A comparison of islamic and conventional banking system

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assets liability management in islamic and conventional banking

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A comparison of islamic and conventional banking system

  1. 1. A Comparison of Islamic and Conventional Banking system Asset liability management Sources and uses of funds Similarities & dissimilaritiesQazi waqas, Zulqarnain , Nouman 1
  2. 2. Qazi waqas, Zulqarnain , Nouman 2
  3. 3. GROUP # 7 QAZI MUHAMMAD WAQAS ZULQARNAIN HAIDER SYED NOUMAN ATHER PIONEER BATCH RCIB MBA (IBF) RIPHAH INTERNATIONAL UNIVERSITYQazi waqas, Zulqarnain , Nouman 3
  4. 4. Outlines:• Introduction of this Project• Objective of the Project• Companies selected for study• Faysal Bank• MEEZAN BANK LTD• Conceptual Framework for Islamic Asset Liability Management Deposits• Uses of funds• Similarities & dissimilarities Qazi waqas, Zulqarnain , Nouman 4
  5. 5. Holy Quran:• “We have created the night ascovering and we have created the day for the economic activities.” Qazi waqas, Zulqarnain , Nouman 5
  6. 6. Hazrat Umar R.A.”, said:“Every system can prevail in this world but not the one which is unjust.” Qazi waqas, Zulqarnain , Nouman 6
  7. 7. Introduction of this Project• In this Project our main focus on three main things regarding Islamic Banking system.• We will discuss the “Comparison of Conventional & Islamic Banking Systems“• According to these things: • Asset Liability Management, • Sources & Uses of Funds, • Similarities & Dissimilarities Qazi waqas, Zulqarnain , Nouman 7
  8. 8. Objective of the Project• The main objective of our project is to clear the basic differences between Islamic and conventional system• We will try to discuss the real face of both systems in depth.• That’s why our discussion will around these things: – How Islamic Banks manage their assets and liabilities – what is the main sources and uses of funds – what are the main and core similarities & dissimilarities between Islamic bank and conventional bank. Qazi waqas, Zulqarnain , Nouman 8
  9. 9. Companies selected for study• We selected two banks first is Faysal banks taken as the conventional banks representative and• Second one is Meezan bank as representative of Islamic banks, Qazi waqas, Zulqarnain , Nouman 9
  10. 10. Faysal Bank• Faysal Bank Limited was incorporated in Pakistan on October 3, 1994, as a public limited company under the Companies Ordinance, 1984.• Currently, the Banks shares are listed on the Karachi, Lahore and Islamabad Stock Exchanges• Faysal Bank is engaged in Commercial, Consumer, Corporate and Islamic Banking activities Qazi waqas, Zulqarnain , Nouman 10
  11. 11. Faysal Bank cont…• The bank is principally engaged in providing consumer, corporate and investment banking services to its customers.• The bank offers a wide range of consumer banking products and services which include deposit accounts, car loans, home loans and other consumer loans. Qazi waqas, Zulqarnain , Nouman 11
  12. 12. Faysal Bank cont…• It also provides treasury and capital market services and cash management services to its customers.• Balance Sheet of BankAssets LiabilitiesLoans and advances to customers Customers’ depositsCash and cash balances with other banks Due to banks and other financial institutionsInvestments in associates, subsidiaries and Other liabilitiesjoint venturesFinancial assets held for trading Sundry creditorsCash and cash balances with the central Equity and reserves 12bank
  13. 13. MEEZAN BANK LTD• MEEZAN was established as an Islamic Investment Bank in 1997 as “AL MEEZAN INVESTMENT BANK LTD”.• First Islamic Commercial Bank’s license was awarded to Al Meezan Investment Bank in year 2002,• They bought the local operations of “Socite General” (French Bank) 03 branches Qazi waqas, Zulqarnain , Nouman 13
  14. 14. MEEZAN BANK LTD cont…• In 2009, Branch network of six dedicated Islamic banks increases to 480 branches (including sub-branches)• Meezan Bank having a 42% share of the Islamic Banking branch network in the country .• 201branches in 54 cities across the country.• Over 5.5% of the total Banking industry. Qazi waqas, Zulqarnain , Nouman 14
