Factors Influencing Profitability of Banks: A Comparative Analysis Between

Conventional and Islamic Banks in Bangladesh

(This Dissertation Report is submitted as the partial requirement for the fulfillment of the Master of
Business Administration degree with a major in Finance and Banking)

Prepared By

Mohammed Saeed-Ur-Rahman
R221017
MBA
Finance and Banking
Autumn -2022

Date of Submission: 4th October 2023

Department of Business Administration

Faculty of Business Studies
International Islamic University Chittagong
Factors Influencing Profitability of Banks: A Comparative Analysis Between
Conventional and Islamic Banks in Bangladesh
(This Dissertation Report is submitted as the partial requirement for the fulfillment of the Master of
Business Administration degree with a major in Finance and Banking)

Prepared By

Mohammed Saeed-Ur-Rahman
R221017
MBA
Finance and Banking
Autumn -2022

Supervised By
Dr. Mohammad Nazim Uddin

Professor

Department of Business Administration

International Islamic University Chittagong

Date of Submission: 4th October 2023

Signature of the supervisor

Department of Business Administration

Faculty of Business Studies
International Islamic University Chittagong
2|Page
October 4th, 2023

To

The Convener,

MBA Internship/Dissertation Committee

Department of Business Administration

International Islamic University Chittagong.

Subject: Submission of Dissertation Report

Dear Sir,

With Immense Pleasure, I would like to submit my dissertation report titled “Factors Influencing
Profitability of Banks: A Comparative Analysis Between Conventional and Islamic Banks in
Bangladesh”, to fulfill the requirement of the MBA program.

I made every effort to include pertinent information and complete this report to an acceptable
standard. This dissertation is based on my research that correlated my academic study and practical
knowledge.

I genuinely think that this report will satisfy the standards for the MBA project report, which will
greatly assist me in acquiring the necessary expertise in “Factors Influencing Profitability of
Banks: A Comparative Analysis Between Conventional and Islamic Banks in Bangladesh”.

I, therefore, humbly ask that you accept my dissertation and grant me the honor of finishing my
research. Any additional required information regarding the dissertation will be provided without
delay.

Sincerely Yours,

Mohammed Saeed-Ur-Rahman

R221017

MBA

Finance and Banking

Autumn -2022

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 Abstract

The banking sector plays an important role in sustaining financial markets and has a significant
impact on the success of the economy. The sound financial health of a bank is the guarantee not
only to its depositors but is equally significant for the shareholders, employees, and the whole
economy as well. As a result of this maxim, efforts have been made from time to time, to measure
the financial position of each bank and manage it efficiently and effectively.

This paper analyzed the financial performance of the Islamic and Conventional commercial
banking sectors in Bangladesh for the period of 5 years from 2018 to 2022. Financial ratios were
employed to measure the profitability and performance of banks. 5 Islamic banks and 5
Conventional commercial banks are considered for this study.

Return on equity (ROE) is considered a dependent variable, while Capital adequacy ratio (CAR),
Total equity to total assets (TETA), Cost to Income Ratio (CIR), and Investment to deposit ratio
(IDR) are considered independent variables.

The primary objective of this study is to compare the financial performance of Islamic and
conventional banks and identify the factors that contribute to their success or failure. To achieve
this, the study used descriptive statistics to summarize the dataset, correlation analysis to examine
the relationships between the variables, and regression analysis to identify the most significant
predictors of financial performance.

Based on the study's findings, it can be said that Islamic banks perform marginally better than
conventional banks in terms of profitability and capital adequacy. However, because of their lower
standard deviations, conventional banks seem to have more reliable and consistent performance.
According to the correlation matrices, each variable offers particular insight into how to forecast
ROE in both types of institutions.

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 Table of Contents

Sub
Chapters Particulars Page
Chapters

Background of the Study 6-12

1.1 Prelude 7-10

01 1.2 Rationality of the Study 10-11

1.3 Objectives of the Study 11
1.4 Scope of the Study 11
1.5 Limitations of the Study 11-12
Literature Review 13-16

2.1 Introduction 14
02
2.2 Relevant Literature 14-19

2.3 Conclusion 19

Methodology of the Study 20-26

3.1 Introduction 21
3.2 Sample Design 21
03 3.3 Sources of Data 23
3.4 Variables Identified 23-25
3.5 Research Model 25
3.6 Hypothesis Development 26

Analysis and Discussion 27-34

4.1 Introduction 28
4.2 Descriptive Analysis of Islamic Banks 28

04 4.3 Descriptive Analysis of Conventional Banks 29

4.4 Correlation between variables of Islamic Banks 30
4.5 Correlation between variables of Conventional Banks 30
4.6 Regression Analysis 31-33
4.7 Conclusion 34

Findings and Recommendations 35-38

05 5.1 Findings of the Study 36

5.2 Recommendations of the Study 36-37
5.3 Conclusion 38

Reference 39-41

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 Chapter One

Background of the Study

6|Page
1.1 Prelude

A bank is a financial institution that accepts deposits of money from customers and uses those
funds to provide various financial services to individuals, businesses, and other organizations.
These services may include lending money, offering credit facilities, providing investment
opportunities, and processing payments.

Banks are typically regulated by a government agency or central bank, which sets standards for
safety and soundness and oversees their operations. They are required to follow strict rules and
regulations to ensure that they operate in a stable and secure manner.

In addition to accepting deposits and making loans, banks also generate revenue through various
means, such as charging fees for services, investing in stocks and other financial instruments, and
earning interest on loans and investments.

Banks are an important part of the financial system and play a critical role in the economy by
facilitating the flow of funds and supporting economic activity. They provide a safe and secure
place for people to deposit their money and access financial services to help them achieve their
financial goals.

The banking industry of a country refers to the collective group of financial institutions that provide
banking services to individuals, businesses, and other organizations within the country. These
services typically include deposit-taking, lending, and payment processing.

The banking industry can be divided into different types of banks, including commercial banks,
investment banks, central banks, and cooperative banks. Commercial banks are the most common
type of bank and provide a wide range of services to customers, including personal and business
banking services. The banking industry plays a critical role in the economy of a country, as it
provides a safe and secure means of holding and transferring money. Banks act as intermediaries
between depositors and borrowers, allowing the flow of funds to support economic activity.

In addition to providing banking services, the banking industry also generates revenue through
various means, including interest on loans, fees for services, and investments. Banks also play an
important role in the financial system of a country, providing liquidity and stability to the market.

The banking industry is typically regulated by a central bank or other regulatory authority, which
sets rules and guidelines for the operation of banks and ensures that they adhere to standards of
safety and soundness. In many countries, banks are also required to have deposit insurance or other
mechanisms in place to protect customers in case of bank failure.

After the independence, the banking industry in Bangladesh started its journey with 6 Nationalized
commercialized banks, 3 State owned Specialized banks, and 9 Foreign Banks. In the 1980s
banking industry achieved significant expansion with the entrance of private banks. Now, banks in
Bangladesh are primarily of two types:

Scheduled Banks: The banks that remain in the list of banks maintained under the Bangladesh
Bank Order, 1972.

Non-Scheduled Banks: The banks are established for special and definite objectives and operate
under any act but are not Scheduled Banks. These banks cannot perform all functions of scheduled
banks.

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There are 61 scheduled banks in Bangladesh that operate under the full control and supervision
of Bangladesh Bank which is empowered to do so through the Bangladesh Bank Order of er, 1972
and the Bank Company Act, of 1991. Scheduled Banks are classified into the following types:

State-Owned Commercial Banks (SOCBs): There are 6 SOCBs that are fully or majorly owned by
the Government of Bangladesh.

