ratio.

PROFIT MARGIN:

Profit margin which is synonymously known as net profit ratio is a powerful tool for
measuring profitability of a bank. Net Profit Margin measures the percentage of profit

earned by using one taka of sales which is calculated through dividing net profit by sales.
It also measures the ability of a bank to generate profit from sales.

Figure 4.B: Profit Margin

Profit Margin
30.00%
20.00%
10.00%
0.00%
2009
-10.00%

2010

2011

2012

2013

-20.00%
-30.00%
-40.00%
-50.00%
-60.00%
Agrani Bank Ltd

Al-Arafah Islami Bank Ltd

***Sources: Annual Report

If we look over the chart, we have a more volatile chart for Agrani Bank Ltd than that of
Al-Arafah Islami Bank Ltd. Growth rate of Agrani Bank Ltd is almost -180%, but this
numerical figure would be a misleading indication to interpret because we can notice here
that in the year of 2012 Agrani Bank Ltd had an abnormal amount of loss. On this year
Agrani bank faced a significant amount of loss and this percentage is almost -50.32%.
This abnormal amount of decrease effects the whole average ratio for five years and it
stood up at almost -180%. On the other hand the situation for Al-Arafah Islami Bank is
much better. During the five years growth rate it had typical ups and downs, no unusual
increment or degrade can be seen here. The ratio grows almost 26%. So from this stand
point Al-Arafah Islami Bank enjoyed more stable profit during five years time period.

NET INTEREST MARGIN (NIM):

Banks earnings is calculated based on interest paid on deposit and interest received on
loan and advances. As Islamic banks can never deal with interest its earnings is
calculated through profit paid on deposit account and profit received on investments. This
earnings can be calculated by Net Interest Margin Ratio (NIM). In fact NIM is the
modified version of net profit ratios. Because it divides net interest or profit by net
interest/profit earnings asset and thus it measures the ability of a banks asset to earn
profit.

Figure 4.C: Net Interest Margin

Net Interest Margin (NIM)

100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2009

2010
Agrani Bank Ltd

2011

2012

2013

Al-Arafah Islami Bank Ltd

***Sources: Annual Report

While analyzing the graph a much more clear depiction is found. As we already know
that Agrani Bank Ltd has faced significant amount of loss in 2012, then it has the lowest
NIM ratio on that year. Though the bank has faced a downfall trend in 2011 and 2012
alongside a significant loss in 2012, it successfully maintained a steady growth rate for
NIM which stood as 12.98%. This success become possible to achieve as the bank
successfully paid its interest and also recovered it interest on loan even if having
difficulties in net profit. On the contrary Al-Arafah Islami Bank had a usual growth rate
in the year between 2010 and 2012 like earlier year. In 2011 the bank hold a very lower

amount of earning asset and thus in that particular year NIM ratio has significantly risen
up.

In 2011 earnings asset was almost 1.5 times net profit margin while on the typical years
this figure was almost 23 time of net profit margin. Due to this abnormality Al-Arfah
Islami Bank has almost 297.21% average growth rate for NIM ratio.

RETURN ON ASSET (ROA):

To measure the efficiency of asset utilization, bank managers usually use ROA ratios
which are derived from dividing net earnings by average assets. The greater the ratio, the
better indication of asset utilization. From the chart mentioned below, we can make a
valid comparison between two selected banks. We already know that in 2012, Agrani
Bank Ltd has faced a significant amount of losses and for this reason the bank faced a
negative trend in ROA ratio. Apart from this incidents the bank showed a positive growth
on ROA. Balancing the negative ROA occurred in 2012 with the rest of the year we can
see that Agrani Bank Ltd has a growth rate of -2.14%. This growth rate would not be
negative if the negative ROA did not exist in 2012.

Figure 4.D: Return on Asset:

Return on Asset
4.00%
3.00%
2.00%
1.00%
0.00%
2009
-1.00%

2010

2011

2012

2013

-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
Agrani Bank Ltd

Al-Arafah Islami Bank Ltd

***Sources: Annual Report

So as a whole Agrani Bank is showing a satisfactory steady growth rate for ROA. While
considering Al-Arafah Islami Bank, we do not get any satisfactory result with a
decreasing growth rate of -4.00%. This poor result has been occurred in average though
in 2010 the bank had a very satisfactory upward trend. But the decreasing trend of rest of
the year finally offset the upward trend.

