Performance of Islamic and Conventional Banks in Pakistan
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Published: Thu, 15 Mar 2018
Islamic banking having distinct modes of operations as compared to conventional banks has been started in the 1970s to address the problem of Riba. The committed and resourceful individuals, professional bankers, Islamic economists and religious scholars are attributed to be pioneer of Islamic banking. Its philosophies and principles are, however, not new having been outlined in the Holy Qur’an and the Sunnah of Prophet Muhammad (p.b.u.h.) more than 1,400 years ago. The emergence of Islamic banking is often related to the revival of Islamic financial system which is totally usury (Riba) free. There was no initial working model to act upon, except the thought that interest-based banking might be replaced by banking on the basis of profit-and-loss sharing. The basic purpose of Riba-free financial system was the elimination of all interest based transactions. Effort for the establishment of this system took place when the financial system at large, as also the regulatory environment, was Riba-based. At the start Riba free financial institute were established through private parties but soon things began to change in the late seventies and in the early eighties when Iran, Sudan, Pakistan and Malaysia realized the need to develop Riba-free financial system in all these countries (Ahmad, 1991).
Islamic banking started with the establishment of two financial institutions in Mit-Ghamr in the Nile Delta and in Karachi from 1963-1967. The progress was made in this movement by the establishment of full- fledged Islamic bank with the name of Dubai Islamic Bank in 1965. By the end of 1996, the number of Islamic financial institutions reached to 166 in at least 34 Muslim and non-Muslim countries. Islamic banking got popularity in 1970s (Chapra, 2001). Now, Islamic banks are operating in more than sixty countries (Aggarwal and Yousaf , 2000).
There are more than 300 Islamic financial institutions all over the world with investment funds in excess of $400 billion (El-Qorchi, 2005).The Islamic banking industry’s world-wide annual growth rate is more than 16%. Islamic banking has also gained approval by international financial institutions (IFI), professional bankers and the academic world. Islamic banking has successfully established its identity and performing its operations distinct from its conventional counterparts. Islamic banking in the modern world, generally aims to promote and develop the application of Islamic principles, law and traditions to transactions of financial, banking and related business affairs. Islamic banks, by doing so, will safeguard the Islamic communities and societies from activities that are forbidden in Islam (Tahir, 2003).
Pakistan is an ideological state and was created in the name of Islam in 1947. The Islamic banking is getting popularity in the country. Many efforts are being made to make it workable and successful in the era of conventional banking. The State Bank of Pakistan (SBP) had initiated the process of converting the conventional banking system into Islamic Banking. SBP developed a Three-step strategy to fulfill this purpose. The first step is to Setup exclusive Islamic banks. In the second step existing conventional banks is permitted to have Islamic Banking subsidiaries. Third step of this strategy is the establishment of stand alone branches by existing commercial banks. The State Bank also appointed Shariah Board to regulate and approve guidelines for the emerging Islamic Banking industry. Being a Muslim country there is huge scope for Islamic and Modaraba Banking system in the country. The country’s first full-fledged Islamic Bank, which is Meezan Bank licensed by SBP in 2002, is a successful business enterprise and a premier one. It has been very careful in its expansion drive. National Bank of Pakistan has started Mudaraba banking and trying its level best to enhance its profitability and accommodate the general masses. Muslim Commercial Bank (MCB), Faysal Bank and Al-Meezan banks are also in the Islamic banking field. Pak-Kuwait Investment Company Limited, which is one of the country’s premiere joint venture financial institutions, is launching the first ever Islamic Insurance Company in Pakistan. There is huge market of Islamic banking i.e. $2.5 to 3 billion in the country (Khan, 2004).
Presently, there are six full-fledged Islamic banks operating in Pakistan. These banks with their year of incorporation are:
AlBaraka Islamic Bank Pakistan (1991)
Meezan Bank Limited (2002 – restructured as Islamic bank)
BankIslami Pakistan Limited (2003)
Dubai Islamic Bank Pakistan Limited (2005)
Emirates Global Islamic Bank Limited (2007)
Dawood Islamic Bank Limited (2007)
Meezan Bank starts working in Pakistan in 2002 .Eight years have been passed since its establishment. There is only one comparative study conducted during this period to analyze the performance of Meezan bank.
