Interest free banking and Islamic banking are interchangeable terms. Shariah guides the economic system of mankind thus requiring interest free banking and finance machinery in a country to make it more productive and beneficial for people. However the banking system has been dominated by the conventional interest based system for centuries in the whole world and interest free banking has a recent origin in the history. It is a matter of great interest in the research community as to analyze the practices of both the systems in different economies in order to understand and learn from their experience as well as to decide which system, whether interest based or interest free, is a better option. Therefore, this study strives to explore the case of Pakistan where interest free banking and conventional interest based banking are competing with each other by taking a representative bank from both system and applying different statistical and financial tools thereupon.
Performance Analysis of Banks
There are many stakeholders of banking sector in an economy e.g. investors, depositors, bank managers, or regulators, and the performance evaluation of banks is imperative for all parties. The decision of the investor-depositor i.e. whether to withdraw funds from the bank or invest is based on the signals provided by the performance of banks in financial market facing high competition. As the depositors are not having the entitlement of fixed returns and the nominal values of their deposits are not guaranteed, so they may also be interested in performance evaluation of the bank. The managers are eager to inquire about the results of the decisions taken by previous management as well as to assess whether to improve credit and loan service or deposit service or even both, in order to develop its finance. Being responsible for the safety and the reliability of the banking system and ensuring public confidence, the bank authorities monitor banks’ performance to figure out banks that are experiencing severe problems. Constant monitoring of performance is imperative as existing issues may remain unnoticed and may lead to financial failure in the future otherwise (Samad and Hassan (2000), and Hassan & Bashir (2003)). This is true for both, the conventional banking as well as for the Islamic banks. There are various issues e.g. rising and stiff competition, consolidation among banks, globalization, deregulation, liberalization, and continuous innovation to provide Shariah compliant and acceptable financial services etc. that have given rise to the interest of all the concerned and interested parties and stakeholders in detailed and critical performance analysis of Islamic banks.
Performance analysis of Islamic Banks in Pakistan
The existing literature on Islamic banking reveals many research studies made on performance analysis of Islamic banks (e.g. Samad & Hassan (2000), Samad (2004), Bashir (2000), Rosly & Abu-Bakar (2003), Hassan & Bashir (2003), Samad (1999), Sufian (2007), Saleh & Rami (2006)). Furthermore, various research studies on assessing the financial performance of Islamic bank and conventional bank in a comparative manner have been included by the existing literature for different countries on Islamic banking and finance but there is a lack of studies published on comparative analysis of financial performance of Islamic bank and conventional bank for Pakistan case.
Different authors and researchers have applied different tools and techniques for the performance analysis and the financial ratios are widely used in these researches as per the literature. Consequently, for this study, the financial ratios have been used to measure and compare Islamic bank and conventional banking performances in terms of liquidity, risk and solvency, profitability, and efficiency.
Islamic Banking in Pakistan
Though, Islamic banking in Pakistan originated around thirty years ago with a project of abolition of Riba (interest) from the operations of conventional commercial banking and from that of the specialized institution in 1977-1978, but serious efforts have been made in the recent past only when in January 2000, the State Bank of Pakistan (SBP) set up a commission namely, Commission for Transformation of Financial System (CTFS) to launch and introduce Shariah compliant modes of financing, and, the second one, being the establishment of the Islamic Banking Department by State Bank of Pakistan (SBP) on 15 September 2003. As a result of these efforts, Islamic banking is now adding value and playing a vital role in banking and finance and contributing to various economic and social sectors in the economy in compliance with the principles and regulations of Shariah in practices of Islamic banking.
There are few Islamic banks in Pakistan and a majority of these Islamic banks started their operations only recently. However, conventional banks in Pakistan, comparatively, are fairly large in number and size, and greater part of these banks is operating in Pakistan for more than a decade.
The Aim of the research study
The aim of the study is to analyze and examine the experience of Faysal Bank, as a representative of Islamic banking, for evaluating the performance of Islamic banking in comparison with the Standard Chartered bank, representing the conventional banks in Pakistan. Since Faysal Bank is the one of the oldest, relatively large and experienced Islamic bank in Pakistan, it can provide a better capacity to generalize the results about the performance analysis of Islamic banks in Pakistan. The research study will also furnish some insight about the Islamic banking performance in comparison to conventional banking in Pakistan.
Objectives
The main objectives of this study are:
To conduct a performance analysis of conventional Banking and Islamic Banking
To compare and contrast the performance of conventional banking practices with Islamic banking practices
To provide a case study of Conventional Bank (Standard Chartered) and Islamic Bank (Faysal Bank) for the period of year 2008-09
Significance of the study
The results of this study will be beneficial for:
Islamic banks in Pakistan (in particular)
The results of the study (whether in the favor or not) will serve as a performance report on comparative basis and will help the Islamic banks to reflect on it and improve further.
Conventional banks in Pakistan (in general)
The results of the study (if in the favor of Interest free-Islamic banking) will serve as a rationale and objective evidence urging interest free product offerings from their platform as well
The research community in Islamic banking and finance for further research as this research is delimited to the extent of two banks of Pakistan (one bank representing each system) and cannot be generalized on the whole banking sector but can be handy to induce further investigation in future.
Delimitation
Only Faysal Bank is taken as a representative of Islamic Banking in Pakistan
Only Standard Chartered Bank is taken as a representative of Conventional Banking in Pakistan
Only the financial data for year 2008 and 2009 are used for the performance analysis of both banks
