Uploaded, designed and prepared by; Muhammad Ameen Ujjan BBA (Hons) #Finance Shah Abdul Latif Univeristy Khairpur, Sindh, Pakistan

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Research Proposal Topic:
A Study on
Comparative Performance Of
Conventional and Islamic Banking in Pakistan
Submitted to
Sir, Rehman Gul Gilal(Assistant professor)
In Partial Fulfillment of the
Requirement of Subject; Business Research Methods
For the Award of the Degree of
Bachelor of Business Administration
Submitted By;
Muhammad Ameen Ujjan (Roll NO# 57)
Zaheer Ahmed Arain (Roll No# 386)
BBA-4 Final Year (A) & (B)

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INTRODUCTION
Banking sector is performing extremely important role in economic progress. Banking activities
are key for healthy economies which ultimately become the reason to be included in the list of
develop nations. Trade and business activities enlarged in 20th century during industrial
revolution by the beginning of large scale production. To boost business operations banking
obtained importance and became fundamental facility. In today’s borderless and global market,
customer satisfaction and product/service quality may enhance the performance of banks for the
effective result. Banks perform an essential part in mobilizing money and encourage investment
for fruitful schemes or projects. They receive deposits from customers and forward loans to
businessmen to increase investment opportunities that are necessary for sound economy.
Pakistan banking sector has seen radical changes since its independence in 1947.
Initially it experienced shortage of resources and insecurity because of prevailing socioeconomic
and political conditions. Shortage of professionals and trained peoples resulted into poor
standards of return & services. At that time banking technology was nearly non-existence in
Pakistan but now it has changed services & access internet, mobile & branchless banking, ATMs
and different methods of delivery make possible to reduce the transaction cost of the bank while
providing convenience to the customer, so today Pakistan banking sector playing important role
in the development of country’s economy. In order to accomplish the purpose of this research
paper is to divide banking in two groups as Islamic Banking and Conventional Banking.
Performance evaluation is an important tool to measure the success of any business including
Islamic financial industry. In this study we will explore the performance of both forms of banking
(Conventional and Islamic). In order to study performance we have divide our population in two
groups (conventional and Islamic) to conduct analysis. Our study will be consist of two phases;
phase one consist of financial analysis for five years (2012-17) and includes profitability, liquidity
management, credit risk management and solvency. To study the profitability we will calculate
ROA, ROE and cost to income ratio. For documenting liquidity management we will calculate loan
to asset ratio, liquid assets to deposits ratio and loan to deposits and borrowings ratio. Phase two
consist of results analysis through the Questionnaire and direct interview conducts from the
consumers of both forms of banking.
Rest of the study proceeds as follow. Literature review is presented in section II, followed by
research objectives and methodology in section III. Findings are presented in section IV while
section V concludes and Suggestions for conducting the research.

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Literature Review
Banks performance can be measured both by using qualitative and quantitative methods and
techniques so we will use both types of methods. Different variables and statistical techniques
will have been use for analysis by different studies and results will draw from them aiming at
performance assessment. Banks performance will be measure in terms of profitability, growth,
efficiency, liquidity, credit risk performance, and solvency.
The foundation of a sound financial system is always built on an underlying theoretical
framework. Both Islamic and conventional banks have their distinct. The conventional banks are
based on the principles of positive theory of economics while Islamic banks are based on the
principles of the normative scientific theory of economics.
There is a general agreement in literature that Islamic banks are superior to conventional or
mainstream banks in terms of their performance (Samad, 2014; awan,2015; Rosly and Abu Bakar,
2013; Safiullah, 2012). Keeping in view the importance of banking sector, different studies will be
carry out for evaluating performance of banks.
According to Iqbal (2014) study “the performance of conventional and Islamic banking. This study
used data for the years 2008-2013 and numerous hypothesis and general perceptions about the
practice of Islamic banking have been tested. The techniques used to evaluate performance of
Islamic banks was both trend and ratio analyses. The performance of Islamic banks was compared
with conventional banks that are the control group.”
According to Ali (2015) in his dissertation analyzed the performance of conventional and Islamic
banks functioning in Pakistan across period of 2010-14. The study investigated whether Islamic
banks doing better as compared to conventional banks in Pakistan. Ratio analysis was used to
determine the liquidity, profitability, risk, solvency & efficiency of both forms of banks. Study
concluded that Islamic banking is more liquid, profitable and better asset quality compared to
conventional banks.
According to Jaffar and Manarvi (2016), they examined and compared the
performance of Islamic and conventional banks operating inside Pakistan during 2010 to 2015 by
applying CAMEL test. A sample of 5 Islamic banks and 5 Conventional banks were selected to
measure and compare their performance. CAMEL test is a standard test to check the strength of
financial institutions and to determine the performance of banks. Different ratios were used to
evaluate each element of CAMEL. The study found that Islamic banks performed better in
possessing adequate capital and better liquidity position while conventional banks pioneered in
management quality and earning ability.

