Gradually, Islamic banking is getting popularity not only all over the world but also in Bangladesh. Islamic banking is less risky compared to conventional banking.Both cases of income and defeat, Islamic bank and its clients share it according to previous agreed proportion. The performance of Islamic banking also in a positive trend and higher than any conventional banking. The Performance of banking has expected a great debate among scholars and researchers nowadays. Thus, this chapter will present the foundation and followed by the evaluation of Islamic bank’s performance. The goals of this chapter are to deliver a broad overview and background of the study, which helps as the details for other subsequent chapters and for this study as a whole. Firstly, this chapter will elaborate the background and the issue of the study by describing the presence performance of Islamic banking industry in Bangladesh. The next sub-section will highlight the problem statement, followed by the research objectives, theoretical Framework and lastly the scope of the study.
1.2 background of the study
Currently, Among the 7.6 billion total population nearly 1.6 billion are followed Islam, that means more than 21% population in the world are Muslims. Moreover, The number of the Muslim population has increased faster than our religion follower.According to the experts, by 2060, Islam will be the leading religion in the world. As a result, Islamic banking also has a bigger market portion because most of the Muslim prefer to do banking with a financial institution that has not any relation to interest-based banking.In Bangladesh, the market for Islamic banking is going to an upward trend and day by day the number of Islamic banking booming faster.Though, The history of shariah-compliant banking in this country not from long ago.
Nowadays, the competition of any industry has increased a lot than any previous time in the history.Like another sector, in the banking industry, it can feel the pressure due to the consumer apprehension.Besides that, the entering of Fintech company in this specific sector has made a big difference for traditional banking institution because those financial technology companies get popularity for its effectiveness and operations. So for existing in this sector Institution has to adjust swiftly and offering better services to keep its client with them.
In general, To figure out any companies performance we need to measure the achievement of this particular institution by its performance.Each company has fixed a target and try to gain it. If any company achieved its aims that it set earlier, then it will be a success for them.On the other hand, if it fails to get it then it will see opposite trend.So, this evaluation is important for the future improvement of this company.
Due to the globalization and borderless market, The performance analysis of shariah-compliant banking is essential today.The competition between a traditional bank and Islamic banking now in fierce.In Bangladesh, the competition between this two type of banking has reached a high level because of the attractiveness of Islamic banking and its upward performances.
The operational approach of traditional and Islamic banking are contrasting.Islamic Banking is the focus and following the Islamic shariah which means it has to take the risk and interest cannot be allowed.On the other hand, Traditional banking does not prohibit of taking interest and it mainly focuses how to maximize the capital of this bank.
Therefore, for the above circumstances, this research considers the valuation of Islamic banking in Bangladesh, after that doing comparison with traditional banking through ratio analysis between two contrasting banking method that mostly happens in the world currently.Six shariah compliant and nine traditional banks will include this research and the financial year is 2010 to 2014.
1.3 Statement of the problem
The market exposed a new window in the banking areas and it places a vital role in countries total growth globally. A firm has to act as safe access to both surfaces to conclude any procedure in banking and dealing. Bank has been committing to the progress of any country for a light years and it’s preserved as an essential market nowadays beyond any doubt.. Currently, Bank is not only regulated within parallel geographical areas but also covering a large volume of operation. Gradually, the competition in banking field has become greater. To attract possible buyer and financier bank has to display diversity and performances. In the current, the client should have knowledge about the previous and present accomplishment of the bank. To be informed about the bank’s position in the banking region the monetary ratio analysis is the best way to all. So this research conduct to show the financial constancy of particular Islamic and conventional bank in Bangladesh by its monetary ratio analysis by associating banks previous financial performance. An overall certainty is that a firm’s financial performance rest on definite key financial factors such as turnover, profit and the variables which originate from the balance sheet of an institution, have both direct and indirect connection with each other. By forming a close relationship between the variables, a firm analyses its economic performance in terms of liquidity, effectiveness, and viability (M.S.Ramaratnam & R.Jayaraman, 2010). For this study, the time of comparison is 2010 to 2014 which has not done in any previous research with comparing both Islamic and conventional banks performance in Bangladesh.