Specialized Banks (SDBs): 3 specialized banks are now operating which were established for
specific objectives like agricultural or industrial development. These banks are also fully or
majorly owned by the Government of Bangladesh.

Private Commercial Banks (PCBs): There are 43 private commercial banks that are majorly owned
by individuals/ private entities. PCBs can be categorized into two groups:

Conventional PCBs: 33 conventional PCBs are now operating in the industry. They perform the
banking functions in a conventional fashion i.e. interest-based operations.

Islami Shariah-based PCBs: There are 10 Islami Shariah-based PCBs in Bangladesh and they
execute banking activities according to Islami Shariah-based principles i.e. Profit-Loss Sharing
(PLS) mode.

Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of the
banks which are incorporated abroad.

There are now 5 non-scheduled banks in Bangladesh which are:

 Ansar VDP Unnayan Bank,

 Karmashangosthan Bank,
 Grameen Bank,
 Jubilee Bank,
 Palli Sanchay Bank

1.1.1 Islamic Banking

Islamic Bank is a financial institution whose status, rules, and procedures are governed by Islamic
Shariah and will refrain from accepting or paying any interest on any transaction. On the other
hand, commercial banks‟ primary source of revenue is by charging interest through lending money
to the customers. The main objective of Islamic banks is to conduct banking activities in such a
way that they can help achieve all kinds of objectives of the Islamic economy.

Islamic banking is a type of finance that involves the use of profit-sharing, interest-free loans, and
other financial services based on the principles of Islamic Sharia law. Unlike conventional banking,
which charges interest on loans, Islamic banks are structured to encourage financial transactions
with a principal focus on charity and community development.

In many ways, Islamic banking is similar to conventional banking in that it allows individuals to
save their money and receive loans for large purchases such as homes or vehicles. However, there
are also differences in how Islamic banks operate. It‟s often referred to as “ethical” or “people-
friendly” banking. As well as being more ethical, Islamic banking is also more environmentally
friendly than conventional banking because it encourages people to make smaller loans rather than

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take out large ones. This means that Islamic banks can also be more sustainable than conventional
ones in the long run.

1.1.2 Islamic Banking in Bangladesh

Bangladesh is a predominantly Muslim country with a population of over 160 million people.
Islamic banking in Bangladesh has its roots in the early 1980s. The first Islamic bank in
Bangladesh, Islami Bank Bangladesh Limited (IBBL), was established in 1983 to provide interest-
free banking services to the people of the country.

IBBL was founded by a group of local businessmen and professionals who were inspired by the
Islamic economic principles of equity, justice, and social welfare. The bank was established with
the support of the Bangladesh Association of Banks and was granted a license by the Bangladesh
Bank, the country's central bank.

IBBL started its operations with two branches in Dhaka and Chittagong and gradually expanded
its network to other parts of the country. The bank offered a range of Shariah-compliant financial
products and services, including deposit accounts, investment accounts, trade financing, and
project financing. The success of IBBL inspired the establishment of several other Islamic banks
and financial institutions in Bangladesh, including Al-Arafah Islami Bank, Shahjalal Islami Bank,
and Social Islami Bank. These banks followed the same principles of Shariah-compliant finance
as IBBL and offered similar products and services.

According to Bangladesh Bank, 10 full-fledged Islamic banks have been operating with 1679
branches out of 10942 branches in the banking sector. In addition, 41 Islamic banking branches of
9 conventional commercial banks and 434 Islamic banking windows of 13 conventional
commercial banks are also providing Islamic financial services in Bangladesh.

The Islamic financial sector is now considered a global industry in terms of its assets like Islamic
banks, Islamic bonds, Islamic mutual funds, Islamic insurance, etc. The sector is growing globally
based on its risk-sharing, optimism, inclusiveness, and real asset-backed transaction features. In
line with global trends, the Islamic banking sector in Bangladesh has also been witnessing robust
growth due to policy support from the Bangladesh Bank and strong public demand.

1.1.3 Current Scenario of Islamic Banks in Bangladesh

According to Bangladesh Bank, Total deposits in the Islamic banking sector reached BDT 3996.79
billion at the end of March 2023, which is 28.21 percent of Bangladesh‟s total deposits. Total
Investment (loans & advances in the conventional banking system) of the Islamic banking sector
stood at BDT 3606.49 billion at the end of March 2022, which is 27.28 percent of the country‟s
total investment. Total remittances mobilized by the Islamic banking sector stood at BDT 134.70
billion during January-March 2023, which is 30.96 percent of the country‟s total remittances.

The excess liquidity of Islamic banking stood at BDT 299.99 billion at the end of March 2023,
which is 14.19 percent of the country‟s total excess liquidity.

The Islamic Banking sector has significant contributions to Bangladesh's growth and economic
development. The sector seems progressively attractive and profitable to conventional banks for
their lower Statutory Liquidity Ratio (SLR) and higher Loan-Deposit Ratio (LDR). The sector has
experienced phenomenal growth and expansion in the country as the deposits and investments both
grew over time.

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Islamic banking has become an important part of the country's financial system, and it has the
potential to contribute to financial inclusion and economic growth. The Bangladesh Bank has
played a significant role in the development of Islamic banking in the country. It established a
dedicated Shariah Supervisory Committee to oversee the operations of Islamic banks in
Bangladesh and ensure their compliance with Shariah principles.

1.1.4 Conventional Banking

Conventional banking plays an immensely important preamble in the promotion of the financial
system. This bank mainly performs different work like reallocation of capital which has easy access
to business. Conventional banking commonly borrows capital from savers and give the borrowing
money to loan seeker. The main source of income is the differentiation between the borrowing rate
and lending rate, known as the interest rate spread. And this bank also helps in international
business through the letter of credit (LC) and guarantee. This banking system relies on interest,
there is no restriction on interest. There is no concept of Halal (legal) and Haram (illegal) from the
viewpoint of Islamic Shariah.

“Islamic banking is an Ethical Banking System, and its practices are based on Islamic (Shariah)
laws. Interest in completely prohibited in Islamic banking. It is asset-based financing, in which the
trade of elements prohibited by Islam is not allowed. For example, you cannot take a loan from a
Wine Shop. On the other hand, Conventional Banking is an Un-Ethical Banking system based on
Man-Made Laws. It is profit-oriented and its purpose is to make money through interest”.

1.1.5 Conventional Commercial Banking in Bangladesh

The history of conventional commercial banks in Bangladesh can be traced back to the pre-
independence era. The first modern bank in Bangladesh was the Dhaka Bank, which was
established in 1806 by British traders and operated as a commercial bank.

After the partition of India in 1947, the banking system in East Pakistan (now Bangladesh) was
dominated by the West Pakistani banking sector. However, after the independence of Bangladesh
in 1971, the government nationalized all commercial banks in the country.

In the late 1970s, the government began to allow private banks to operate, and the banking sector
gradually began to diversify. The first private commercial bank in Bangladesh was the Uttara Bank,
which was established in 1983. Since then, many other private commercial banks have been
established, including the BRAC Bank, Dutch-Bangla Bank, and Prime Bank.

The state-owned commercial banks in Bangladesh include the Sonali Bank, Agrani Bank, and
Janata Bank. These banks were established during the nationalization of banks in the early 1970s
and remain important players in the banking sector.

In addition to these banks, there are also foreign commercial banks operating in Bangladesh, such
as Standard Chartered Bank, Citibank, and HSBC. These banks entered the market in the 1990s
and have since expanded their operations in the country.