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Profitability is also another measure to determine the performance of banks. According to Javaid,
Anwar and Zaman (2015) gave the analysis of the determinants of top 10 banks’ profitability in
Pakistan over the period 2004-2014 using the pooled Ordinary Least Square (POLS) method to
examine the impact of assets, loans, equity, and deposits on one of the major profitability
indicators, return on assets (ROA). Their study focused on internal factors only. The empirical
results showed that these variables have a strong influence on the profitability. However, the
results depicted that higher total assets may not necessarily lead to higher profits due to
diseconomies of scales. Their study also found that higher loans contribute towards profitability
but their impact is not significant. However, equity and Deposits have considerable impact on
profitability.
External factor analysis is also important for measuring and evaluating performance of banks. Till
date many studies have been conducted to evaluate performance of banks using external factors.
From the study of Sheikh et, al; (2010), it was concluded that customers of both banks are
satisfied with kinds of products both mediums are providing depending upon their nature. A
questionnaire of 15 questions was distributed in banks of Bahawalpur, Islamabad, Lahore,
Quetta, and Faisalabad.
Muslim customers are mostly satisfied with Availability of ATM in several locations, phone
account access, and safety of funds, ease of opening a current account, bank image and
reputation (Al- Hashash and Bahzadi, 2014). 650 questionnaires were distributed in different
banks of Pakistan to measure satisfaction level of Islamic and conventional banks. Descriptive
statistical tools and ANOVA test was being used to measure customer satisfaction. The results
showed a slight degree of difference in customer satisfaction of both streams.
Many different previous studies results accordingly we observes , Firstly results indicates that
both bank’s efficiency and ability have been enhanced & widen their activities and investment.
Second most important development was that both banks contributed huge investment to
projects in Pakistan. Third banks main focus was low period investment. Finally the Islamic banks
had rising growth in profitability and credit facilities.
It is applicable to study comparative performance of well established (conventional banking) and
newly introduced (Islamic banking) to uncover the strengths and weaknesses of each stream.

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Purpose of the Study/ Objectives of the Research;
The aim of this study is to investigate comparative performance evolution of Conventional and
Islamic banking systems in Pakistan so that the performance of each sector will be document for
the period under study. This research will assist in allocating resources in hereafter like
investments, finance, deposits & different banking related services. In short the research
questions.
 To give people awareness that will make them choose the best banking system for their
development.
 To evaluates the performance of Islamic and conventional banks and their role in banking
sector to maintain the stability towards the economic conditions of Pakistan.
This study will help in channelizing resources in future including deposits, finances, investments
and other banking services. In summary following are research objectives questions:
 Which of the banking stream is relatively more profitable?
 Which of the banking sector is relatively more liquid?
 Which of the banking sector is exposed to relatively more credit risk?
 Which of the banking stream is more solvent?
 Which of the banks is best performer in both streams?
 Which of the banking stream has relatively more satisfied customers?
In order to answer the above questions the research will include five full fledge Islamic banks
operating in Pakistan and five conventional banks. The conventional banks select that will be
select are not old and large in size like Islamic bank. For performance comparison among Islamic
& conventional banks we will use in study the financial ratios analysis technique to determine
the liquidity, profitability, risk & solvency and efficiency of these banks. Overall pattern contains
financial ratios as independent variable & financial performance as dependent variable.
To answer the risk and return relationship (first four questions) the study will calculate financial
ratios and for last question the research will conduct customer survey. Mostly, the type of
research that we will conduct is a combination of financial statement analysis, ratio analysis and
banks external factor analysis of the two streams of banking operating in Pakistan. The study
have measured banks performances on set critical factors that we think are specific to
performance of any bank. We will have to calculate required ratios and have to do necessary
arithmetical and statistical working require to see the performance year wise.