1.2. Significance of the Study
Financial Institutions are very important for every economy because they are the most contributing factor to keep economies on the path of economic growth and development. Financial ratios are the indicator of financial health of organization. Ratio analysis is not only important for depositors but also for management to improve organization future performance. The purpose of the study is to provide full picture of banks financial position to investors, management and shareholders .The another purpose of research is to make people aware of Islamic banks financial position and to make comparison of performance of Islamic and Conventional banks in order to identify, which one has, better financial position.
1.3. Statement of the Problem
This research study will investigate the financial performance of Islamic and conventional banks in Pakistan. There is a question that whether or not Islamic Banks in Pakistan are less profitable, more liquid, cost effective, less risky, have better capital adequacy and operational efficiency than conventional Banks. There is a need to conduct a study to analyze the performance of Islamic and conventional banks in Pakistan. There has only one study yet been conducted to answer such questions with reference to Islamic banking in Pakistan? This study analyzed some dimensions. There is still need of more studies to answer these questions. This study would prove a significant contribution and would fill the gap in the body of knowledge. This study will provide true picture of performance of Islamic and conventional banks in Pakistan to concerned managers, regulators, depositor and shareholders.
1.4. Research Objectives
Based on the above discussion, following are the objectives of the study:
To compare the performance of Islamic and Conventional Banks to facilitate depositors, bank managers and regulators by providing true picture of banks financial position.
To point out certain areas of business in both Islamic and conventional banking where improvement is required and
To fill the gap in the body of knowledge.
1.5. Delimitations of the study
Sample size is small to measure performance of Banks.
In literature different other methods and models were used to evaluate the performance of banks but this study follows only one method.
Performance evaluation process requires long time span.
Only three Islamic and three conventional banks for generalization of results have been taken.
To measure financial performances every category contains several ratios but this study focus on some ratios under each category.
2. LITERATURE REVIEW
Previous studies on the empirical investigation of the financial institutions operating on the interest-free principles are very limited. The existing ones are mostly descriptive, and focus on the simple financial ratios. Although few empirical studies are available which have undertaken a comparative analysis and explored the performance of the Islamic and conventional banks among these, Moin (2008), Samad (2004), Samad and Hassan (1999) and Iqbal (2001) got great importance.
The performance of first Islamic bank in Pakistan i.e. Meezan bank was compared with group of 5 conventional banks. The study evaluated the performance in terms of profitability, liquidity, risk, and efficiency for the period of 2003-2007. Twelve financial ratios such as Return on Asset (ROA), Return on Equity (ROE), Loan to Deposit ratio (LDR), Loan to Assets ratio (LAR), Debt to Equity ratio (DER), Asset Utilization (AU), and Income to Expense ratio (IER) were used as variables to assess banking performances. T-test and F-test were used to measure the significance difference of these Performances. The study found that MBL is less profitable, more solvent (less risky), and also less efficient comparing to the average of the 5 Conventional banks. However, there was no significant difference in liquidity between the two sets of bank (Moin, 2008). Islamic bank business development framework is not working efficiently as compare to conventional banks (Farrukh, 2006).
Metwally (1997) evaluated the performance of 15 interest-free banks and 15 conventional banks in terms of liquidity, leverage, credit risk, profitability and efficiency. He concluded that the two groups of banks may be differentiated in terms
of liquidity, leverage and credit risk, but not in terms of profitability and efficiency. Interest-free banks rely more heavily on their equity in loan financing and face more difficulties in attracting deposits than interest-based banks. Interest-free bank hold a higher Cash/deposit ratio because they tend to be relatively more conservative in using their loanable funds and lack lending opportunities. The profit/loss sharing principle has made it difficult for interest-free banks to finance personal loans and pushed interest-free banks to channel a greater proportion of their funds to direct investment (using Musharaka and Mudaraba tools of finance). Both banks offer their depositors similar returns and direct the largest proportion of their funds towards the financing of durables. Interest-free banks rely heavily on the Murabaha mode of finance which is like interest charge and based on the use of a mark-up. These performance measures were analyzed by Samad (2004) to compare the performance of Bahrain Islamic and conventional banks. He used studet-t test and found similar results in respect of profitability and risk while no difference is found in liquidity of two banks.
Samad and Hassan (1999) evaluated the intertemporal and interbank performance of Islamic bank Bank Islam Malaysia Berhad (BIMB) for the period 1984-1997 by using same performance measures and found that in inter-temporal comparison Islamic bank BIMB’s made (statistically) significant progress in profitability while the BIMB risk increased. In interbank comparison the study found that BIMB is relatively more liquid and less risky compared to a group of 8 conventional banks.