Overall, the conventional commercial banking sector in Bangladesh has experienced significant
growth over the years and has become an important contributor to the country's economy.
However, the sector has faced challenges such as fraud and mismanagement, leading to the closure
of some banks in recent years. The regulatory framework for the sector has also been strengthened
to ensure the stability and sustainability of the banking industry.

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1.2 Rationality of the Study

In this study, I will try my best to provide an idea of the financial performance of Islamic banks in
comparison with conventional banks in Bangladesh.

This study aims to analyze the financial performance of Islamic banks in Bangladesh and compare
it to that of conventional banks. The study also seeks to identify the key factors that affect the
financial performance of Islamic and conventional banks and provide recommendations for
improving their performance. The research involved the analysis of financial data of Islamic banks
and conventional banks.

Islamic banks operate on different principles from conventional banks, and it is important to
compare their financial performance with that of conventional banks. This comparison can help to
identify the strengths and weaknesses of the Islamic banking sector and its potential to compete
with conventional banks.

This study will allow me to fulfill the partial requirement of my MBA degree.

1.3 Objectives of the Study

The study‟s main objective is to provide an in-depth analysis of the performance of Islamic banks
and conventional banks in Bangladesh and to identify factors that may affect their performance.
This study will also uphold some other objectives, such as

1. To evaluate the financial performance of Islamic banks and conventional banks in Bangladesh
based on relevant financial indicators such as profitability, capital adequacy, and efficiency.
2. To compare the performance of Islamic banks and conventional banks in Bangladesh based on
the identified financial indicators.
3. To identify the factors that may contribute to the performance of Islamic banks and
conventional banks in Bangladesh.

1.4 Scope of the Study

The study will analyze the financial performance of Islamic banks and Conventional banks in
Bangladesh. This analysis will evaluate key financial indicators such as return on assets, equity,
net profit margins, and cost-to-income ratios.

The study will compare the financial performance of Islamic banks with that of conventional banks
in Bangladesh. This comparison will help to identify the strengths and weaknesses of the Islamic
banking sector and its potential to compete with conventional banks.

The study will focus on both banks operating in Bangladesh, and the data for the analysis will be
collected from publicly available sources such as annual reports, financial statements, and other
relevant publications.

Based on the analysis, the study will provide recommendations for improving the financial
performance of both banks in Bangladesh. These recommendations may include improving
efficiency, enhancing risk management practices, and developing innovative and competitive
products and services.

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1.5 Limitations of The Study

2. Limited data availability: As my study is based on secondary data, I have had limited control
over the data that was available for analysis. I had to rely on publicly available data, which
could be incomplete or inconsistent. This could have limited the scope of the study and affected
the accuracy of my findings.
3. Data quality: The quality of secondary data sources can vary, and this could have affected the
accuracy of my findings. For example, there may have been errors in the data or discrepancies
between different data sources that could have affected the validity of my analysis.
4. Time period: The study only analyzed a five-year time period, and this may not have been
sufficient to capture long-term trends in the performance of Islamic and conventional banks in
Bangladesh. The performance of banks can be influenced by a range of factors, including
economic conditions, regulatory changes, and customer preferences, which may have varied
over a longer time period.
5. External factors: There may have been external factors that influenced the performance of
Islamic and conventional banks in Bangladesh, which were not accounted for in the study. For
example, changes in government policies or global economic conditions could have affected
the performance of banks in ways that were not captured in my analysis.
6. Methodological limitations: This study may have had methodological limitations that could
have affected the validity of my findings. For example, I may have used a limited number of
performance indicators or relied on a specific statistical model that could have affected the
accuracy of my results.
7. Generalizability: The study only focused on Islamic and conventional banks in Bangladesh,
and the findings may not be generalizable to other countries or regions. Differences in
regulatory frameworks, market conditions, and customer preferences could affect the
performance of banks in different ways, and this should be taken into consideration when
interpreting the results of the study.

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 Chapter Two

Literature Review

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2.1 Introduction

The definition of "performance" is "the performance of an activity while considering the

achievement made by it." In other words, "performance" refers to the role that an arrangement
plays in light of the accomplishments that it achieves. It considers how the banks are progressing
in relation to them. Performance is defined as the actions taken to efficiently and effectively attain
the goals; this includes making integrated use of available financial, human, and natural resources.
The process of valuing the outcomes of an organization's operations and policies is known as
financial performance. The profitability, liquidity, or leverage of the business are indicators of these
outcomes. Considering a company's financial performance enables decision-makers to assess its
performance.
Ratios are typically used to assess an organization's financial performance. It is anticipated that
well-designed and implemented financial management will positively impact the generation of a
firm's value. By using resources effectively, a company can attain its ultimate goal of profitability.
The maximization of shareholders‟ wealth is what it is focused on. The measurement of financial
statistics including return on equity (ROE), return on assets (ROA), earnings per share (EPS),
capital asset ratio, growth rate of total revenue, and cost/income ratio is typically used to evaluate
the financial performance of banks. No model has yet been created that would completely fulfill
the analysis of demands and evaluation of the efficiency of bank operations, regardless of how
many ratios are being employed.

The bank is a financial institution that is working as the most important organ of the economic
growth and development of any country. Banks provide financial security by accepting customer
savings, creating high employment opportunities through investment, and playing a role in
alleviating poverty. Similarly, the economic development of a country also depends on the
performance of the banking industry. Researchers have taken the issue of the financial banking
industry‟s financial performance very seriously. Many previous studies have evaluated
comparative financial performance between traditional and Islamic banks.

2.2 Relevant Literature

“A comparative analysis of the financial performance of Islamic banks vis-a-vis conventional

banks: evidence from Pakistan” was conducted by Muhammad Tariq and Abida Zainab (2021).
This paper aims to undertake a comparative analysis of the financial performance of IBs and
conventional banks
(CB) in Pakistan over the period 2008–2019 to evaluate how IBs are faring compared to their
conventional peers.
This paper considers Financial Ratio Analysis (FRA) to analyze and compare the performance of
the top 10 IBs and CBs operating in Pakistan. The sample includes five full-fledged IBs and five
CBs which offer Islamic windows in Pakistan. The top-five performing CBs offering Islamic
windows have been selected in this study.
The results show that IBs are better capitalized, less risky, and have higher liquidity as compared
to
CBs. In contrast, the profits of IBs are found to be lower than those of CBs.

Comparative Analysis of the Financial Performance of Islamic vs. Conventional Banks in

Bangladesh was conducted by Md. Shamim Hossain (2012).

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This paper analyzed the financial performance of Islamic and Conventional commercial banking
sectors in Bangladesh for the period of 5 years from 2008 to 2012. Financial ratios were employed
to measure the profitability and performance of banks; Additionally, statistical tools mean, standard
deviation, minimum, maximum, range, and Skewness was used to evaluate performance.
ROE, ROA, and EPS are considered variables with a sample size of 15 banks in Bangladesh. The
indicators of profitability of ROA, ROE, and EPS demonstrate, all bank groups recorded an
increase in the rate of profit in the first three years of the study, and Islamic banks are found to be
the more profitable in comparison to the conventional banks, banks profitability deteriorated
during 2011 to 2012 as the banks‟ operating environment deteriorated due to the stock market crisis
and a slowing economy and another reason could be increasing bank operating costs and reduced
income.

“A Comparative Study of Islamic and Conventional Banking in Bangladesh: Camel Analysis” was
conducted by Md. Tanim-Ul-Islam and Mohammad Ashrafuzzaman (2015).