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Hypothesis
 H0- The bank category having large total assets, large fixed assets, large operational
assets and large equity has lower growth rate and lower return.
 H1- The bank category having large total assets, large fixed assets, large operational
assets and large equity has higher growth rate and higher return.
 H3: Islamic Banks are less profitable than conventional Banks.
 H4: Islamic Banks Liquidity is higher than conventional Banks.
 H5: Islamic Banks are less Risky than conventional banks.
 H6: Islamic Banks are well capitalized than conventional banks.
 H7: Islamic Banks operational Efficiency is greater than conventional banks.
 H8: Islamic Banks resource allocation efficiency is less than conventional banks.
Research Model;
Dependent Variable
Performance of
Conventional and Islamic
Banking in Pakistan
Independent Variables
FinancialPerformance
Profitability Ratio
Liquidity Ratio
Credit risk
Growth and Efficency
Solvency
Quality of products
and Services
Costumer
Satisfaction
Employees
Behaviour
Independent Variables

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Data and Methodology;
The aim of the study is the financial performance comparison between Islamic and conventional
banking in Pakistan.
 Research philosophy
This research is based on the qualitative and quantitative research technique. As quantitative
research generate the data which will be analyzed through SPSS or other statistical tools. The
results of quantitative research are easily understandable. As previously researchers use the
quantitative technique and it is more reliable, so this study will be based also on the quantitative
approach.
We will use the following research techniques in this study.
 Direct interview method will be used to record the views of Islamic and conventional
bankers.
 Comparative analysis technique will be applied to compare the operational background
of Islamic and conventional banks.
 Ratio analysis technique will be used to measure the asset quality, profitability and
earning potential of Islamic and conventional banks.
 Research approach
A survey study will be carry out to collect data. In order to make this research study more
comprehensive we will use both primary and secondary sources for collection of relevant data and
required information.
Primary Data; we will also use “interview Method” to collect primary data from respective
professional bankers. Primary data collection techniques will be used for conducting external
factor analysis, for both Islamic and conventional banking includes Questionnaires filled by
customers.
Secondary Data; The study will also collect data from secondary source because the primary data
is not sufficient to meet the requirement of this study. This data will be collect from the following
sources:
 Annual and quarterly financial statements of six Islamic Commercial Banks and selected
Conventional Commercial Banks
 Quarterly Brochures of the State Bank of Pakistan on Islamic Banking.
 Different Research Journals