A study conducted on five Islamic banks from MENA region analyzed their financial statements over the period 1993 – 2002 found that Liquidity risk arises because of pre mature withdrawal by account holders due to a mismatch between investor’s expectations of return and the actual return. Therefore Islamic banks are required to keep adequate cash or cash equivalents to meet the demand. They identified the other reasons of liquidity risk can be the lack of confidence on the banking system, reliance on few large depositors, reliance on current accounts and restrictions of Islamic banks on sales of debt. The profitability of Islamic banks is low due to short term investments and low equity base (Badr-El-Din, Ibrahim and Vijaykumar, 2003). In case of Islamic banks, short term Debt financing includes Murabaha, Salam, and Qard fund and long term debt financing includes Sukuk, leasing and Istisna. In case of conventional banks short term debt financing include treasury bills, trading bonds, short term loan and advances and deposits at other financial institution that mature within one year. Long term debt financing include non trading bonds and medium and long term loans (Hussein, 2004).
The Islamic Bank Bangladesh, as a case in the region has successfully developed and employed Islamic modes of banking. The performance of IBBL over the last 16 years has been continuously increasing. Performance is measured by using some additional variables as Bank’s deposits, investment, remittances, and foreign exchange business. IBBL overall performance has been very significant in respect of mobilization of deposits, deployment of funds, operating results, capital adequacy ratio, provision for bad & doubtful investments, liquidity, equity, profit paid to depositors, income from ancillary business, payment of dividend, return on equity and foreign exchange business (Ahmad, Hussain and Hannan, 1999).There are differences between Islamic and conventional banks with respect to mobilization of deposits and application of funds. In Islamic bank depositor profit is not pre-determined and principal amount is not guaranteed while conventional banks have guaranteed principal and accrued interest (Siddiqui, 2005). One of the major advantages of opening a PLS Savings Account with the Islamic Bank is that the initial deposit figure to open a Savings Account is only Taka 100.00 (2.5 US $) where in any other commercial banks in Bangladesh it is not less than Taka 4000 (US $ 100). The Islamic bank invests its funds mainly under Murabaha, Musharaka, Bai-Muajjal, Hire Purchase and Quard E Hasana mode of investments. The remarkable advantages of Islamic bank are easy procedure of obtaining loan and quick action in processing loan activities (Alam, 2000).
Iqbal (2001) made comparison of performance of Islamic banks with conventional banks. He compared performance of both types of 12 banks of equivalent size during 1990-1998. In additional to profitability, liquidity, risk some more variables such as Capital Adequacy and Deployment efficiency were also studied .The performance of Islamic banks has been evaluated using both trend and ratio analysis. He concludes that Islamic banks as a group out-performed the former in almost all areas and in almost all years. He analyzed through ratio analysis Islamic banks are not suffering from excess liquidity and are more cost effective and profitable than their conventional counterparts. Kader and Asarpota (2007) found the same results in UAE.
The conventional banks profitability theories exist in Islamic banking. It is found that determinants such as capital ratio, liquidity, interest rate and money supply have similar effect on Islamic banks. Capital ratio, interest rate and inflation are positively related with the profitability of Islamic banks. However there is negative relationship between market share and profitability (Haron & Ahmad, 2001).The conventional financing system is concerned only with the interest rate, while the Islamic financial system provide loan without interest and collateral or only against an administrative cost [( Arif 1988) and (Ayub, 2002)]. Islamic banks are certainly more profitable than their conventional peers enjoying the same balance sheet structure. The main reason for such a difference is that Islamic banks benefit from a market imperfection. Islamic banks lose on the grounds of liquidity, assets and liabilities concentrations and operational efficiency (Hassoune, 2002). The net non-interest margin (NIM) another indicator of performance measure indicate that conventional banks are operational efficient than Islamic banks. The profitability of interest-free banks is positively influenced by high capital and loan-to-asset ratios, favorable macroeconomic conditions, and negatively to taxes (Hassan & Bashir, 2003).
Hassan (2005) using a panel of interest-free banks from 22 countries, and using multiple efficiency techniques, found that interest-free banks were relatively less efficient in containing cost than conventional counterparts in the world but they are efficient in generating profit. The variable used to measure efficiency were Bank size, profitability and loan to asset ratios. The reason of less efficiency of interest-free banks is that they often face regulation not favorable to Islamic transactions in most countries.