This study aims to evaluate the financial performance of Islamic and conventional banks in
Bangladesh through the CAMEL test from 2009 to 2013. The study tries to determine whether
there are significant differences between the two categories of banks for each of the ratios used in
the CAMEL test. Based on CAMEL, there are five categories of variables. These categories are
capital adequacy, asset quality, management capability, earnings ability, and liquidity.
A sample of five listed conventional banks and five listed Islamic banks was selected to study the
objectives. The data used in this study were compiled from the financial statements of the
respective sample banks. To make substantial noteworthy results, a t-test (independent sample) is
used. This paper found no significant difference between Islamic banks and conventional banks
regarding capital adequacy, management capability, and earnings but found a significant difference
regarding asset quality.

Mohammad Hedayet Ullah, A.S.M. Kamruzzaman, and S. M. Masudur Rahman (2019)

researched the “Performance Evaluation of Conventional and Islamic Banks in Bangladesh”

This study aims to evaluate the financial performances of Conventional banks and Islamic banks
operating in Bangladesh and compare the financial performance based on some selected variables.
The study has used panel data from the period 2010 to 2018 published in the annual reports of
these banks and the Bangladesh Bank. The study had a sample of 10 commercial banks consisting
of 5 Conventional and 5 Islamic banks.
This study has chosen a common set of 7 balance sheet variables to test the performance of both
groups of banks and used the OLS regression method and the correlogram to measure the
relationships and the contributions of these variables to the profitability of both groups of banks.
The study results reveal those balances with other banks, money calls, investment in securities,
total loans, borrowings from other banks and total deposits had significant contributions to the
operating profits of the group of conventional banks. On the other hand, balances with other banks,
investments in securities, and total deposits had significant contributions to the operating profits
of the group of Islamic banks.

Muhamad Abduh, Sidratul Mahabub Hasan, and Alfatih Gesan Pananjung (2013) researched
the “Efficiency and Performance of Islamic Banks in Bangladesh”

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Which to investigate the efficiency and performance of five Islamic banks in Bangladesh namely,
Islami Bank Bangladesh Limited, Al- Arafah Islami Bank Limited, Social Islami Bank Limited,
Shahjalal Islami Bank Limited, and First Security Islami Bank Limited.
Data are collected through their published annual reports from the year of 2006 to 2010. In
addition, methods used to measure the performance and efficiency of Islamic banks are ratio
analysis and data envelopment analysis respectively. Regarding banks‟ performance, this study
concludes that Shajalal Islami Bank Limited is better than other Islamic banks in terms of its ROA,
ROE, ETA, CAR, IER, and AU ratios. On the other hand, regarding banks‟ efficiency, all Islamic
banks have shown an improvement in their efficiency level.
However, the result shows that First Security Islami Bank is better in terms of efficiency. This
study complements other studies which discuss performance and efficiency in Islamic banks,
particularly in the case of Bangladesh.

M. S. Hadriche (2015) researched “Banks performance determinants: Comparative analysis

between Conventional and Islamic banks from GCC countries”

This research aims to compare and identify the determinants of the performance of Islamic banks
with Conventional banks operating in GCC countries from 2005 to 2012.
Using a sample of 71 Conventional banks and 46 Islamic banks that operate inside GCC countries
for the period 2005-2012 and by using the CAMEL test, we find that comparing the profitability
of the Islamic and Conventional banks shows that for all the ratios used to measure profitability,
Islamic banks are on-average more profitable than the conventional ones.
The CAMEL framework is a set of variables that include capital adequacy, asset quality,
management quality, earnings ability, and liquidity.
For performance determinants, results show that bank size affects the performance of both
Conventional and Islamic banks. The operation cost has a positive and significant effect on
performance in Conventional and Islamic banks. The coefficient of credit risk is negative and
significant in Conventional banks and positive but nonsignificant in Islamic banks. For
macroeconomic variables, inflation and DPG growth haven‟t a significant effect on Conventional
banks‟ performance. For Islamic banks, inflation has a positive and significant coefficient. Results
show differences regarding factors affecting performance between Conventional and Islamic
banks. Specifically, credit risk does not affect Islamic bank performance, while inflation and DGP
growth do not affect the performance of Conventional banks.

Peerzada Shah Faisal and J. A. Arul Chellakumar (2018) researched the “Performance Analysis
Of Islamic Banks: A Case Study Of Malaysian Banks”
Performance analysis of Malaysian Islamic banks is the main aim of this study. Three performance
indicators, namely Profitability, Liquidity, and Credit risk of the banks are being analyzed. Data
collected is standardized to 2010 prices as per the wholesale price index of Malaysia equal to 100.
The obtained data is analyzed with the help of ratio analysis.
Under profitability performance, the Real return on assets ratio and the Real return on equity ratio
is analyzed. Under liquidity performance, the Real net loan to total asset ratio, Real liquid asset to
customer deposit ratio, and Real net loan to total deposits and borrowings ratio are analyzed.
Under Credit risk performance, Real Common equity to total asset ratio, Real Total equity to net
loan ratio, and Real Impaired loans to net loan ratio are analyzed.
Two major findings of the study are: (i) the liquidity risk of all the banks has increased which has
resulted in a decline in the convertibility of banks to convert its assets into face value; and (ii)
under credit risk performance real impaired loan to net loan ratio, which is the most important

16 | P a g e
criteria to assess the quality of loans or assets of all the banks has improved increasing the
asset/credit performance of the banks.

“Performance of Conventional and Islamic Banks in the UAE: A Comparative Graphical Ratio
Analysis” was conducted by Manoj Kapur (2020).

This comparative analysis is conducted to ascertain the performance of Conventional and Islamic
Banks operating in the UAE for 5 years from 2014-2018. To compare, the author has chosen the
top 6 Conventional and Islamic banks, respectively. The study is purely analytical and as
previously mentioned, is based on secondary data. Different financial ratios have been used to
calculate liquidity, asset quality, efficiency, and leverage.
Based on ratio analysis, the study found that there is a significant difference between the
performance of Islamic and conventional banks in terms of liquidity, efficiency, asset quality, and
leverage. The results indicate that conventional banks are efficient in terms of return on equity,
EPS, and other key parameters. Even case of the Net Interest Margin ratio, conventional banks
have tended to outstrip Islamic banks. While Islamic banks have been conservative in advances
due to Shariah restrictions, conventional banks have a larger risk appetite for lending activities.

“Performance And Profitability of Islamic Banks in Saudi Arabia: An Empirical Analysis” was
conducted by Saima Javaid, and Suha Alalawi (2018) to examine all the internal and external
determinants contributing to the profitability of 9 Islamic Banks in the region of Saudi Arabia from
2000 to 2013, that is a period of 14 years.

The study took the unbalanced panel data of 10 Islamic banks in the Saudi Arabian region.
Profitability and Efficiency performance was considered the dependent variable and Capital
adequacy, asset quality, liquidity, management quality, operating efficiency, and leverage was
considered the independent variable.

The empirical findings indicate that the coefficient of the capital adequacy ratio is positive and
highly significant, with both measures of profitability, reflecting the sound financial condition of
Saudi banks. On the other hand, the positive and significant leverage ratio (LR) implies that Saudi
Islamic banks are relying heavily on debt financing, suggesting that Saudi Islamic banks are riskier
in nature, though profitable to a certain extent, these might be badly hit in times of recession in the
economy. Thus, a diversified portfolio is necessary to maintain stability in the future and to reduce
risk and uncertainty.