RETURN ON EQUITY (ROE):

Return on Equity is a profitability ratio which measure the banks ability to earn profit for
its shareholders. The ratio is calculated through dividing net profit by average
shareholders equity. The higher the ratio, the better percentages of return will go for its
shareholders. It is an important measurement for a banks profitability. Return on Equity
ratio for Agrani Bank Ltd is showing a decreasing trend like the same reason causes the
decreasing trend of Return on Asset ratios. By analyzing the graph below we can see that,
this ratio for Agrani Bank is showing a diminishing growth though the bank tried to
recover it earlier state during the last year of calculation. Return on Equity for Agrani
Bank Ltd is showing almost an average of -755% growth rate. This abnormal numerical
figure has been produced due to the significance fall of return on equity ratio in 2012.

 Figure 4.E: Return on Equity:

ROE
100.00%
50.00%
0.00%
2009
-50.00%

2010

2011

2012

2013

-100.00%
-150.00%
-200.00%
-250.00%
-300.00%
Agrani Bank Ltd

Al-Arafah Islami Bank Ltd

***Sources: Annual Report

Return on Equity for Al-Arafah Islami Bank is much more encouraging than that of
Agrani Bank Ltd. Though ROE of Al-Arafah Islami Bank is showing a decreasing trend
but it possess lower fluctuation compared to that of Agrani Bank. Average growth rate of
Al-Arafah Islami Bank Ltds ROE ratio is almost 11.72% which is quite satisfactory.

DEBT TO EQUITY RATIO:

One of the important measurement of capital adequacy for a bank is debt to equity ratio.
It shows the percentages of a banks financing which came from outside sources
compared to insider sources and thus measures the leverage or riskiness of the bank. If a
bank is more leveraged that means higher debt to equity ratio, it is assumed that the bank
is more risky to borrow money from outsider sources of financing. In this circumstances
lender become unwilling to grant loan to such a bank or demand higher interest rate even
if the lender grants the loan. The higher magnitude of this ratio does not come alone with
drawbacks, there is an advantages for having this ratio higher. If a bank has more debt
capital compared to equity capital it can enjoy tax deductible advantages come in the
form of lower amount of tax needed to pay. When we look over the graph below, a most

amazing fact can be noticed. In every year Agrani Bank Ltd which is a state owned bank
in Bangladesh has much more debt to equity ratio than that of Al-Arafah Islami Bank Ltd.
Most likely reason for this circumstance can be presented as Agrani Bank Ltd is a state
owned bank and every state owned bank is back by government and central bank so the
bank does not feel any risk to borrow from outside sources. This fact is most prevalent
here. Another fact to be noticed here that the change occurred in the year of 2012 for
Agrani Bank Ltd.

Figure 4.F: Debt to Equity Ratios:

Debt to Equity
60
51.82

50
40
30
20
17.71
10

12.6

0
2009

15.85

12.45
6.56

2010
Agrani Bank Ltd

7.91

2011

9.63
2012

11.46

9.76

2013

Al-Arafah Islami Bank Ltd

***Sources: Annual Report

We already noticed that in 2012 Agrani Bank Ltd faced significant amount of losses. We
can assume here that this loss might happen for this significant amount of borrowings
which result a significant amount interest cost to be paid. This interest cost ultimately
deducts the profit could be earned. On the contrary this ratio for Debt to Equity ratio for
Al-Arafah Islami Bank is much more stable and has a decreasing trend of -1.06% on an
average. It indicates the lower dependence on outside borrower of banks management. In
a reverse way it is an indication of greater self-dependency to provide capital of the bank.

A/D RATIO:

Loan to Deposit Ratio is synonymously known as A/D ratio or Advance to Deposit ratio
is a powerful tool to measure bank liquidity. It is simply found through dividing advance
or loan by deposit. It is a very important indicator for bank because if the ratio is too high
which indicates bank will face liquidity problem and it has not enough fund in its hand to
meet customer demand. On the contrary if the percentage is too low, it harms profitability
of a bank. So as a decision maker of a bank, a manager must be prudent about this issue.
By observing the graph, it is obvious that this ratio for both of the two banks are too high
which indicates both of the bank may face liquidity problem in near future. But with the
compilation of current ratio we can get a clearer picture about the liquidity of these two
banks. A/D ratios above 60% is considered as a sound ratio for banks.