1.4 Objectives of the study
The key purposes of the study are to estimate and evaluate the financial performance of Islamic banks in Bangladesh. As the financial performance valuation of an Islamic bank, the study has taken into accounts the following specific objectives:
· To show the financial stability in both kinds of Banking
· To recognize the financial position of the sample Islamic banks to observe and examine the financial performance of the sample banks
· To spot a comparative analysis based on the findings of the study.
· To appreciate overall Bank financial performance condition.
1.5 Research Question
I. What is the performance of selected Islamic bank and how they form an inter-banking relationship?
II. What type of problems are faced by Islamic bank while implementing Islamic banking?
III. What are the possible ways of achieving sustainable banking?
IV. What are the financial position of the sample Islamic bank and conventional banks?
1.6 Scope of the study
In this research, we limit recent fiscal year from 2010 to 2014 has been selected to analyze the financial statement in the annual report from that are listed below:
Year of Incorporation
Islami Bank Bangladesh Limited
Al-Arafah Islami Bank Limited
Social Islami Bank Limited
Shahjalal Islami Bank Limited
First Security Islami Bank Limited
Exim Bank Limited
Jamuna Bank Limited
City Bank limited
Brac Bank Limited
Dutch- Bangla Bank Limited
Prime Bank Limited
Premier Bank Limited
Southeast Bank Limited
Trust Bank Limited
Mercantile Bank Limited
CHAPTER 2: LITERATURE REVIEW
This chapter will focus and discuss the previous analyst perspective and their uncovering with respect to this study. Consequently, this review provides us the vital or a theory that rise from a central point of view and therefore the investigator will be able to achieve an overall setting regarding examine the performance of Islamic and conventional in Bangladesh. Their findings are essential in term of the data and performance of those respective banks that involved and thus it will contribute and monitor to further step in this study.
2.1 LITERATURE REVIEW
Sarker, Md. A. A. (1999) intended to check the performance of Bangladesh first sharia-compliant bank’s pursuance in the advantage of the usage of a different economic proportion during 1988 to 1997.In this particular research they evaluated and rated Islami bank Bangladesh in a first place in term of its skyward enlargement due to remain in leading in respect of revenue throughout the stage Besides, they also concluded that the retaining in the joint partnership was below 5% of the whole contribution and leaving standing another trust payment settlement.
Akkas (1996) did a comparative analysis on two different kind of bank in Bangladesh which were Islamic and traditional banking and he came to a conclusion that traditional bank is far behind in term of strength with the sharia complaint banks. According to Ali (2005), the general financial institution was incompetent compare with its opposite financial industry. Sarker (1999) concluded that different business organization should not act on under different operation. Hasan (1999) matched the performance of IBBL with other private banks in Bangladesh in 1993 to 1994. He disclosed that in terms of payment growth and investment growth, the performance of Islami Bank Bangladesh Limited (IBBL) was far way better than the performance of private banks. Mahal and Rahman (2013) made a comparative inquiry between traditional and Sharia complaint banks of Bangladesh. They argued the distinctions of product or contract and the differences in terms of business efficiency between Islamic banks and conventional Banks.
Mahmood (2005) examined the economic competence of both Islamic Islamic and general banking in Pakistan. Where Islamic banks were performing far ahead than conventional banks during his chosen era. Ahmad, Rehman, and Saif (2010) studied more than 700 Islamic and found that conventional bank traders in Pakistan are more delighted with the services presented by Islamic banks rather than conventional banks. Sadaqat, Ali and Farhan (2011) studied that the key threats for Islamic banks in Pakistan is liquidity risk and they also debated that Islamic banking has well-performed comparing to conventional banking regarding profitability, operational efficiency, growth and liquidity during the global financial crises. Akhtar, Ali & Sadaqat (2011) made a comparative analysis of Islamic and conventional banks of Pakistan by concentrating on the importance of dimension of the firm, networking capital, return on equity, capital competence and return on an asset with liquidity risk management. They found that size of the banks and net working capital to net assets having a positive but insignificant relationship with liquidity risk, On the other hand, the capital adequacy in conventional banks and return on asset in Islamic banks having a positive relationship with liquidity risk. Jaffar & Manarvi (2011) assessed the performance of Islamic and conventional banks of Pakistan through CAMEL test during the period of 2005 to 2009 and revealed that Islamic banks operated better and having high liquidity than the conventional banks.