“A Comparative Analysis of the Financial Performance of Conventional And Islamic Banks In

Indonesia” was conducted by Suskim Riantani, and Wien Dyahrini (2021)

Which aims to analyze the differences in financial performance between conventional banks and
Islamic banks. Financial performance is measured through the capital, asset quality, earnings, and
liquidity. The unit of analysis was carried out on conventional banks and Islamic banks during the
research period of 2014-2018. This research uses descriptive and comparative methods. The
sampling method used was two-stage cluster sampling and purposive sampling.
Observations were made on three conventional banks and three Islamic banks. The analysis method
used a mean difference test with the t-test statistic at a significance level of 5%. The results showed
that there was a significant difference in the capital between conventional banks and Islamic banks,
conventional banks had better capital performance than Islamic banks.

17 | P a g e
There is a significant difference between the asset quality of conventional banks and Islamic banks.
Conventional banks have better asset quality performance than Islamic banks. There is a significant
difference in earnings between conventional banks and Islamic banks. Conventional banks have
better earnings performance than Islamic banks. There is a significant difference between the
liquidity of conventional banks and Islamic banks. Islamic banks have better liquidity performance
than conventional banks.

Saba Sehrish, Faiza Saleem, Muhammad Yasir, Farhan Shehzad, and Kamran Ahmed (2012)
researched “Financial Performance Analysis of Islamic Banks and Conventional Banks in
Pakistan: A Comparative Study”

Which aims to compare the financial performance of the Islamic banking sector and conventional
banking sector in Pakistan from the years 2007-2011. Islamic banking in Pakistan is new compared
to conventional banking. Therefore, to give a clear picture of Islamic banks to the stakeholders,
the financial position of Islamic banks has been analyzed and compared with that of well-
established conventional banks in Pakistan.
To measure Performance, six ratios are developed. Financial ratio analysis has been conducted to
test the ratios of eight sample banks. The results show that Islamic banks are less risky in terms of
dealing with loans and less efficient in expense management as compared to conventional banks.
Whereas, no significant difference has been found in the profitability of both the banking sectors.
Overall, Islamic banks‟ performance has been found satisfactory.

“Financial Performance Comparison between State-Owned Commercial Banks and Islamic Banks
in Bangladesh” was conducted by Mohammad Hedayet Ullah S.M. Masudur Rahman (2022).

This research aims to assess and assimilate the financial performance of Islamic banks and state-
owned commercial banks in Bangladesh. For this study, researchers assemble secondary data from
the annual reports of five Islamic banks and five state-owned commercial banks from 2015 to 2019.
Researchers employed panel data for analyzing and determining the significant determinants of
the banks‟ performance to compare.
As a measure of profitability, Return on Equity (ROE) has been considered a dependent variable
whereas the total asset, capital, capital adequacy ratio, liquidity, credit to deposit, Gross Domestic
Product (GDP), and inflation are considered independent variables.
The findings of this study reveal that total asset, capital adequacy, and liquidity variables affect
Islamic banks momentously whereas state-owned commercial banks are momentously affected by
total asset and liquidity. But credit to deposit has no significant effect on both categories of banks.
From these viewpoints, Islamic banks have a greater ability to influence the ROE than those state-
owned commercial banks and in terms of financial performance; Islamic banks are categorized as
better-performing banks.

Tanbir Ahmed Chowdhury, Tanveer Kabir, and Tahiya Ahmed Chowdhury (2022) researched the
“Performance Evaluation of Selected Islamic Banks in Bangladesh”

Which was carried out to evaluate the performance of selected Islamic banks in Bangladesh. Both
quantitative and qualitative analyses were used. The relevant data and information were collected
from relevant banks and stock exchanges. The performance of the banks was assessed through
different variables, such as paid-up capital, investment-to-deposit ratio, classified investments,
assets, net income, earnings per share (EPS), and dividends, which were then analyzed using

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various statistical measures, such as growth percentage, trend equations, the square of the
correlation coefficient, and a correlation matrix.
Fifty trend equations and R-squared were tested for ten different banks' activities. Among them,
the trend values were positive for all the banks. The square of the correlation coefficient (R2) of
most of the equations is more than 0.8, indicating well-fitting trend equations. This study proves
that the industry has the scope to grow.

Md. Aminuzzaman Talukder, Md. Sazib Molla, Dr. Mobarak Hossain, and Abu Ishaque Hossain
(2021) researched “Does the Financial Performance Of Islamic Banks Are Higher Than The
Traditional Banks In Bangladesh? Panel Data Analysis”

This study aims to examine the comparative financial performance between traditional and Islamic
banks in Bangladesh. The study used secondary data as panel data of banks for 2016-2020. Since
the data is secondary, the quantitative approach to research is considered to use financial ratio
analysis (FRA). For analyzing the panel data, Decision Analyst Stats 2.0 software was used. This
study randomly selected 10 scheduled commercial banks where 5 traditional and 5 Islamic banks.
The results found that the financial performance of Islamic banks and traditional banks are
satisfactory but more satisfactory in the case of Islamic banks in Bangladesh.

“Measuring Efficiency of Islamic Banks in Bangladesh: An Application Of Data Envelopment

Analysis” was conducted by Idris Ali (2015).

This paper investigates the technical, pure technical, and scale efficiency of the Islamic banks
operating in Bangladesh applying a non-parametric, Data Envelopment Analysis (DEA) method.
Data were collected from the annual reports of the respective banks, and DEA-solver software was
used to analyze the data in two different phases considering different input-output variables.
In the first phase of the analysis, profit paid on deposit and operating expenses were selected as
the input variables. On the other hand, income from the investment and operating profit were
selected as the output variables. Analysis in the first phase revealed that the technical efficiency of
all the Islamic banks was very high amounting to an average of 98 percent, 96 percent, 98 percent,
and 96 percent in 2010, 2011, 2012, and 2013 respectively.
In the second phase of the analysis deposit, fixed assets, number of branches, number of total
employees, profit paid on deposit, and operating expenses were selected as the input variables.
Investment, income from the investment, and operating profit were selected as the output variables.
Analysis in the second phase revealed that the inclusion of some new variables changed the result
completely. Including some more variables in the analysis of the efficiency measurement process,
it was found that all the Islamic banks were technically efficient in the period of the study.

2.3 Conclusion
Based on previous studies, it can be said that many studies have been conducted on traditional
banks relating to financial performance in the world and Bangladesh. Although there is some
research on the financial performance of Islamic banks separately, the number of comparative
studies is less. Most of the studies have documented different and mixed results. There is little
evidence to suggest that both Islamic banks and traditional banks have had productive levels in
Bangladesh. So based on the previous studies‟ gap, the purpose of the present study is to provide
comparative empirical evidence of two different banking sectors (Islamic and Conventional).

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 Chapter Three
Methodology of the Study

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3.1 Introduction

The primary objective of this study is to compare the financial performance of Islamic and
conventional banks and identify the factors that contribute to their success or failure. To achieve
this, we will use descriptive statistics to summarize the dataset, correlation analysis to examine the
relationships between the variables, and regression analysis to identify the most significant
predictors of financial performance. We employ multiple regression analysis to capture significant
determinants of profitability and to test the hypothesis.

3.2 Sample design

Currently, in Bangladesh, 61 Scheduled banks are operating under the full control and supervision
of Bangladesh Bank, which is empowered to do so through the Bangladesh Bank Order, 1972 and
the Bank Company Act. 43 private commercial banks are majorly owned by individuals/ private
entities. PCBs can be categorized into two groups:

Conventional PCBs: 33 conventional PCBs are now operating in the industry. They perform the
banking functions in a conventional fashion i.e. interest-based operations.
Islamic Shariah-based PCBs: There are 10 Islamic Shariah-based PCBs in Bangladesh and they
execute banking activities according to Islamic Shariah-based principles i.e., Profit-Loss Sharing
(PLS) mode.