Figure 4.G: A/D Ratios:

A/D Ratio
100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%

94.21%
73.51%

93.43%
79.13%

89.07%
76.95%

90.56%

88.74%

72.72%
58.21%

2009

2010
Agrani Bank Ltd

2011

2012

2013

Al-Arafah Islami Bank Ltd

***Sources: Annual Report

When we look over the current ratios of these two banks, we see that both of the banks
are in a sound position during the last five years. So we can conclude that both of the
banks will not face liquidity problem for the higher percentage of A/D ratios, rather they
will reap benefit of this percentages. It is a demonstration of proper loan management.
Managements are good enough to produce enough loan from the funded collected in the
form of deposit.

TIER-I CAPITAL RATIO:

Tier-I capital ratio is a part of capital adequacy ratio. It makes a comparison between a
banks core capital and banks risk weighted asset. Banks core capital is the measure of
financial adequacy and thus known as Tier-I capital. This ratio is calculated through
dividing total equity by risk based asset. Sometimes revaluation reserve is being deducted
from total equity. Total equity includes retained earnings, current year earnings and other
equity reserve. From the chart shown here we get a clear picture about the capital
adequacy of these two selected banks. If we look over the chart for Agrani Bank Ltd, we
can see that the bank successfully maintained a steady growth during five years time
period. We have seen in earlier ratio analysis that, Agrani Bank Ltd has faced net loss in
2012, Tier-I capital ratio for that year was negative. Apart from this little wrench, the
bank always maintain an amazing upward trend which was verily stable during the years.
As the bank is a state owned bank, it will not be great concern for the banks
management. When we look over the graph for Al-Arafah Islami Bank Ltd, we get a
more hopeful picture. During this fiver years

Figure 4.H: Tier-I Capital Ratios:

Tier-I Capital Ratio

15.00%
10.00%
5.00%
0.00%
2009

2010

2011

2012

2013

-5.00%
-10.00%
Agrani Bank Ltd

Al-Arafah Islami Bank Ltd

***Sources: Annual Report

time period. The bank maintained a steady growth rate -5.7%. Though the growth rate is
negative but it would not be a much concern due to its little magnitude.

TIER-II CAPITAL RATIO:

Another dimensional capital adequacy ratio is Tier-II capital ratio, though it is less
reliable than Tier-I Capital ratio. It is also known as supplementary capital ratio. Under
Basel-I, Tier-II capital includes revaluation reserve, general provisions and subordinated
debt. It is calculated in the same process of calculation Tier-I capital ratio. Tier-II capital
is being divided by risk weighted asset. If we look over the chart for Agrani Bank Ltd, we
see that this graph is almost similar to Tier-I capital ratio. Like Tier-I capital ratio, this
ratio has a negative magnitude in the year of 2012. Apart from this year, this ratio was
showing upward growth rate during the five years time period. On the other hand, Tier-II
ratio for Al-Arafah Islami Bank Ltd is much more stable that of Agrani Bank Ltd. Tier-II
capital ratio is showing 5% positive growth rate which is quite satisfactory.

Figure 4.I: Tier-II Capital Ratio:

Tier-II Capital Ratio

6.00%
4.00%
2.00%
1.33%
2.00%
0.00%
2009
-2.00%

4.00%

3.00%

3.00%

1.37%

1.16%

1.28%

1.57%

2010

2011

2012

2013

-4.00%

-6.00%

-6.00%
-8.00%
Agrani Bank Ltd
***Sources: Annual Report

Al-Arafah Islami Bank Ltd

 CHAPTER-5: STATISTICAL ANALYSIS

5.1 REGRESSION ANALYSIS CONCEPT:

Regression analysis is used to determine the underlying dependency between dependent

variable and independent variable. It measures the degree to which dependent variable is
changed by the cause of the change in independent variable. To measure the impact of
retail banking services of both Islamic banks and Conventional banks over it sales and
profitability, I have decided to run regression analysis. For this purpose I will conduct
single linear regression analysis and my assumptions are:

Table 5.A: Dependent and Independent Variable:

Independent Variable (X)

Dependent Variable (Y)
Deposits

Sales
Regression Equations
Y(sales) = + bx(deposits)

I will derive two regression equation where I will show the relationship between deposit
and sales. In second equation I will show the relationship between deposit and
profitability. For the purpose of the study, loan/investment of different particular year will
be assumed as Sales.