All above studies conducted in different countries deal with common problem. Most of them were conducted to analyze the performance of Islamic and conventional banks. All studies have not same result because of differences in selected time periods, analytical tools and cultural perspective. It is analyzed through these studies that Islamic banks are more profitable, more liquid, cost effective, and less risky and have better quality of loan portfolio and capital adequacy than their conventional counterparts but they loose at the ground of operational efficiency.
2.1. Conceptual Framework
Risk and solvency
3.1. Theoretical Framework
The ratio analysis involves method of calculating and interpreting financial ratios to asses firm’s or bank performance. Financial ratios are the indicator of financial performance of bank. In order to compare performance of Islamic banks (Mand Conventional banks (for the period of 2006-2009 the study uses inter-bank analysis. The study evaluates inter-bank performance of Islamic banks and Conventional banks in term of profitability, liquidity, risk and solvency, capital adequacy, operation and resource allocation efficiency. Financial ratios are applied to measure these performances. The study uses eighteen financial ratios to evaluate bank performances. These ratios are grouped under six broad categories.
3.1.1. Profitability Ratios
Profitability ratios measure the managerial efficiency. These ratios use margin analysis and show the return on assets, deposits, investments, and equity. The higher profitability ratios are indicator of better performance. Sammad and Hassan (1999) used three profitability ratios to evaluate the performance of Islamic bank Malaysia. These ratios were Return on assets (ROA), Return on equity (ROE), and Profit expense ratio (PEM).This study uses the same Profitability measure to analyze the performance of banks in Pakistan.
Return on assets (ROA) = Earnings after tax/Average assets
Return on equity (ROE) = Earnings after tax/Average equity
Profit Expense Margin (PEM) = Profit before tax/operating expense
3.1.2. Liquidity Ratios
Liquidity ratios measure the firm ability to meet its short-term obligations. Banks face liquidity problem due to excess withdrawal from current and saving account. There are several measures of liquidity. Iqbal (2001) used current ratio as liquidity measure. Samad & Hassan (1999) used three more measures which include Cash deposit ratio (CDR), Loan/deposit ratio (LDR) and Current asset ratio (CAR) to evaluate the performance of Malaysian Islamic bank during 1984-1987. Hassan & Bashir (2003) also used Net loans/ total assets ratio as liquidity measurement indicator. Liquidity position of banks in Pakistan is measured by using four above ratios.
Current Ratio (CR) = Cash and account with banks/Total deposits
Current Asset Ratio (CAR) = Current asset /Total asset
Loan Deposit Ratio (LDR) = Loans/ Deposits
Net Loan/ Total Asset Ratio (LAR) = Net loans/Total assets
3.1.3. Risk and Solvency Ratios
Solvency Ratios give a picture of a Bank’s ability to generate cash flow and pay its long-term financial obligations. If the total value of bank assets is greater than its equity then the bank is solvent. Samad & Hassan (1999) used three risks and solvency ratios in their study .These ratios included Debt equity ratio (DER), Debt to total asset ratio (DTAR) and Loan deposit ratio (LDR).This study uses the same hold to measure risk and solvency of banks in Pakistan. The above mention ratios are calculated with the help of following formulas.
Debt Equity Ratio (DER) = Total Debt / Shareholder Equity
Debt to total asset ratio (DTAR) = Total Debt/ Total asset
Loan Deposit Ratio(LDR) = Loans/ deposits
3.1.4. Capital Adequacy Ratios
Capital ratios indicate the healthiness of financial institution to shock withstanding losses. These ratios identify the already existing banking problems. Adverse trends in these ratios may increase risk exposure and capital adequacy problems. Iqbal (2001) used Capital Asset Ratio (CAR) as capital adequacy measure. Hassan & Bashir (2003) in addition to CAR used Equity/Liabilities ratio to measure capital adequacy in their study. This study focused on three following Capital ratios.
Equity/Liabilities ratio = Average equity/ Average liabilities
Capital Risk Asset ratio = Total Capital/Risk weighted Assets
3.1.5. Operational Ratios
Operational Ratios show how efficient a company is in its operations and use of assets. There are several ways of measuring operations. Iqbal (2001) used Cost to income ratio to evaluate the operational efficiency of banks. Hassan & Bashir (2003) used thirteen operating ratios to evaluate operating efficiency of banks in their study. Some ratios used by Hassan & Bashir as operating ratios other researches used them as profitability ratios. This study also focused them as profitability measures.