This study has a sample size of 10. 5 Islamic banks are chosen from the Islamic bank‟s population
of 10 and 5 Conventional banks are chosen from Conventional PCB‟s population of 33.

Islamic Bank’s Conventional Bank’s

Al-Arafah Islami Bank Limited (AIBL) Bank Asia Limited (BAL)

International Finance Investment and Commerce

Islami Bank Bangladesh Limited (IBBL)
Bank Limited (IFIC)

Export-Import Bank of Bangladesh Limited

Prime Bank Limited (PBL)
(EXIM)

Shahjalal Islami Bank Limited (SJIBL) Jamuna Bank Limited (JBL)

National Credit and Commerce Bank Limited

Social Islami Bank Limited (SIBL)
(NCC)

Table-3.2: Sample banks

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3.2.1 Introduction to Selected Islamic Banks
(BDT in Million)

Particulars AIBL IBBL EXIM SJIBL SIBL

June 18, March 13, June 02, 10th May November

Date of Incorporation
1995 1983 1999 2001 22, 1995

Authorized Capital 15,000 20,000 20,000 15,000 30,000

Paid up capital 10,649.02 16,099.91 4,475.57 10,291 9849.09

Deposits 336,890.72 1,381,979.53 420,673.77 217,289 341,661.06

Investments 353,287.97 1,285,992.40 429,033.37 216,587 312,773.82

Number of branches 201 384 140 132 172

Number of
4,247 19,193 3242 2,741 3192
employees
Number of
19,146 30,126 58969 26,060 26,743
shareholders

Table-3.2.1: Selected Islamic banks

3.2.2 Introduction to Selected Conventional Banks

(BDT in Million)

Particulars BAL IFIC PBL JBL NCC

November 27, February June 03, May 15,

Date of Incorporation 1983
1999 12, 1995 2001 1993

Authorized Capital 15,000 40,000 25,000 10,000 20,000

Paid up capital 11,659.07 17,009 11,323 7,492.26 10,169

Deposits 317,782.43 333,142 243,070 212,043.65 203,244

Investments 77,021.19 55,612 59,144 68,067.84 49,298

Number of branches 129 160 146 157 125

Number of employees 2547 4,350 2,997 3,346 2176

Number of
7,583 57,234 13,700 19,586 40300
shareholders

Table-3.2.2: Selected Conventional Banks

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3.3 Sources of Data
This study is based on secondary data which is collected from the annual reports of the selected
Islamic and conventional banks. 5 years of data from 2017 to 2021 were considered for calculating
the financial performance of both sector banks.

3.4 Variables Identified

Return on equity (ROE) is considered a dependent variable, while Debt to Equity ratio (D/E),
Capital adequacy ratio (CAR), Total equity-to-total assets (TETA), Cost to Income Ratio (CIR),
and Investment to deposit ratio (IDR) are considered independent variables.

Return on Equity (ROE)

Return on Equity (ROE) is a financial ratio that measures a company's profitability by expressing
its net income as a percentage of its shareholders' equity. It is a key performance indicator that
measures how effectively a company is using its shareholders' capital to generate profits.
For banks, ROE is an important metric used to evaluate their financial performance and efficiency
in generating profits for their shareholders. Banks with a high ROE are considered to be more
profitable and efficient in using their equity capital than those with a lower ROE. ROE is obtained
by dividing net income by shareholders‟ equity.

Debt to Equity Ratio (D/E)

The debt-to-equity ratio is a financial ratio that measures the proportion of a company's total debt
to its total equity. It is calculated by dividing the total liabilities (including both short-term and
long-term debt) by the total shareholder equity.
The debt-to-equity ratio is an important metric for investors and lenders because it indicates how
much of a company's financing comes from debt compared to equity. A high debt-to-equity ratio
suggests that a company is heavily reliant on debt financing, which can increase financial risk and
make it more vulnerable to economic downturns.
On the other hand, a low debt-to-equity ratio indicates that a company has a relatively small amount
of debt compared to equity, which suggests that it has a more stable financial position and is less
likely to default on its debt obligations.

Capital Adequacy Ratio (CAR)

Capital Adequacy Ratio (CAR) is a financial ratio that measures a bank's ability to absorb losses
and maintain its financial stability in the face of unexpected events or adverse market conditions.
CAR is calculated by dividing the bank's regulatory capital by its risk-weighted assets (RWA).
Regulatory capital includes Tier 1 capital, such as common equity and retained earnings, and Tier
2 capital, such as subordinated debt and loan loss reserves. RWA is calculated by weighting the
bank's assets based on their level of risk, with riskier assets assigned a higher weight than less risky
assets.
CAR is an important measure of a bank's financial strength and ability to withstand unexpected
losses. A higher CAR indicates that the bank has a stronger capital base relative to its risk-weighted
assets and is better positioned to weather financial shocks.

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The minimum CAR required for banks varies by country and is set by the regulatory authorities.
Generally, a CAR of at least 8-10% is considered adequate, but some banks may maintain higher
levels of capital to provide an extra buffer against potential losses.

Total Equity to Total Assets Ratio (TETA)

The Total Equity to Total Assets ratio (also known as the Equity-to-Assets ratio) is a financial ratio
that measures the proportion of a bank's assets that are financed by its equity capital. It is calculated
by dividing the bank‟s total equity by its total assets.
This ratio is an important indicator of a bank's financial strength and stability. A higher equity-to-
assets ratio indicates that the bank has a larger cushion of equity capital to absorb potential losses
or risks. Conversely, a lower ratio indicates that the bank is relying more heavily on debt financing
to fund its assets, which can increase its financial risk and vulnerability to economic downturns.
The optimal level of the equity-to-assets ratio depends on a variety of factors, including the bank's
business model, risk profile, and regulatory requirements. In general, higher levels of equity-to-
assets ratio are considered desirable as they provide a greater level of financial safety and
soundness for the bank.

Cost to Income Ratio (CIR)

The Cost to Income Ratio (CIR) is a financial ratio that measures a bank‟s operating expenses as a
percentage of its operating income. It is calculated by dividing the bank's operating expenses by
its operating income.
The CIR is an important indicator of a bank's efficiency in managing its costs and generating
income. A lower CIR indicates that the bank can generate more income relative to its expenses,
which is generally considered more favorable. Conversely, a higher CIR indicates that the bank is
less efficient in managing its expenses and generating income.

Investment to deposit ratio (IDR)

The Investment to Deposit Ratio (IDR) is a financial ratio that measures the number of a bank's
deposits that are invested in assets, such as securities or loans. It is calculated by dividing the bank's
investments by its total deposits.
The IDR is an important measure of a bank's ability to manage its liquidity and generate income.
A higher IDR indicates that the bank is investing a greater portion of its deposits in assets, which
can generate higher returns but also involve higher risks. Conversely, a lower IDR indicates that
the bank is holding a larger portion of its deposits in cash or other liquid assets, which can provide
greater stability but lower returns.
The optimal level of the IDR depends on a variety of factors, including the bank's business model,
risk appetite, and regulatory requirements. In general, banks with a higher IDR are considered
more aggressive in their investment strategies, while banks with a lower IDR are considered more
conservative.