Before going to analyze mathematical data, it is very crucial to have a clear concept about
regression analysis. I will try to find out following parameters:

Constant (): The alpha or constant parameter measures the extent to which change in
dependent will occur regardless with the change in independent variable.

Slope (): Slope measures the degree to which change in dependent variable will occur
for the change occurred in independent variable.

5.2 HYPOTHESIS TESTING CONCEPT:

I have decided to conduct hypothesis test to evaluate the relationship found in regression
analysis. It is very essential tool to assess the accuracy of mathematical model. Through
regression model, we can show the underlying relationship between dependent and
independent variables. But whether the relationship already build up is really true or not
can be assessed by hypothesis testing. Thus no mathematical model is said to be
completed without hypothesis testing.

Simply Hypothesis Testing implies as a process of determining whether the hypothesis is

a reasonable statement or not. Broadly hypothesis testing or significance testing is a
method for testing a claim or hypothesis about a parameter in a population, using data
measured in a sample.

Before going to conduct hypothesis testing, I need to define both Null Hypothesis and
Alternate Hypothesis.

Null Hypothesis: The Null hypothesis (H0), stated as the null, is a statement about a
population parameter, such as the population mean, that is assumed to be true. The null
hypothesis is a starting point. Through hypothesis test, it is tested that whether the value
stated in the null hypothesis is likely to be true. It is assumed that no hypothesis exists
(null or zero) in population parameter and therefore population parameter is true.

Reason for testing null hypothesis is that it is assumed that null hypothesis is wrong and
what is the wrong in null hypothesis will be stated in Alternate Hypothesis.

Alternate Hypothesis: An alternative hypothesis (H1) is a statement that directly

contradicts a null hypothesis by stating that that the actual value of a population
parameter is less than (<), greater than (>), or not equal to () the value stated in the null
hypothesis. The alternative hypothesis states what we think is wrong about the null
hypothesis.

To conduct hypothesis testing, I need to follow a series of structured steps. These are:

1) State the Null Hypothesis (H0) and the Alternate Hypothesis (H1).
2) Select a Level of Significance.

3) Compute the Test Statistics.

4) Formulate the Decision Rule.
5) Make a Decision.

Determining confidence level is an important step in Hypothesis Testing. Confidence

level is defined as one minus level of significance while level of significance is defined
as the percentage of error the researcher is willing to accept. Usually in every case of
research 95% or 99% confidence level are being used.

In hypothesis testing region of rejection and do not reject are determined through the
decision rule. To reach in a conclusion test statistics are compared with decision rule. If
test statistics lies within the region of rejection, the Null hypothesis becomes rejected.

5.3 FINDINGS OF THE REGRESSION EQUATION:

I have derived two regression equations for two banks. Comparative discussion of
regression equation for both of the banks are discussed here.

Sales-Deposit Regression Equation:

We know that banks generate loan and advances from deposit collected from its
customers. For that reason it is most likely to have a strong relationship between these
two variables. By the first regression equation, I have tried to find the magnitude of the
equation for both of the banks.

REGRESSION EQUATION:

Equation(Agrani Bank Ltd)

Y (Sales/Loan & Advances) = +x(Deposit)

Y (Sales/Loan & Advances)= 2558 + 0.494 Deposit

Equation(Al-Arafah Bank Ltd) :

Y (Sales/Loan & Advances) = + x(Deposit)

Y (Sales/Loan & Advances)= 2741.3 + 0.883 Deposit

While we concentrate over the regression equation of Agrani Bank Ltd, we see that is
almost 2558 unit. The magnitude of is considered as constant and thus does not change.
It concludes that Agrani Bank ltd will be able to generate 2558 unit of sales or loans even
if it failed to generate any single amount of deposits. Such amount of sales will be
generated by the bank regardless of the situation in every year. is considered as slope
intercept, which measure the sensitivity of independent variables with dependent
variable.