This study uses Net Interest Margin (NIM), Other Opt Income / Average Assets, Non Interest Exp / Average Assets and Cost income ratio to measure bank efficiency in its operations and use of assets. The following formulas are given to calculate these ratios
Net Interest Margin = Net markup & interest income/Average assets
Other Opt Income/Average Assets = Other operating Income / Average Assets
Non Interest Expense /Average Assets = Non-interest expenses/ Average Assets
Cost/Income ratio =
3.1.6. Deployment Ratios
Deployment ratios are used to evaluate how well bank is using its resources. Iqbal (2001) used two deployment ratios to evaluate the Performance of Islamic and conventional banks in 1990s. This study uses the same deployment ratios to evaluate bank efficiency in resources allocation.
Investment/ Equity & Deposit = Total Investment /Total equity + Total Deposits
Investment/ Liabilities = Total Investment /Total Liabilities
The population of this research is Banks of Pakistan.
Meezan bank Limited, BankIslami Limited and Dubai Islamic Bank limited are selected as Islamic banks and Askari Commercial Bank, Atlas Bank and Samba Bank limited are selected as conventional banks.
H1: Islamic Banks are less profitable than conventional Banks.
H2: Islamic Banks Liquidity is higher than conventional Banks.
H3: Islamic Banks are less Risky than conventional banks.
H4: Islamic Banks are well capitalized than conventional banks.
H5: Islamic Banks operational Efficiency is greater than conventional banks.
H6: Islamic Banks resource allocation efficiency is less than conventional banks.
3.5. Data Sources
The Audited financial statements i-e Income Statement and Balance Sheet of both banks Islami Banks ( Meezan bank Limited, BankIslami Limited and Dubai Islamic Bank limited) and Conventional Banks ( Askari Commercial Bank, Atlas Bank and Samba Bank limited )for the period of 2006 -2009 are used for ratio analysis. The ratios have been calculated with the help of ratio formulae. The other sources used for data collection are SBP, KSE and business recorder databases.
3.6. Data Analysis
Inter bank comparison or cross-sectional analysis is used to compare the Performances of both banks. Independent Sample t-test is used to determine the significance of mean differences of these ratios. As the categorical variable is having two categories (Islamic and Conventional) and the test variables are on ratio scale so it meets the criteria of independent sample t test. A decision criterion is P value. If P value is greater than 0.05 we will accept null hypothesis and will reject research hypothesis.
4. DATA FINDING, ANALYSIS AND DISCUSSION
This chapter analyzes and discusses the results obtained through financial ratios and Independent sample t-test. In order to make comparison more reliable, Independent sample t-test is used. The equality of means of two banks is tested through Independent sample t-test.
Profitability of banks is analyzed by using three profitability measures ROA, ROE and PEM. ROA is the net earnings per unit of a given asset. ROE is the net earnings of per dollar equity capital. PEM is measure of cost efficiency which analyzes the bank efficiency of making higher profits with given expense. Table 4.1 shows a fluctuating situation in all the profitability measures of Islamic banks bank from 2006-2009. Table 4.2 Shows that there is a declining trend in conventional bank’s ROE from 2006-2009 while ROA and PEM fluctuates. It is analyzed from these figures that the profitability of both banks has two way trends. Table 4.3 shows that average Profitability ratios ROA, ROE and PEM for Islamic Bank are -1.60, 3.75 and 2.12 compared to -0.64, -1.89 and -46.13 for conventional banks. This difference in profitability performance of two banks is not significant at 5% level of significance. Islamic bank ROE ratio is lower than conventional bank. Overall result shows that profitability performance of Islamic and conventional banks is not significantly different so research hypothesis is rejected that Islamic banks are more profitable than conventional banks. This result is consistent with those of Metwally (1997), Samad and Hassan (1999) and Samad (2004).