Mamun, Dr. Muhammad Z (2008) concentrated on the hidden presumption Islamic banks in Bangladesh as observed by Islamic and general lenders. In this research, he tried to figure out why a client should prefer Islamic banking with traditional one and for that Bank’s took any initiatives on it or not. The research raised approaches of standard facilitates that the extraordinary drugs that Islamic banks get from national bank add to their productivity and this factor admit a basic part in influencing some customary banks to give Islamic dealing with a record as a comparable organization. The paper found that nonattendance of relentless legal framework goes about as the fundamental factor in obstructing advancement of Islamic keeping cash in Bangladesh.
Mahmud, Abdullah Al & Islam M. Muzahidul (2010) paper stated on two different categories of the banking sector and both have played an important role in country’s economy.Moreover, Shariah complaint and traditional banking were using the same way to calculate the profitability ratio.In Shariah-compliant banking, interest is totally banned and should not any connection with this type of banking. On the contrary, Traditional Institution does transaction on the interest that means while they trading, there must have been linking with the extension of money.The major other contrast between two way of banking is: Conventional banking follows manmade way of banking where Islamic chased shariah. Beside that in traditional banking main target is to access the wealth without limitation where it follows shariah condition.
Muhamad, Abduh et.al., (2013) attempted to look into the viability and execution of five critical Islamic banks in Bangladesh. In this paper, extent examination and data envelopment examination methodologies have been associated with measure the execution and viability of Islamic spares cash with data accumulated from circulated yearly reports in the midst of the season of 2006-2010.In this paper he watched that each Islamic bank was going on the climbing stage in the midst of the year 2006 to the year 2010, suggesting that the Islamic banks have enriched their profitability over the examination time period. The paper in like manner urged also investigate applying stochastic edges approach with more factors, enhancing a number of day and age and making relationship among general and Islamic dealing with a record.
2.2 Theoretical Framework
There are two wide ways to deal with measure innovation and clarifying execution such as nonstructural and structural. Utilizing different kinds of monetary measures that catch diverse parts of execution. For looking at the execution among banks and thinks about the association of execution to venture methodologies and different components including qualities of direction and administration forwarding the non-basic methodologies. For instance, the nonstructural approach may examine innovation by asking how execution measures correspond with such speculation procedures as developing by resource buy and raising or centering the bank’s item blend. It searches for a sign of institution challenges in relationships of execution measures and factors describing the nature of banks’ administration. While casual and formal hypotheses may inspire some of these examinations, no broad hypothesis of execution gives a binding together system to these investigations.
The structural approach relies upon a hypothetical model of the managing an accounting firm and an idea of enhancement. The customary microeconomic hypothesis of generation to keeping money firms was utilized as a part of more seasoned writing additionally it is connected to non-monetary firms and enterprises. The more up to date writing sees the bank as a money-related go-between that produces data partner serious budgetary administrations and goes out on a limb – one of a kind, basic parts of economic intermediation that are not for the most part considered in conventional uses of generation hypothesis.
The non-basic way to deal with bank execution estimation more often than not accentuations on accomplished Performance and measures yi, in condition (1) by an assortment of budgetary proportions, e.g., return-on-resource, return on-value, or the proportion of settled expenses to add up to costs. In spite of the fact that in a few applications have utilized measures of execution that depend available estimation of the firm (which naturally consolidates showcase evaluated hazard), e.g., Tobin’s q-proportion (which is the proportion of the market estimation of resources for the book estimation of benefits); the Sharpe proportion (which measures the proportion of the association’s normal abundance return over the hazard free come back to the instability of this overabundance return (as measured by the standard deviation of the overabundance return)); or an occasion concentrate’s combined unusual return, CAR (the aggregate blunder terms of a model foreseeing banks’ market return around a specific occasion). Then again, encourage applications to have a noble execution by a wastefulness proportion accomplished by evaluating either a non-auxiliary or basic execution condition as a wilderness. From that point forward, The non-auxiliary approach finds the relationship of execution to various bank and natural attributes.