Figure 5.A: Sales-Deposit Regression Line (Agrani Bank Limited):

20000
18000

f(x) = 0.49x + 2557.99

16000
14000
12000

Sales

10000
8000
6000
4000
2000
0
10000

15000

20000

25000

30000

35000

40000

Deposit

***Sources: Annual Report

When we look over the equation of Agrani Bank Ltd, we notice that is almost 0.494
unit which implies that 1 unit of deposit collection will make the bank able to generate
0.494 unit of sales. In other words, the bank will generate almost 50 (49.4) Taka of loan
by collecting 100 Taka of deposit.

On the other hand and are almost 2741.30 unit and 0.8825 unit respectively for AlArafah Islami Bank. While analyzing the equation, we can see that Al-Arafah Islami
Bank can generate more sales that that of Agrani Bank Ltd regardless of collected
deposit. This situation become obvious by observing and magnitude of for Al-Arafah
Islmai Bank is higher than that of Agrani Bank Ltd. When we consider or sensitivity,
we see that Al-Arafah Islami Bank is also prominent here. The bank can generate almost

90 (88.25) Taka of sales by using 100 Taka of deposit which is about 40 Taka greater than
that of Agrani Bank Ltd.

Figure 5.B: Sales-Deposit Regression Line (Al-Arafah Islami Bank Limited):

140000
120000

f(x) = 0.88x + 2741.32

100000
80000

Sales

60000
40000
20000
0

20000

40000

60000

80000

100000 120000 140000 160000

Deposit

***Sources: Annual Report

On the whole we can conclude here Al-Arafah Islami Bank is more efficient to generate
sales from its deposit than Agrani Bank Ltd and its deposit causes much changes in its
sales generation.

COEFFICIENTS OF CORRELATION (R):

Coefficients of correlation (R) determines the degree of relationship between independent

variable and dependent variable. In fact, it measures the direction of relationship relying
between independent variables and dependent variables. Broadly it explains the direction
of change occurred in dependent variables due to the change of independent variables.
We can have a clear vision regarding the correlation for both of the banks through below

table:
Table 5.B: Pearson Correlation: Coefficient of Correlation (R):

Net

Sales
Depos

it
Com
ment

Pearson Correlation

Agrani Bank Ltd

Net Sales

Deposit

Al-Arafah Islami Bank Ltd

Net Sales

Deposit

1.00

0.937

1.00

0.999

0.937

1.00

0.999

1.00

Strong Positive Relationship

Strong Positive Relationship

We can notice that Correlation Coefficient for Agrani Bank Ltd is 0.937 or 93.7% while it
is 0.999 or 99.9% for Al-Arafah Islami Bank. That means dependent variable sales or
loans and advances are being changed 93.7 unit due to 100 unit change of independent
variable Deposit. Statistically this relationship is called strong positive relationship which
means deposit and net sales move in the same direction. Most similar picture can be
found in case of Al-Arafah Islami Bank Ltd. Coefficient of Correlation for this bank is
also positive and it stands very close to 100%. So if amount of deposit increases for both
of the banks, these two banks can increase its net loans and advances.

COEFFICIENT OF DETERMINATION (R2):

Coefficient of determination measures the ability of dependent variable to explain the

variability of dependent variable. Higher the magnitude of R2, the greater the indication
of the validity of dependent variable prevails. It is a very important tool used in

regression analysis because it gives the proportion of the variance (fluctuations) of

dependent variable that can be predicted by independent variables.

Table 5.C: Coefficient of Determination (R2):

Coefficient of Determination (R2)

Agrani Bank Ltd

Al-Arafah Islami Bank Ltd

0.877

0.998

From the above table, we can conclude about the validity of the model for both of the
banks. We can see that independent variable deposit can explain almost 87.7% of the
variability of dependent variable for Agrani Bank Ltd and this percentage is almost
99.8% for Al-Arafah Islami Bank. So for both of the banks my independent variables are
sufficient enough to predict the variability of independent variable.

ADJUSTED R SQUARE (ADJUSTED R2):

Adjusted R2 measures the necessity of including more independent variable in the model
to have more accurate prediction. If value of Adjusted R2 exceed the value of R2, it
indicates that we need to insert more independent variable and thus R 2 will reach in a
magnitude to the extent value of adjusted R 2 is prevailing now. So if we have Adjusted R 2
greater than R2, then independent variables are not sufficient enough and thus the model
will not be valid.