  15. 15. PRINCIPLES BASIS OF ISLAMIC FINANCE• Prohibition of RIBA• Alkharaj-o-bildhaman (entitlement to profit is associated with corresponding risk)-Risk Sharing, i.e. No Risk, No Gain.• Prohibition of sale of goods before acquiring ownership• Prohibition of sale of food stuff before possession• Prohibition of debt for debt• Avoidance of Gharar (uncertainty)• Time value measured only through Price or Rent.• Debt contracts can be made / traded but without discount.• Risk can be distributed through forward Trading / Contracts by way of Salam & Istisn’a. 15 Qazi waqas, Zulqarnain , Nouman
  16. 16. Asset Liability Management• Assets liability management is very important phenomena in banks earning strategy even in Islamic banking system, all the investments contributions to this effects to be used even on and off-balance sheet components in ALM. The risk taking is the key determinant for the banks either conventional or Islamic to portfolio or ALM. Qazi waqas, Zulqarnain , Nouman 16
  17. 17. BALANCE SHEET STRUCTURE OF ISLAMIC BANK. 17 Qazi waqas, Zulqarnain , Nouman
  18. 18. Objectives of ALM To manage the portfolio in a manner consistent with the banks investment policy. To obtain the desired earning while holding risk at acceptable levels. To maintain adequate liquidity at a cost consistent with earnings goals. On and Off-balance sheet investments are considered in ALM. Qazi waqas, Zulqarnain , Nouman 18
  19. 19. Techniques of ALM.• Matching Techniques.• Swap Techniques.• Futures as a Hedging Technique.• Options as Hedging Techniques.• Effective Portfolio Management. Qazi waqas, Zulqarnain , Nouman 19
  20. 20. ALM - Pillars• ALM Information Systems. – MIS – Information availability – Accuracy – Adequacy – Expediency• ALM Organization. – Structure and responsibilities – Level of top management involvement• ALM Process. – Risk Parameters – Risk Identification – Risk Measurement – Risk Management Qazi waqas, Zulqarnain , Nouman 20
  21. 21. Current Ratio:• The current ratio highlights Faysal Bank Meezan Bank the firm ability to cover short term liabilities with its current Particulars 2007 2008 2009 2007 2008 2009 assets. Current Assets 138,762,4 62 135,594, 508 176,797,8 78 66,145,5 96 83,395,5 55 121,561,1 87• Current Ratio = Current Current 58,877,32 65,763,5 108,009,0 36,967,0 51,844,2 77,699,05 Liabilities 0 83 79 02 28 8 Assets / Current Liabilities Current• Interpretation: Ratio 2.36 2.06 1.64 1.79 1.61 1.56• The current ratio of Faysal bank Current Ratio & Meezan Bank for the year 2007, 2008 & 2009 is, 2.36, 2.50 2.36 2.06 & 1.64, 1.79, 1.61 & 1.56 2.00 1.79 2.06 1.64 1.56 respectively, compared to 1.61 Faysal Bank 1.50 Ratio standard ratio 2:1 this of Mezaan Bank 1.00 Meezan Bank ratio is then 0.50 Faysal Bank 0.00 2007 2008 2009 21 Qazi waqas, Zulqarnain , Nouman
  22. 22. Sales to Working Capital = Sales / Working Capital• In this ratio we compare the Faysal Bank Meezan Bank working capital or net current assets with sales which are part of Particulars 2007 2008 2009 2007 2008 2009 the revenue. Sales 11,610, 781 13,404, 132 16,957, 875 4,573,7 52 6,803,2 13 10,102, 060• Interpretation: Working 79,885, 69,830, 68,788, 29,178, 31,551, 43,862, Capital 142 925 799 594 327 129 Sales To• The average turnover in working Working Capital 0.15 0.19 0.25 0.16 0.22 0.23 capital of Faysal Bank is 19% & Meezan Bank have 20% this Sales To Working Capital Ratio shows the profitability of working capital of Meezan Bank is slightly 0.30 0.25 0.25 0.22 0.23 high then Faysal Bank. 0.20 0.19 0.150.16 Faysal Bank Ratio 0.15 Mezaan Bank 0.10 0.05 0.00 2007 2008 2009 22 Qazi waqas, Zulqarnain , Nouman
  23. 23. Working Capital = Current Assets – Current Liabilities• Arithmetically it is the Faysal Bank Meezan Bank difference of Current Assets Particula rs 2007 2008 2009 2007 2008 2009 and Current Liabilities. Current Assets 138,762, 135,594, 176,797, 66,145, 83,395, 121,561, 462 508 878 596 555 187• Interpretation: Current Liabilities 58,877,3 20 65,763,5 83 108,009, 079 36,967, 002 51,844, 228 77,699,0 58• The working capital ratio of Working Capital 7988514 2 6983092 5 6878879 9 291785 94 315513 27 4386212 9 Faysal Bank limited is higher which indicates that Faysal Working Capital Ratio bank has have sufficient 100000000.00 resources to meets its current 80000000.00 obligations as compare to 60000000.00 Faysal Bank Ratio Mezaan Bank 40000000.00 Meezan Bank Limited. 20000000.00 0.00 2007 2008 2009 23 Qazi waqas, Zulqarnain , Nouman