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 Description Variable Measure Notation

Dependent
Return on Equity Net Profit/Shareholders Equity ROE
Variable
Debt to Equity Total debt/ Total equity D/E

Regulatory Capital/ Risk-

Capital Adequacy CAR
weighted assets
Independent Total equity to total
Total Equity/Total assets TETA
Variable assets
Total operation cost/Total
Cost to Income CIR
operating income
Total Investments/ Total
Investment to deposit deposits IDR

Table-3.4 Variable structure

3.5 Research Model

Y = 𝛼 + 𝛽1𝑋1 + 𝛽2𝑋2 + 𝛽3𝑋3 + 𝑒 ............ +𝛽𝑖𝑋𝑖

ROE =𝛼 + 𝛽1𝐷/𝐸 + 𝛽2𝐶𝐴𝑅 + 𝛽3𝑇𝐸𝑇𝐴 + 𝛽4𝐶𝐼𝑅 + 𝛽5𝐼𝐷𝑅

Where,

B = Beta

D/E = Debt to Equity ratio

CAR = Capital Adequacy ratio

TETA = Total equity to total asset ratio

CIR = Cost to income ratio

IDR = Investment to deposit ratio

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3.6 Hypothesis development

H1 = Debt to equity (D/E) ratio has a significant effect on ROE

H2 = Capital adequacy ratio (CAR) has a significant effect on ROE

H3 = Total equity to Total asset (TETA) has a significant effect on ROE

H4 = Cost to income ratio (CIR) has a significant effect on ROE

H5 = Investment to deposit ratio (IDR) has a significant effect on ROE

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 Chapter Four

Analysis and Discussion

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4.1 Introduction
In this chapter, we analyze the data we get from the bank‟s financial statement with the help of
Ratio analysis. To analyze both banks‟ financial performance, we use various techniques such as
descriptive statistics, Pearson correlation, and regression analysis to interpret the data. The
collected data will be analyzed using descriptive statistics, correlation analysis, and multiple
regression analysis. Descriptive statistics will be used to summarize the data, while correlation
analysis will be used to examine the relationship between the financial ratios and bank
performance. Multiple regression analysis will be used to determine the significant predictors of
bank performance.

4.2 Descriptive Analysis of Islamic Banks

Variable Observations Mean Standard Kurtosis Skewness Minimum Maximum

Deviation

ROE 25 9.8448 1.85 1.10 0.843 6.95 14.7

D/E 25 14.76 1.80 -0.290 -0.290 11.07 17.87
CAR 25 13.378 1.39 -1.009 -0.07 10.88 15.7
TETA 25 5.8814 1.01 0.164 0.28 3.95 8.28
CIR 25 56.585 13.28 -0.249 1.07 43 82.58
IDR 25 88.825 4.11 0.951 -0.98 79.62 96.11

Table: 4.2 Data collected from annual reports of Islamic banks (2018-2022)

This table provides descriptive statistics for seven financial variables:

 Observations: This column indicates the number of observations available for each variable.
In this case, there are 25 observations for each variable.
 Mean: This column indicates the average value of each variable across all observations. For
example, the average return on equity (ROE) is 9.8448.
 Standard Deviation: This column indicates the extent to which each variable varies from the
mean value. For example, the standard deviation of ROE is 1.85, indicating that ROE varies
by about 1.85 percentage points from the mean value of 9.8448.
 Kurtosis: This column indicates the degree of peakedness or flatness of the distribution of
each variable. A positive kurtosis value indicates a relatively peaked distribution, while a
negative value indicates a relatively flat distribution. In this case, ROE has a positive kurtosis
value of 1.10, indicating that it has a relatively peaked distribution.
 Skewness: This column indicates the degree of symmetry or asymmetry of the distribution of
each variable. A positive skewness value indicates that the distribution is skewed to the right
(i.e., has a longer tail on the right), while a negative skewness value indicates that the
distribution is skewed to the left (i.e., has a longer tail on the left). In this case, CIR has a
positive skewness value of 1.07, indicating that it is skewed to the right.
 Minimum: This column indicates the minimum value of each variable across all observations.
For example, the minimum value of ROE is 6.95.

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 Maximum: This column indicates the maximum value of each variable across all
observations. For example, the maximum value of ROE is 14.7.

Overall, these descriptive statistics can provide valuable insights into the distribution of each
variable and can be used to make comparisons between variables or to identify potential outliers
or extreme values.

4.3 Descriptive Analysis of Conventional Banks

Variable Observations Mean Standard Kurtosis Skewness Minimum Maximum

Deviation

ROE 25 9.73 2.92 0.41 -0.62 2.3 14.8

D/E 25 11.68 1.68 -0.308 -0.194 8.3 15.02
CAR 25 14.61 2.02 -1.39 0.17 11.51 17.93
TETA 25 7.44 1.13 -0.19 0.29 5.58 9.99
CIR 25 49.85 6.11 0.09 0.41 40.31 65.6
IDR 25 19.69 5.37 0.006 0.71 11.96 31.91

Table: 4.3 Data collected from annual reports of conventional banks (2018-2022)

 Observations: This column indicates how many observations were collected for each variable
(in this case, 25 for all variables).
 Mean: This column shows the average value of each variable across all observations. For
example, the average ROE is 9.73.
 Standard Deviation: This column shows how much variation there is in the data for each
variable. Specifically, it indicates how much the data deviates from the mean. For example,
the standard deviation of ROE is 2.92, which means that the values for ROE tend to vary from
the mean by about 2.92 units.
 Kurtosis: This column measures the "peakedness" of the distribution for each variable. A
positive kurtosis value indicates a more peaked distribution than a normal distribution (i.e.,
more data points around the mean and fewer outliers). A negative value indicates a flatter
distribution (i.e., more outliers). In this dataset, most variables have kurtosis values close to
zero, which suggests that their distributions are relatively normal.
 Skewness: This column measures the asymmetry of the distribution for each variable. A
positive skewness value indicates that the distribution has a "tail" to the right (i.e., there are
more outliers on the high end); while a negative value indicates a "tail" to the left. In this
dataset, most variables have negative skewness values, which suggest that their distributions
are slightly skewed to the left.
 Minimum: This column shows the smallest value observed for each variable. For example,
the minimum value of ROE is 2.3.
 Maximum: This column shows the largest value observed for each variable. For example, the
maximum value of ROE is 14.8.

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Overall, these results provide some basic descriptive statistics for each of the seven variables in
the dataset, including information on their central tendency, variability, and distribution shape.

4.4 Correlation between Variables of Islamic Banks

ROE D/E CAR TETA CIR IDR

ROE 1
D/E -0.308750366 1
CAR 0.046503235 0.388702046 1
TETA 0.500111975 -0.593471288 -0.114307414 1
CIR -0.451820229 -0.210728942 -0.307666894 0.266831 1
IDR 0.076374122 -0.000238179 -0.349394624 0.225862 0.030322 1

Table: 4.4 Correlation Matrixes (IB) (Computer Generated: Excel-2019)

The correlation matrix can provide insights into the relationships between financial ratios. Here
are some key takeaways from the matrix:
 ROE has a positive correlation with CAR and TETA, which suggests that companies with
higher capital adequacy and total equity to total asset ratios tend to have higher returns on
equity.
 D/E has a negative correlation with ROE and TETA, which indicates that higher debt levels
can decrease a company's return on equity and total equity to total asset ratio.
 CAR has a weak positive correlation with CIR, which suggests that companies with higher
capital adequacy ratios may also have higher cost-to-income ratios.
 TETA has a positive correlation with CAR, which makes sense because total equity is a
component of capital adequacy.
 IDR has a weak positive correlation with TETA and a weak negative correlation with CIR.
This implies that companies with higher investment-to-deposit ratios may also have higher
total equity-to-total asset ratios, but lower cost-to-income ratios.