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 Sample
Who is to be sampled?
In this research, for the primary research the target respondents will be the consumers from
Pakistan, who will have to be a consumer banking account either in Islamic or conventional
banking or in Secondary a sample of 5 Islamic banks and 5 Conventional banks will be selected to
measure and compare their performance. In Primary the respondents will be from different
demographic composition will be the part of sample.
Sample of Islamic & Conventional banks for Survey to collect Secondary data.
Islamic banks Conventional banks
Bank Islami Pakistan Limited
Dawood Islamic Bank
Dubai Islamic Bank Pakistan Limited
Meezan Bank Limited
Albaraka Bank Limited
Standard Chartered bank
Askari Bank Limited
NIB Bank Pakistan
United Bank Limited
Habib Bank Limited.
How large a sample?
In Primary, the sample will be consists of 20 respondents for our field research and 280 from the
research earlier done on similar questionnaire, which represent the whole population. These 300
respondents will represent the all banking consumers and some also employees either Islamic or
conventional. In Secondary, the sample will be consists of 10 banks same quantity of banks from
each side.
How will sample units be selected?
Probability sampling method will be used to select the target respondent. Sample units will be
selected through simple random sampling method, by which respondents will be selected
randomly.
 Instrument
In Primary, A five- point Likert scale questionnaire will be used in this research study. The
structured questions will be used in this study, so respondent can select the appropriate answer.
In Secondary, The famous camel System used to evaluates the performance of the both type of
banks in banking sector and to satisfy the costumer need on their financial and environmental
factors.

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Data and Results Analysis;
Interbank comparison or cross-sectional analysis will be used to compare the Performances of
both banks. Independent Sample t-test will be 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 measure is P value. If P value is greater than 0.05 we will accept null
hypothesis and will reject research hypothesis.
Based on Literature we found that performance measure is a complex process, so for our better
understanding and sound comparison, we will have to divide key performance indicators into (1)
internal factors and (2) external factors. Internal factors include measure of differences in
performance of Islamic and conventional banks in terms of profitability, liquidity, credit risk and
solvency.
Financial Analysis; Results of financial analysis will covering four main areas of profitability,
liquidity, credit risk and solvency through simple sectorial averages for both forms of banking.
ROA, ROE and COSR are the financial measures that show the profitability of Islamic banks and
conventional banks. ROA this shows that assets of one type of banks are capable of yielding more
return than other. Similarly ROE also shows that one type of banks are more profitable than other
types of banks which shows that one type of banks are more efficient in generating profits from
every unit of shareholders equity/bank capital.
The liquidity position of Islamic and conventional bank will analyze through Current ratio, Current
Asset ratio, Loan Deposit ratio and Net Lon’s to Total Asset ratio. Current ratio shows the bank
ability to meet its current liabilities. A higher value of Current Ratio shows that the bank has more
liquid assets to pay back to its depositors.
Credit risk of both banking sectors is showed by EQTA, EQL and IMLGL. It shows from that EQTA
(Common Equity to Total Assets ratio) of one banking sector is higher than other providing
evidence that one have more capacity of absorbing asset losses as compare to other type of
banks. This ratio also shows that one type of banks have more capacity to absorb potential
expected or unexpected loan asset losses as compare to other type of banks. EQL (total equity to
net loans ratio) of both banking streams however, If EQL of one banks is slightly more than EQL
of other which shows that one banking form is more capable in absorbing loan losses as compare
to other banking form.

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Three Risk and solvency measure DER, DTAR and LDR will be 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.
To measure the solvency of each banking sector we will use Bank-o-meter which use to show
that this sector is sound and solvent.
The last component of financial performance is positioning ratios. Positioning ratios measure the
resource allocation efficiency. The higher these ratios will be considered better.
Customer Survey Results; that will be based on the Questionnaire and interviews, Most of the
correspondents of both stream will belong to job seeking class. The correspondents will be males
or can be females. The educational background of the correspondents is either they will under
graduate students or post graduate students. This also shows the satisfaction level of customers
of both Islamic banking and conventional banking in terms of providing fast and efficient services
to the customers. Customers of which banks will be mostly satisfied by the terms and conditions
that exist for availing the products or services, responsiveness of bank personnel, and the fact
that Islamic banks operate on the principle of profit and loss sharing.
Justification for Research;
Since Islamic Banking are in the introductory phase in the Pakistan. There is a strong need to
conduct Performance evaluation studies from time to time so that helpful actions may be taken
accordingly.
If this research will be conducted then this research will provides new opportunities for future
research. Finding of this study will generate a lot of questions in researchers mind;
 Why there is no difference between the profitability of two banks.
 Why Islamic bank are more liquid than conventional banks.
 Why Islamic banks are less risky than conventional banks.
 Why operational efficiency of Islamic bank is better than conventional banks.