  24. 24. Qazi waqas, Zulqarnain , Nouman Balance Sheet Meezan Bank Limited Horizontal Analysis 2007 2008 2009 2007 2008 2009ASSETS Rs.In ,000 Rs.In ,000Cash and balances with treasurybanks 5,644,028 5,763,710 8,387,432 100 102.12 148.61Balances with other banks 3,729,549 1,344,974 5,260,467 100 36.06 141.05Due from financial institutions 8,850,000 18,108,000 34,499,500 100 204.61 389.82Investments 10,535,186 14,286,949 23,290,309 100 135.61 221.07Financings 34,576,339 39,768,481 44,188,066 100 115.02 127.80Operating fixed assets 1,032,963 1,880,515 2,416,375 100 182.05 233.93Deferred tax asset - - 204,172 - - #DIV/0!Other assets 2,810,494 4,123,441 5,935,413 100 146.72 211.19 67,178,559 85,276,070 124,181,734 100 126.94 184.85LIABILITIESBills payable 1,192,160 1,057,017 1,249,210 100 88.66 104.79Due to financial institutions 2,415,606 4,008,496 8,468,425 100 165.94 350.57Deposits and other accounts 54,582,353 70,233,875 100,333,051 100 128.68 183.82Sub-ordinate loan - - - - - -Liabilities against assets subject tofinance leases - - - - - -Deferred tax liabilities 430,377 453,038 - 100 105.27 -Other liabilities 2,851,407 3,548,666 4,946,589 100 124.45 173.48 61,471,903 79,301,092 114,997,275 100 129.00 187.07 24NET ASSETS 5,706,656 5,974,978 9,184,459 100 104.70 160.94
  25. 25. REPRESENTED BYShare capital 3,779,897 4,925,961 6,650,048 100 130.32 175.93Reserves 720,785 845,022 1,050,092 100 117.24 145.69Unappropriated profit 1,219,228 570,114 1,390,395 100 46.76 114.04 5,719,910 6,341,097 9,090,535 100 110.86 158.93Deficit on revaluation ofinvestments (13,254) (366,119) 93,924 100 2,762.33 (708.65) 5,706,656 5,974,978 9,184,459 100 104.70 160.94 Qazi waqas, Zulqarnain , Nouman 25
  26. 26. Balance Sheet Faysal Bank Limited Horizontal Analysis 2007 2008 2009 2007 2008 2009ASSETS Rs.In ,000Cash and balances with treasurybanks 6,872,032 8,927,524 8,427,202 100 129.91 122.63Balances with other banks 3,708,451 876,780 508,795 100 23.64 13.72Lendings to financial institutions 7,078,102 2,861,401 15,017,826 100 40.43 212.17Investments 31,553,108 30,186,168 56,531,338 100 95.67 179.16Advances 87,346,401 89,758,789 91,346,001 100 102.76 104.58Operating fixed assets 2,514,959 2,646,978 2,787,617 100 105.25 110.84Deferred tax assets - net - - 1,279,918 - - 100.00Other assets 2,204,368 2,983,846 4,966,716 100 135.36 225.31 141,277,421 138,241,486 180,865,413 100 97.85 128.02LIABILITIESBills payable 2,406,927 1,536,517 1,465,451 100 63.84 60.88Borrowings from financialinstitutions 9,995,855 13,027,468 34,985,766 100 130.33 350.00Deposits and other accounts 102,067,422 102,776,793 123,655,188 100 100.70 121.15Sub-ordinated loans 1,000,000 999,600 999,200 100 99.96 99.92Liabilities against assets subject tofinance lease 7,827 4,103 - 100 52.42 -Deferred tax liabilities - net 2,691,466 2,483,355 - 100 92.27 -Other liabilities 6,951,421 6,641,542 6,977,069 100 95.54 100.37 125,120,918 127,469,378 168,082,674 100 101.88 134.34 26 Qazi waqas, Zulqarnain , Nouman
  27. 27. 16,156,50 10,772,10 12,782,73NET ASSETS 3 8 9 100 66.67 79.12REPRESENTEDBYShare capital 5,296,445 5,296,445 6,090,911 100 100.00 115.00Reserves 3,567,033 3,790,023 4,030,056 100 106.25 112.98Unappropriatedprofit 1,481,668 1,049,519 1,215,179 100 70.83 82.01 10,345,14 10,135,98 11,336,14 6 7 6 100 97.98 109.58Surplus onrevaluation of assets 5,811,357 636,121 1,446,593 100 10.95 24.89 16,156,50 10,772,10 12,782,73 3 8 9 100 66.67 79.12 Qazi waqas, Zulqarnain , Nouman 27
  28. 28. Conclusion/Findings• Liquidity position of Faysal Bank Limited is higher then Meezan Bank Limited this indicates that Meezan Bank Limited has higher leverage. Both financial institutes should improve their current ratio & working capital position in financial year 2011. The analysis shows that its lower down gradually.• Net profit margin of Meezan Bank Limited is higher then Faysal Bank Limited.• Gross profit margin of Meezan Bank Limited is higher then Faysal Bank Limited so we would like to suggest Faysal Bank should improve its Gross Profit margin to meet the expenses efficiently and set a sight profit for shares holders. Qazi waqas, Zulqarnain , Nouman 28
