Comparative Performance Analysis of Islamic and Conventional Banking:Introduction:Generally the worlds banking system revolves around the two

types of banks. The one is interest-based banking system called as conventional banking system and the other is interest-free banking system called as Islamic banking system. Islamic banks and conventional banks both create competition among themselves to satisfied customers and fulfill their expectations and long term benefits for the economy. The conventional banks and the Islamic banks are differentiated commonly on the basis of their goals, Riba and risk sharing practices. Islamic bank follows the Shari law given by the Quran and Sunnah. As Pakistan is a Muslim country and having the population of 96% of the Muslims. Islamic banks have different kinds of opportunities to meet the multiple challenges as strong reaction from public to meet their requirements. Islamic bank and conventional banks are also differentiated as interest free banks and interest based banks. The economic philosophy of Islam has no concept of Riba because according to Islam, Riba is that curse in society, which accumulates money around handful of people, and it results inevitably in creating monopolies, opening doors for selfishness, greed, injustice and oppression. Deceit and fraud prospers in the world of trade and business. Islam, on the other hand, primarily encourages highest moral ethics such as universal brotherhood, collective welfare and prosperity, social fairness and justice. Due to this reason, Islam renders Riba as absolutely haram and strictly prohibits all types of interest based transactions. On the one hand, there are severe warnings of the Quran and Sunnah and on the other, it has been taken today as an integral part of the world economy. Due to which the whole society is facing injustice, oppression, selfishness, greed, deceit and frauds, and so many other problems. Therefore, we the Muslims should move away from interest based transactions and move towards interest free banking.

Difference between Conventional Banks and Islamic Banks:

s no Conventional Banks Islamic Banks

i. Interest is the integral part of the Interest of all blessings is completely conventional banks prohibited in Islamic banking. ii Conventional banks functions and Islamic banks functions and operating modes . operating modes are based on self are based on the Islamic Shariah principles. developed principles. ii Conventional banks provide fixed The Islamic banking based on profit and loss sharing. i. return. i Conventional banks focus only on Islamic banking v lending to get interest in shape of business. profit. . promotes partnership

v It aims at maximizing profit without It also aims at maximizing profit but under the umbrella of Shariah. . any restriction. v Conventional banks only deals with i. tax but not deals for the collection and distribution of Zakat. v Conventional banks provide guarantee ii to clients for their deposits. Islamic banks are used to provide services of collection and distribution of Zakat. Islamic bank did not take responsibility of return of real equity.

. v The bank has no concern with clients Islamic banks highly appreciate equity growth for public interest ii equity growth. i. i For interest-based commercial banks, For the Islamic banks, it must be based on a x borrowing from the money market is Shariah approved underlying transaction. relatively easier . x The defaulter of the bank pays extra Islamic banks are multipurpose institution because of this their scope is wider. . charges as a penalty.

x Bank build relation with clients of Islamic bank create a relation with client as a partner, investor and trader. i. creditor and debtors x Conventional bank greatly emphasis Islamic banks clients can lose their actual deposit rather than the profit. ii on the client creditworthiness .

BANK ALFALAH
Bank Alfalah Limited is a private bank in Pakistan owned by the Abu Dhabi Group. Bank Alfalah was incorporated on June 21, 1992 as a public limited company under the Companies Ordinance 1984. Its banking operations commenced from November 1, 1992. The bank is engaged in commercial banking and related services as defined in the Banking companies ordinance, 1962

Private Banking Industry Capital Markets Founded June 1992, Karachi PRODUCTS: Headquarters Principal Office, Karachi Pakistan With the mission to provide allH.E. Sheikh Hamdan Bin Mubarak Al Key people Nahayan (Chairman) encompassing banking services to the Loans, credit cards, Savings, customers, Bank Alfalah has a uniquely Products Consumer Banking etc. Revenue PKR 35.561 billion (2009) defined menu of financial products. Net income PKR 897.03 million (2009) Employees 7,462 (2009) Website www.bankalfalah.com Car Financing Rupee Travelers Cheques Online Banking Credit Cards ATMs Home Financing Islamic Banking

Type

Corporate and Structured Financing

HABIB BANK:
HBL (Urdu: ( ) 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.