The liquidity position of Islamic and conventional bank is analyzed through Current ratio, Current Asset ratio, Loan Deposit ratio and Net Lons to Total Asset ratio. CR indicates the bank ability to meet its current liabilities. A higher value of CR shows that the bank has more liquid assets to pay back to its depositors. CAR indicates the percentage of bank liquid assets. A high CAR is sign of liquidity. LDR measure the degree of relines of bank on borrowed funds. The high figure of LDR shows that bank is more relying on borrowed funds and leads to illiquidity. Net loans to total assets ratio measures the total loans outstanding as a percentage of total assets. The higher this ratio indicates a bank is loaned up and its liquidity is low. Table 4.1 shows there is declining trend in CR and CAR of Islamic banks while LDR and NL/TAR ratio fluctuates. Table 4.2 shows that there is rise and fall condition in all the liquidity measure of Conventional banks. However the values of CR and CAR are higher for Islamic bank during whole selected period. This shows that Islamic bank has more liquid asset to meet its current liabilities. Table 4.4 shows that Islamic bank average CR and CAR are 26.37 and 17.71 as compared to 11.58 and 8.06 for conventional banks and this mean difference in liquidity performance is significant at 1% level of significance. Islamic bank average LDR and NL/TA are 44.62 and 43.56 as compared to 51.90 and 48.39 for conventional banks. This mean difference is not significant at 5% level. LDR and NL/TA ratios are in the favor of Islamic banks. These ratios are lower for Islamic banks, the lower these ratios it is considered better. These ratios show that Islamic banks do not rely more on borrowed funds and their percentage of assets tied up in loan is lower than conventional banks. These results are consistent with those of Metwally (1997), Hassan (1999), Iqbal (2001),Badr-El-Din, Ibrahim and Vijaykumar( 2003) and Kader and Asarpota (2007). Overall results of liquidity ratios support the hypothesis that Islamic banks are more liquid than conventional banks.
The reasons of Islamic bank high liquidity are firstly they do not have enough investment opportunities. Secondly, they are bound by religion and are allowed to invest only in Sharia approved projects. Thirdly, they rely more on their equity in making loans so they lack lending opportunities.
Three Risk and solvency measure DER, DTAR and LDR have been used to evaluate the riskiness of banks. DER measures the bank ability to absorb financial shocks. DTAR is the indicator of bank financial strength to pay its debtors. Table 4.1 and 4.2 shows that there is rise and fall condition in all risk measures of both Islamic and conventional banks in whole selected period. These results show that Islamic banks involvement in risky businesses grew with the passage of time. Table 4.4 shows that average DER and DTAR and LDR for Islamic bank are 25.24, 2.35 and 44.62 as compared to 77.06, 8.88 and 51.90 for their conventional counterpart. Independent Sample t-test supports that the mean difference of LDR is not statistically different; however, the mean difference of DER and DTAR is statistically different at 5% level of significance. The lower risk and solvency ratios are good and show low riskiness of bank. All risk and solvency indicator shows lower percentage of risk for Islamic banks as compared to conventional banks. It is analyzed from these results that Islamic bank are less risky than conventional banks. It is concluded from these results that Islamic banks ability to absorb financial shocks and their financial strength to pay their debtor is higher and conventional banks. These results are consistent with Moin (2008), Sammad(2004) and Hassan(1999)
Capital adequacy of banks is measured with the help of Equity/Liability and Capital/Risk asset ratios. Islamic and Conventional bank Capital adequacy ratios (Table 4.1& 4.2) shows increase and decrease trends. Islamic banks are reducing their ratio of Equity liability from year to year by enlarging their investing portfolio. When average Capital ratios are compared for Islamic and conventional banks it is analyzed that Islamic bank have higher Equity liability and lower Capital risk asset ratio than conventional banks. Table 4.4 shows that Islamic bank average Capital risk asset ratio and Equity liability ratios are 23.52 and 31.89 respectively while these ratios for conventional banks are 25.7 and 21.53 respectively. There is no significant mean difference between these ratios at 5% level. Results do not provide any evidence in either way that Islamic banks are well capitalized. These results do not support the hypothesis that Islamic bank are better capitalized than their conventional peers.
The fifth component of the study is operational ratios. NIM is one indicator of bank operational efficiency. The higher this ratio it is considered better. Table 4.1 shows that Islamic bank NIM increases from 2006-2009 while there is a fluctuation in conventional bank NIM (Table 4.2). Table 4.4 shows that the average NIM ratio for Islamic bank is 6.51 higher than conventional bank ratio 2.28. This mean difference between two banks is not significant at 5% level of significance. This ratio indicates that Islamic banks has high margin. Table 4.4 shows that the average Non Interest Exp/Average Assets ratios and Other Opt Income/ Average Assets ratio are 9.95 and 0.39 for Islamic banks as compared to 5.18 and 0.44 for conventional banks However, a Cost / Income ratio is lower for Islamic banks. The lower the cost income ratio it is better. Islamic Bank Cost/Income ratio 99.40 is lower than Conventional bank 135.59. The mean differences of these ratios are not significant at 5%level. It is analyzed from overall results that major operational ratios NIM and Cost income ratios are in favor of Islamic banks and supports the hypothesis that Islamic banks operation
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