Table 5.D: Adjusted R2:

Agrani Bank Ltd

0.860

Adjusted R2

Al-Arafah Islami Bank Ltd

0.998

***Sources: SPSS Output

From the table, Adjusted R2 for Agrani Bank Ltd is lower than R 2 (0.860 < 0.877) and is
equal to R2 (0.998 = 0.998), so models are accurate for both of the banks. The model will
not give better result if more independent variables are entered.

ANALYSIS OF VARIANCE (ANOVA):

Total sum of squares is divided into two parts; Sum of Squared due to Regression (SSR)
and Sum of Squared due to Error (SSE). Addition of SSR and SSE compose SST. So:

SST

SSR + SSE

Table 5.E: Analysis of Variance (ANOVA):

Analysis of Variance (ANOVA)

Model

Regres

Squares

sion

Residu

Total

124983
716.411

al

Sum of

17502713.811
142486430.222

Model

Regres

sion

Residu
al

Total

Mean Square

124983716.411

Sum of

135709
39279.090

49.9
86

Mean Square

13570939279.

23621795.762

13594561074.8

52

Si

2500387.687

8
Al-Arafah Islami Bank Ltd

Squares

Agrani Bank Ltd

090

3374542.252

Si

402

1.56

Mean square is an important component for the analysis of variance. It measures the
average variation occurred by independent variable and also by the error. From the table
we can see that SSR and MSR for both of the bank is greater than SSE and MSE. It
indicates that the estimated regression equation provides a better fit for the observed data.
If SSE or MSE exceed SSR or MSR we could not draw such a conclusions.

5.4 TEST OF HYPOTHESIS:

STEP-1: STATE THE NULL HYPOTHESIS (H0) AND ALTERNATE HYPOTHESIS (H1):

Through Hypothesis testing model, I tried to test whether any significant relationship
exist or not between the dependent and independent variable. So, Null Hypothesis and
Alternate Hypothesis can be written as:

H0 = 1=2= 0 (No linear relationship exist between independent and dependent

variable)

H1 = 1 2 (Significant relationship exist between independent and dependent

variable)

STEP-2: SELECT A LEVEL OF SIGNIFICANCE:

While inputs are given in SPSS software, I have used confidence level as 95%,
synonymously which implies as significance level () as 5% or 0.05 (100%-95%) for
both of the bank. That means I am accepting 5% error of this calculation.

STEP-3: COMPUTE THE TEST STATISTICS:

As I have shown simple regression analysis, so I have to use T-Statistics to find the
parameter. Another Test Statistics F-Test shows the aggregate relationship of independent
variable with dependent variable and it is not applicable here. T-Statistics can be found:

Table 5.F: T-Statistics:

Name of the Bank

Agrani Bank Ltd

(1/S1)

(0.494/0.070)

T-

Statistics
7.070

Al-Arafah Islami Bank Ltd

(0.883/0.014)

63.416

Both of values are found by SPSS software. To reach the conclusion, we have to consider
degrees of freedom which is:

Here,

df = (n-p-1)

n = Number of Observation; P = Number of Independent Variable

So degrees of freedom (df) for both of the bank is 7 and it is similar. As I am going to test
whether any relationship exist between independent variable and dependent variable or
not, so it is a two tailed test.

STEP-4: FORMULATE THE DECISION RULE:

To reach in the conclusion we need to compare calculated T-Statistics with tabulated

value. If tabulated value exceed the calculated T-Statistics, Null Hypothesis will be
accepted and vice versa decision will made in reverse situation. Tabulated value can be
found in altogether with degrees of freedom (df) and our accepted significance level ().