  29. 29. Conclusion/FindingsThe Operating income margin of Faysal Bank Limited is higherthen Meezan Bank Limited which indicates that Faysal BankLimited generates higher income by its own operation as compareto Meezan Bank Limited.The Long Term debt to long term liabilities ratio of Meezan BankLimited is higher then Faysal Bank Limited because Faysal banklimited employed its funds in short term activities more thenMeezan Bank LimitedMeezan Bank Limited has a good market perception due tocontinuous declaration of dividends but on the other hand FaysalBank limited did not declared dividend in financial year 2009.The three years average price / earning ratio of Meezan BankLimited 13.97 while the Faysal Bank Limited has 7.78 % thisindicates the Meezan Bank Limited has much potential in stock ascompare to Faysal Bank Limited.The operating cash flow to total debt ratio of MeezanBank Limited is little higher then Faysal Bank Limited 29 Qazi waqas, Zulqarnain , Nouman
  30. 30. RecommendationsWith the assistance analyses of financial reports we would like to recommend both financial institutes should over come their pit falls, flaws and deficiencies. Meezan Bank limited should improve its current ratio. The Meezan Bank Limited Net Profit Margin is higher then Faysal Bank Limited. The Faysal Bank Limited should improve its profitability ratio by efficiently use its resources. Similarly the price earning ratio & dividend payout ratio of Meezan Bank Limited is higher then Faysal Bank this highlights good return on investment as well good market perception. Faysal should also pay dividend consistently through generate the profit by improving its operation. We would also like to recommend that financial institute should much promote the business activities and provide financial assistance to industry which will be reduce the un employment, inflation and increase productivity of Pakistan Qazi waqas, Zulqarnain , Nouman 30
  31. 31. SIMILARITIES & DISSIMILARITIES• There are two major difference between Islamic Banking and Conventional Banking:• Conventional banking practices are concerned with "elimination of risk" where as Islamic banks "bear the risk" when involve in any transaction.• When Conventional banks involve in transaction with consumer they do not take the liability only get the benefit from consumer in form of interest whereas Islamic banks bear all the liability when involve in transaction with consumer. Getting out any benefit without bearing its liability is declared Haram in Islam. Qazi waqas, Zulqarnain , Nouman 31
  32. 32. Differences between Islamic and Banking System Conventional System Islamic SystemMoney is a product besides medium of exchange and store Real Asset is a product. Money is just aof value. medium of exchange.Time value is the basis for charging interest on capital. Profit on exchange of goods & services is the basis for earning profit.Interest is charged even in case, the organization suffers Loss is shared when the organizationlosses. Thus no concept of sharing loss. suffers loss.While disbursing cash finance, running finance or working The execution of agreements for thecapital finance, no agreement for exchange of goods & exchange of goods & services is must,services is made. while disbursing funds under Murabaha, Salam & Istisna contracts.Due to non existence of goods & services behind the Due to existence of goods & services nomoney while disbursing funds, the expansion of money expansion of money takes place and thustakes place, which creates inflation. no inflation is created.Due to inflation the entrepreneur increases prices of his Due to control over inflation, no extragoods & services, due to incorporating inflationary effect price is charged by the entrepreneur.into cost of product.Bridge financing and long term loans lending is not made Musharakah & Diminishing Musharakahon the basis of existence of capital goods. Rather, they are agreements are made after making suredisbursed on the basis of Windo Dressed project feasibility the existence of capital good beforeand credibility of the entrepreneur. disbursing funds for a capital project. 32
  33. 33. Qazi waqas, Zulqarnain , Nouman 33

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