MUHAMMAD TAQI BALTI

PRESENTATION TOPIC:
COMPARISON OF ISLAMIC AND CONVENTIONAL BANKING IN PAKISTAN

Govt College University Faisalabad

COMPARISON OF ISLAMIC AND CONVENTIONAL BANKING IN PAKISTAN

Conventional Banking is economic system -----------> collect the deposits from General Public at low rate of interest give loan--------------------> collected deposits to the public, Government institutions and business corporation and charge high rate of interest.

system of banking or banking activities-------> Islamic law & Economics Islamic law prohibits usury-----------> interest (Riba) Islamic law also prohibits ------------> Trading in Financial Risk

Islamic law also prohibits------------> Investing In Unlawful & illegal Business

CONVENTIONAL VS ISLAMIC BANKING

Current Global Environment banks performing Multiple Functions to provide a variety of Product and services & providing latest Facilities. Pakistani Banking Sectors has experienced very unstable environment since 1950 A proper Islamic Banking started in Egypt in 1970. In 2002 Meezan Bank was registered as first full fledge Islamic bank by the SBP. Islamic Banking is growing with fast speed While Conventional Banks surprisingly decline in countries due to capitalisms and founder of interest based financial system Many Global Bank opened separate window Branch. The annual growth Rate of Islamic banking is 20%

ISLAMIC FINANCIAL SYSTEM

 some basic difference in theory and practice which draws a line of separation. The basic function of the two institutions is same. the Following things are d/f with each others: 1. 2. 3. 4. 5. 6. Different mode of borrowing Different mode of financing Different modes of investment Different concept of money. Different concept of risk-sharing Having different objectives and goals

1. DIFFERENT MODE OF BORROWING

Conventional banks offer different deposit schemes and borrow funds from the depositors. Short term, Medium Term & long Term. interest is fixed on these deposits The banks are liable to pay these fixed rates of interest to depositors at the completion of term. Islamic Banks share profits and loss with depositors.

According to the SBP report, 2008, in Pakistan average weighted deposits rate between 2006 and 2007. conventional banking 11.2% and 11.56%( interest) Islamic banking 3.56% and 3.79% ( profits)

2. DIFFERENT MODE OF FINANCING

Conventional banks provides loan to government, business firms, and individuals. Consumer Financing Working Capital Financing Project Financing banks charge high rates of interest on all these types of loans. high rate of interest results in failure of businesses and default of loans especially in case of non-performing loans. Islamic bank also provides funds for project financing and for working capital. But its practice of financing is different from conventional bank It provides loans on profit-and-loss (PLS) basis. Moreover, Islamic banks provide loans only for productive purpose.

TYPES OF FINANCING PROVIDED BY ISLAMIC BANKING IN PAKISTAN

Musharikah Financing Mudarabah Financing Murabaha Financing Ijarh Financing Diminishing Musharakah Mussawama Financing SALAM Project Financing Working Financing

3. DIFFERENT MODES OF INVESTMENT

Conventional banks make more than 50 percent investment in government Treasury bills, bonds and term finance certificates Islamic banks also make investment out of their deposits in different sectors. But this investment is different from conventional banking.

Islamic banks cannot invest in government treasury bills, bonds and Term Finance Certificates which carries fixed rate of interest
Islamic banks can only invest in non-interest bearing financial instruments like equity market, Islamic Sukuk, Mutual fund etc Since 2000, all Islamic banks have been started issuing Islamic Sukuk

4. DIFFERENT CONCEPT OF MONEY.

The conventional bank uses the money as a commodity which is bought and sold

People who borrow money on interest sometimes commit suicide

In other words, interest is just like cancer Islamic bank use money as a medium of exchange to facilitate trade transactions. Islamic bank supplies money to traders to purchase real assets plants or raw material Islamic bank does not use money to multiply it wealth

5. DIFFERENT CONCEPT OF RISK-SHARING Islamic banking is perfectly a risk-sharing (PLS) system. (both borrower & lender)

the conventional banking is non-risk-sharing system as the investors or lenders have nothing to do with the loss of borrower.
the borrowers are fully responsible to take every kind of risk and bear loss.

In case of business failure, he has to lose collateral.

Islamic bank or investor is vigilant about the proper use of loan and watch the activities of the borrower.

6. HAVING DIFFERENT OBJECTIVES AND GOALS The objective of Islamic banking is to earn profit through fair distribution of financial resources with adopting sharia rules and regulations. The objective of conventional banks is to maximize the profit by concentrating the resources and charging high rate of interest.

Systematic Deference B/w Islamic and Conventional Banking

loans ---------------------------------> Cash payment ---------------------------------> Purchase Asset

Repayment of loan (Principal + interest)

Interest Based Banking= Bank as a lender

Deferred Payment --------------------------------->

Cash payment --------------------------------->

Assets Transfers to client

Purchase Asset Cash price + bank margin

Profit and loss Sharing Based banking= bank as a Trader

Growth of Islamic Banks: Some important indicators(December2003- to June 2011)

Total Assets (December) Total Rs.b 13 44 71 119 206 276 366 411 Share of Total IBIs % Rs.b 1 2 2 3 4 5 6 6.1 8 30 50 84 147 202 283 330 Deposits Share of IBIs % 1 1 2 3 4 5 6 6.4 Net financing Investment Total Rs.b 10 30 48 73 138 186 226 236 Share of IBIs % 1 1 2 2 4 4 5 4.6

2003 2004 2005 2006 2007 2008 2009 2010 (June)

2011 (June)

560

7.3

452

7.6

420

7.0

The following conclusions emerge from the above table: 1)IBIs represent 7.3% of banking industry. 2) IBIs share of deposit was 7.6% and

3) The share IBIs in net financing investment was 7.0% of banking industry.

Satisfaction of Customers
Facilities of Banks Islamic Banks Conventional Banks Fast and efficient counter Services 66% 82.9% Speed and efficiency of Transactions 61.3% 87.8% Interior comfort of Branches 56.8% 58.5% Experienced management team 75% 82.9% Availability of financial advice 77.3% 92.7% Faster document processing 63.6% 90.2% Knowledge on customer's Business 54.5% 80.4% Sufficient time for transaction 79.6% 90.2% Convenient branch location 50% 90.2% Awareness program on services 56.8% 68.3% Competitive Product Offerings 63.6% 80.4% Uniform services in all branches 56.9% 80.5% Confidence in Bank's Management 68% 82.7% Bank size in assets and capital 63.6% 43.9% Lower service charge 59.1% 26.8%

Comparison of the Financial Ratios of Islamic and Conventional Banks

Indicators EARNING RATIOS Returns on assets Return on deposits Return on equity Earning per share ASSET QUALITY RATIOS 0.47 0.42 7.78 0.94 -0.75 -0.75 -2.27 -0.34 Islamic Banks Conventional Banks

Non-performing loans (NPLs)

NPL to advances

Rs.790,654 million
1.06

Rs.26.228 Billion
5.88

Provisions to NPLs
DEBT MANAGEMENT RATIOS Debt to Equity Deposit time capital

47.09

40.89

2.3 3.57

8 5.71

Debt to Assets

0.78

0.85

LIQUIDITY RATIOS Earning assets to total assets Advances to deposits yield on earning assets SOLVENCY RATIOS Equity to total assets Equity to deposits Earning assets to deposits

0.95 0.83 1.81

21.78 36.2 143.79

0.93 0.70 -0.27

14.59 20.09 115.98