PRODUCTS OF HBL:
To the ever changing customers need HBL is offering large no of products some of them are given below: Deposits accounts hbl car loan hbl car to car Hbl credit card Hbl visa debit card Hbl phonebanking Hbl personal loans Lockers Type Public Limited Company (KSE: HBL) Banking Industry Capital Markets Founded Bombay (now Mumbai), in 1941. Headquarters Habib Bank Plaza, Karachi, Pakistan Loans, credit cards, Savings, Products Consumer Banking etc. Revenue PKR 76.08 bn Net income PKR 13.4 bn Website Habib Bank Limited

RATIO ANALYSIS OF BANK ALFLAH AND HBL:(A) LIQUIDITY RATIOS:In a nutshell, a company's liquidity is its ability to meet its short-term obligations, and it is a major measure of financial health. The liquidity ratios include the following ratios: 1). Current Ratio Current ratio measures a companys ability to meet its current debts with current assets. 2010 1.03 1.4 2011 0.1 1.05 MEAN 0.565 1.225

BANK ALFALAH HBL

2). Advance to Deposit Ratio: This ratio shows the investment of the bank through approving the loans against accepting the loan. 2010 58.52% 61.52% 2011 49.46% 48.99% MEAN 53.99% 55.26%

BANK ALFALAH HBL

3).Cash Ratio:-

Cash ratio indicates the extent to which readily available funds can pay off current liabilities. BANK ALFALAH HBL 2010 0.04 0.10 2011 0.01 0.10 MEAN 0.025 0.1

(B).LEVERAGE RATIOS:A company's leverage relates to how much debt it has on its balance sheet, and it is another measure of financial health. Generally, the more debt a company has, the riskier its stock is. 1).Debt-to-Total Assets:The debt total assets ratio measures the companys financial risk by determining how much or what portion of the companys assets are being financed through debt. The lower the Debt to Asset Ratio, the better, as companies with high amounts of debt introduce more risk. 2010 0.95 0.90 2011 .045 0.90 MEAN 0.4975 0.90

BANK ALFALAH HBL

2).Debt-To-Equity Ratio The debt/equity ratio measures how much of the company is financed by its debt holders compared with its owners.

BANK ALFALAH HBL

2010 69.45% 46.59%

2011 79.58% 39.41%

MEAN 74.52% 43.00%

(C).PROFITABILITY RATIOS:Profitability ratios relate profits to sales and investment. These ratios indicate the firms overall effectiveness of operation. 1). Return On Average Equity (ROE):-

Return on equity is a straightforward ratio that measures a company's return on its investment by shareholders BANK ALFALAH HBL 2010 4.90% 18.86% 2011 16.46% 21.70% MEAN 10.68% 20.28%

2). Return On Average Assets (ROA):Return on assets measures a company's ability to turn assets into profit. BANK ALFALAH HBL 2010 0.24% 1.90% 2011 0.80% 2.16% MEAN 0.52% 2.03%

3) Earning Per Share:2010 0.72 15.26 2011 2.60 20.13 MEAN 1.66 17.69

BANK ALFALAH HBL

Analysis and interpretation:A) Analysis of liquidity ratios:The higher the liquidity ratios the favorable it is because it shows the companys ability to meet its short-term obligations. The first ratio is current ratio. The mean valve of two years of current ratio for Bank Alfalah is 0.565while for HBL it is 1.225. It shows that the current assets of the HBL are more than its current liabilities as compared to Bank Alfalah. The advance to deposits ratio and cash ratio is also high of HBL as compared to Bank Alfalah. B) Analysis of Leverage Ratios:The lower the Leverage Ratios, the better it is, as companies with high amounts of debt introduce more risk. The first ratio is debt ratio. The mean valve of two years of debt ratio for Bank Alfalah is 0.4975 while for HBL it is 0.90. It indicates that Bank Alfalah have low debt than HBL. In other words it means that Bank Alfalah have more assets than liabilities indicating lower cost of financing. The second ratio is Debt to Equity Ratio. The mean valve of two years of Debt to Equity Ratio for Bank Alfalah is 74.52% while for HBL it is 43.00%. This ratio indicates lower debt for HBL banks and higher for Bank Alfalah. Hence HBL is favorable. C) Analysis of Profitability Ratios:The three ratios to measure the profitability are Return on Assets (ROA), Return on Equity (ROE) and Earnings per Share (EPS). Higher ratios are preferable. The first ratio is Return on Assets. The mean valve of two years of Return on Assets Ratio for Bank Alfalah is 0.52% while for HBL it is 2.03%.The ratios show that assets of HBL generate more profit than Bank Alfalah. The second ratio is Return on Equity (ROE). The mean valve of two years of Return on Equity Ratio for Bank Alfalah is 10.68% while for HBL it is 20.28%. The third ratio is Earnings per Share (EPS). The mean valve of two years of Earning per Share for Bank Alfalah is 1.66 while for HBL it is 17.69.

Conclusion:-

From the above comparison it is clear that the performance HBL is much better than the Bank Alfalah. HBL started is operation even before the creation of Pakistan and Bank Alfalah started its operations very recently but still its position in the banking industry is very satisfactory. Almost all the ratios show that the position of HBL is favorable. It is concluded from the overall ratio analysis that HBL is more liquid, less risky and operationally efficient than Bank Alfalah.

References
1. Dr. Muhammad Imran Ashraf Usmani, 2002, Meezan Banks Guide to Islamic Banking, Karachi, Meezan Bank Limited. 2. Muhammad Ayub, 2002, Islamic banking and Finance (Theory and Practice), State Bank of Pakistan