ANALYSIS OF FINANCIAL STATEMENTS OF ISLAMIC BANKS VERSUS CONVENTIONAL BANKS

Abstract

Various types of banking systems operate in the world but if we talk about the most common and most suitable systems then there is two types of banking systems are very usable in the world i.e. conventional and Islamic banking systems. Islamic banking has been first started around 1960's in the world. Customers evaluate these systems before they decide to invest. There are some core objectives of this project which needs to be presented. First of all it is necessary to check and analyze the financial performance of conventional banks of Pakistan. Secondly for comparison it is very important to check and analyze the financials and there performance of Islamic banks of Pakistan. Thirdly it's important to then compare the performance of analyzed financials of both conventional and Islamic banks for good and better decision making. Fourthly it is to conclude that which type of bank is operating well and effectively in Pakistan whether Islamic banks or conventional banks. To fulfill the objectives of this study there are certain ratios which needs to be calculated and then analysis is needed. In these ratios there is liquidity ratio, profitability ratio and solvency ratio. Liquidity ratio is divided into current ratio and loan deposit ratio. Profitability ratio is divided into Return on Equity (ROE) ratio, Return on Assets (ROA) ratio and Earning per Share (EPS). Solvency Ratio is divided into Debt to Equity Ratio, Debt to Asset ratio and Breakup Value per Share. Banks offer different types of products and services for the satisfaction of customers for their financial needs. Conventional banking is based on interest while Islamic banking offers interest-free banking. To compare their respective performance financial ratios are applied. In our study we have taken 3 conventional banks namely Bank Al Habib, Askari Bank and Allied Bank Limited furthermore have also taken 3 Islamic Banks namely Meezan Bank, Dubai Islamic Bank and Al Baraka Bank. Five (05) years data were obtained from the "Financial Statement Analysis of Financial Sector of Pakistan 2014-2018" State Bank of Pakistan publication. The analyses reflect that the liquidity ratio of Islamic banks appeared higher as compared to conventional banks, whereas the profitability and solvency ratios of conventional banks were comparatively higher than Islamic banks. Debt to asset ratio of Islamic banks seemed better than conventional banks due to low debt financing. Also, with regard to expansion, the growth rate of Islamic banks in Pakistan is comparatively higher than conventional banks.