Table 5.G: Decision Rule

If

Situation
t(df,
)

Calculated

Statistics
If
t(df,
Calculated

>

T)

<
T-

Decision
Accept the Null Hypothesis (H0)/Reject the Alternate
Hypothesis (H1)

Reject the Null Hypothesis (H0)/Accept the Alternate

Hypothesis (H1)

Statistics

STEP-5: MAKE A DECISION:

From T-table, we can find tabulated T-Statistics. Combining altogether degrees of

freedom 7 and significance level 0.05, we find table value as 2.365. As degrees of
freedom and significance level are same for both of the banks, so tabulated value will be
same for the two banks. From the SPSS output we can see,

Table 5.H: Hypothesis Decision:

Name of the Bank

t(7,.05) = 2.365

T-Statistics =

Al-Arafah Islami

7.070
t(7,.05) = 2.365

Bank Ltd

T-Statistics =

Agrani Bank Ltd

T-Statistics

Decision

t(7,.05) < t-statistics

Reject the Null Hypothesis (H0)

t(7,.05) < t-statistics

Reject the Null Hypothesis (H0)

63.416

From the above table we can make a clear conclusion. We can see that Null Hypothesis
(H0) is rejected for both of the banks. It synonymously indicate to accept the Alternate
Hypothesis (H1). Our Alternate Hypothesis (H1) was the conclusion that significant
relationship exists between dependent variable and independent variable. Finally it is
clear that the change of deposit amount significantly affect the change of loan amount for
both of the banks.

 Findings & Conclusions:

6.1 FINDINGS:

Based on data analysis and theoretical discussion a somewhat clear conclusion can be
made. If we look over ratio analysis, we have a very clear vision about my selected two
banks. Consider liquidity ratio and profit margin ratio, we can see Al-Arafah Islami Bank
is enjoying higher percentages of ratio than that of Agrani Bank Limited. Alongside, all
the ratios of Al-Arafah Islami Bank are more stable than that of Agrani Bank Limited.
Another clear indication can be found by looking over A/D ratio. This ratios were also
higher than that of Agrani Bank ltd and also stable during five years time period. So
looking over all the ratios it is clear that Al-Arafah Bank Ltd is in a better position than
that of Agrani Bank Ltd in terms of ratio analysis.

Making a decision based on only ratio analysis will be misleading. So it is necessary to

combine ratio analysis with another statistical analysis tools to have a valid comparison.
Correlation Coefficient of Al-Arafah Islami Bank is higher than that of Agrani Bank Ltd.
It is an indication that Al-Arafah Islami Bank Ltd is more efficient to generate loan from
its deposit than that of Agrani Bank Ltd. Because its deposit is more related with its loan.
R2 and adjusted R2 considered as tools of validating regression model are also showing
higher result for Al-Arafah Islami Bank Ltd than that of Agrani Bank Ltd though
significance level for both of the banks are similar. Finally move to hypothesis testing,
Null Hypothesis (H0) were rejected for both of the banks indicating that significant
relationship existed between deposit collection and loan generation for both of the banks.
So combining these three mathematical analysis, we can surely conclude that both of the
banks were solvent in terms of liquidity, attractive in terms of profit generation, efficient
in terms of capital and asset management. But bottom line is that Al-Arafah Islami Bank
Ltd was in a far better position than that of Agrani Bank Ltd.

6.2 CONCLUSIONS:

In these report, I tried to show to present a comparative analysis between our

conventional banks and Islamic banks. For this purpose I have selected two banks.
Analyzing retail banking sector of these two banks, I have drawn a conclusion regarding
its retail banking performances. Though making a comparison between these two sectors
cannot be drawn properly based only the comparison of my selected two banks. But I
have tried to show a more relevant statistics and comparison which represents the whole
banking sector. My analysis showed me a pros and cons in our banking sector focusing
only retail banking services. Upon completing my study and analysis I have found that,
Islamic Bank in our country are much better to generate loan and to manage their retail
services. To some extent state owned commercial banks in our country outperform
Islamic Banks in our country. But their success in temporary and lies in very small arena.
Stability in state owned commercial banking sector is rare even very fatal to some extent.
During the period of my analysis, I have sometimes found a few dangerous situation
which causes a bank to be bankrupt and my selected bank would be bankrupt if it would
have not been a state owned bank. But when I look over Al-Arafah Islami Bank, the
situation is reversed. The bank earned a stable growth rate in every dimension during the
period of my analysis and did not face any situation like Agrani Bank Ltd. This analysis
actually shows the indigence of our public banking sector. Public banks are not in a
position to compete with the other banks. Their customer demand is increasing and might
not be survive if would not be public banks. On the other hand Islamic banks are being
popular and have growing popularity due to their transparency, accountability and
responsibility to their business.

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