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REFERENCES
Youssef Latif, Ali Abbas, Muhammad Nadeem Akram, Shahid Manzoor and Saeed Ahmad, (2016).
“Study of Performance Comparison between Islamic and Conventional Banking in Pakistan”,
European Journal of Educational and Development Psychology Vol.4, No.1, pp.17-33.
Awan, A., (2015). Comparison of Islamic and Conventional Banking in Pakistan, Proceedings 2nd
CBRC, Lahore, Pakistan, November 14, 2015.
Jaffar, M., & Manarvi, I., (2016). Performance comparison of Islamic and Conventional banks in
Pakistan. Global Journal of Management and Business Research 11: 1.
Hanif, M., Tariq, M., Tahir, A., & Momeneen, W. (2012). Comparative Performance Study of
Conventional and Islamic Banking in Pakistan. Available at SSRN.
Moin, M. S. (2014). Performance of Islamic Banking and Conventional Banking in Pakistan: A
Comparative Study. University of Skövde.
Sheikh, M., Taseen, U., Haider, S.A., Naeem, M., (2010). Islamic Vs Conventional Banks in Pakistan
(A case study of Bahawalpur). Journal of Education Research.
Zia-ur-Rehman, M. M. A. a. (2011). The Performance Analysis of Islamic and Conventional Banks.
Erol .C & El .B. Radi (1989) “Attitude, behavior and patronage factors of bank customers towards
Islamic Banks. International Journal of Bank Market.”
Haron .S, Ahmed .N & Planisek .S (1994) “Bank patronage factors of Muslims and non-Muslim
customers. International Journal of Bank Marketing” Vol.12 No.1 Page.32-40.
Ahmad, A. (2010). A Comparative study of Islamic Banking in Pakistan: Proposing and Testing a
Model. Foundation University, Islamabad.
Saleh, A. S., & Zeitun, R. (2006). Islamic Banking Performance in the Middle East: A Case Study of
Pakistan. Faculty of Commerce-Economics Working Papers, 157.
Ayub, Muhammad, (2011), “Islamic Banking and Finance: Theory and Practice”, published by
State Bank of Pakistan Press, Karachi, Pakistan.
Khan,Mansoor and M.Ishaq Bhatti (2014) “: Development in Islamic Banking: The case of
Pakistan,” Palgrave Macmillan, New York.

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APPENDIX;
Customer Satisfaction and Perception about Islamic Banking in Pakistan
Questions Asked
Fully
Satisfied Satisfied Neutral Dissatisfied
Fully
Dissatisfied
Bank provides fast and efficient services
Terms and conditions for availing Islamic
product or investments
Friendliness of bank personnel
Profit and loss sharing
Bank policies are according to Islamic Law
Location of bank
Variety of products and services offered by the
bank
The quality of service of e-banking provided by
the bank
Customer Satisfaction and Perception about Conventional Banking in Pakistan
Questions asked
Full
Satisfied Satisfied Neutral Dissatisfied
Fully
Dissatisfied
Bank provides fast and
efficient services
Ease of obtaining loans (the
acceptability of loan terms and
conditions)
Friendliness of bank personnel
Interest rate/ profit you get on
saving account or investments
Interest rates on which bank
gives you loan
Location of bank
Variety of product and services
offered by the bank
The quality of service of
ebanking provided by the bank

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Customer Choice of Banking
Islamic Banking Conventional Banking
When you have to open
an account in a bank you
look for?
When you have to open
an account in a bank you
look for?
Shari’a based banking Friendliness of personnel
Friendliness of personnel
Facilities provided by the
bank
Facilities provided by the
bank Image of bank
Image of bank Return on investment
Effectiveness in handling
problems
Effectiveness in handling
problems
Cost effectiveness Other
Others