4.5 Correlation between variables of Conventional banks

ROE D/E CAR TETA CIR IDR

ROE 1
D/E 0.017781716 1
CAR -0.17378841 -0.229701905 1
TETA -0.10569484 -0.629345755 0.276153 1
CIR -0.44850018 -0.190140108 -0.09747 0.559222 1
IDR 0.091516978 -0.021183707 0.554386 -0.1114 -0.07783 1

Table-4.5: Correlation Matrix (CB) (Computer Generated: Excel-2019)

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Here are some interpretations of the correlations in this table:
 ROE has a weak positive correlation with D/E and a weak negative correlation with CAR, but
there is no significant correlation with TETA, CIR, or IDR.
 D/E has a weak positive correlation with ROE, but a stronger positive correlation with TETA,
which suggests that companies with higher debt-to-equity ratios tend to have higher total
equity-to-total asset ratios.
 CAR has a weak negative correlation with D/E and a weak positive correlation with CIR,
which indicates that companies with higher capital adequacy ratios may have lower debt-to-
equity ratios and higher cost-to-income ratios.
 TETA has a strong negative correlation with D/E and a weak negative correlation with CAR,
which implies that companies with higher total equity-to-total asset ratios tend to have lower
debt-to-equity ratios and capital adequacy ratios.
 CIR has a weak positive correlation with TETA and a moderate positive correlation with IDR,
which suggests that companies with higher cost-to-income ratios may have higher total equity-
to-total asset ratios and investment-to-deposit ratios.
 IDR has a moderate positive correlation with CIR, which implies that companies with higher
investment-to-deposit ratios may also have higher cost-to-income ratios.

4.6 Regression Analysis

Variables Coefficients Standard Error t-stat P-value

Intercept 13.70669105 7.734318636 1.772191151 0.092398825

D/E 0.006903226 0.209149647 0.033006155 0.974013953

CAR -0.15672424 0.240797346 -0.650855362 0.522933839

TETA 1.262696265 0.35806495 3.526444756 0.002255775

CIR -0.09313634 0.021371153 -4.358040012 0.000338543

IDR -0.04529507 0.073914291 -0.6128053 0.547270699

Multiple-R 0.795332027
R-Square 0.632553034
Adjusted R-Square 0.535856464
F-Statistics 6.541628455
Prob. (F-statistics) 0.001070586

Table: 4.6(a) Regression Analysis (IB) (Computer generated Excel-2019)

This regression analysis aims to explain the variation in the dependent variable, Return on Equity
(ROE), based on the variation in the five independent variables: Debt to Equity (D/E), Capital
Adequacy Ratio (CAR), Total Equity to Total Asset (TETA), Cost to Income Ratio (CIR), and
Investment to Deposit Ratio (IDR).
The regression equation can be written as follows:

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ROE = 13.7067 + 0.0069(D/E) - 0.1567(CAR) + 1.2627(TETA) - 0.0931(CIR) - 0.0453(IDR)
The intercept coefficient of 13.7067 suggests that if all the independent variables are equal to zero,
the expected value of ROE would be 13.7067.
The coefficient for D/E is positive but not statistically significant (p-value of 0.974), meaning that
there is no evidence of a significant linear relationship between ROE and D/E.
The coefficient for CAR is negative but not statistically significant (p-value of 0.523), indicating
that there is no evidence of a significant linear relationship between ROE and CAR.
The coefficient for TETA is positive and statistically significant (p-value of 0.002), suggesting that
there is a positive linear relationship between ROE and TETA. Specifically, for every one-unit
increase in TETA, we can expect a 1.2627-unit increase in ROE.
The coefficient for CIR is negative and statistically significant (p-value of 0.0003), indicating that
there is a negative linear relationship between ROE and CIR. Specifically, for every one-unit
increase in CIR, we can expect a 0.0931-unit decrease in ROE.
The coefficient for IDR is negative but not statistically significant (p-value of 0.547), meaning that
there is no evidence of a significant linear relationship between ROE and IDR.
The multiple R of 0.795 suggests that there is a strong positive correlation between the independent
variables and the dependent variable. The R-square value of 0.633 indicates that approximately
63.3% of the variation in ROE can be explained by the variation in the independent variables. The
adjusted R-square value of 0.536 suggests that approximately 53.6% of the variation in ROE can
be explained by the variation in the independent variables after adjusting for the number of
independent variables in the model.
The F-statistics of 6.5416 with a p-value of 0.0011 indicates that the model is statistically
significant, meaning that at least one of the independent variables is related to ROE.

Variables Coefficients Standard Error t-stat P-value

Intercept 22.36670963 8.610551063 2.597593286 0.017675754

D/E 0.270123569 0.389753999 0.6930617 0.496656071

CAR -0.993730329 0.346421526 -2.868558257 0.009834361

TETA 1.825656048 0.78198691 2.334637606 0.030688817

CIR -0.403012535 0.10825827 -3.722695138 0.001443107

IDR 0.265523038 0.120185509 2.209276636 0.039632283

Multiple-R 0.685957634
R-Square 0.470537876
Adjusted R-Square 0.331205738
F-Statistics 3.377095067
Prob. (F-statistics) 0.02377161

Table: 4.6(b) Regression Analysis (CB) (Computer generated Excel-2019)

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The regression equation for the last analysis, with ROE as the dependent variable and the five
independent variables D/E, CAR, TETA, CIR, and IDR, is:
ROE = 22.36670963 + 0.270123569D/E - 0.993730329CAR + 1.825656048TETA -
0.403012535CIR + 0.265523038IDR
The intercept of the regression equation is 22.37, which means that when all independent variables
are equal to zero, the expected value of the dependent variable (ROE) is 22.37.
The coefficient for the D/E variable is 0.27, which indicates that a one-unit increase in the D/E
ratio is associated with a 0.27-unit increase in the ROE, holding other variables constant.
However,this coefficient is not statistically significant as the p-value is greater than 0.05.
The coefficient for the CAR variable is -0.99, which suggests that a one-unit increase in the CAR
is associated with a 0.99-unit decrease in the ROE, holding other variables constant. This
coefficient is statistically significant as the p-value is less than 0.05.
The coefficient for the TETA variable is 1.83, which means that a one-unit increase in the TETA is
associated with a 1.83-unit increase in the ROE, holding other variables constant. This coefficient
is statistically significant as the p-value is less than 0.05.
The coefficient for the CIR variable is -0.40, which indicates that a one-unit increase in the CIR is
associated with a 0.40-unit decrease in the ROE, holding other variables constant. This coefficient
is statistically significant as the p-value is less than 0.05.
The coefficient for the IDR variable is 0.27, which suggests that a one-unit increase in the IDR is
associated with a 0.27-unit increase in the ROE, holding other variables constant. This coefficient
is statistically significant as the p-value is less than 0.05.
The multiple R is 0.69, which means that there is a moderate positive linear relationship between
the independent variables and the dependent variable. The R-squared value is 0.47, which indicates
that about 47% of the variation in the dependent variable (ROE) is explained by the independent
variables.
The adjusted R-squared value is 0.33, which takes into account the number of independent
variables and suggests that about 33% of the variation in the dependent variable (ROE) is explained
by the independent variables.
The F-statistic is 3.38, which is statistically significant as the p-value is less than 0.05. This
suggests that at least one of the independent variables has a significant linear relationship with the
dependent variable.

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4.7 Conclusion

Islamic Banks
Variables P-value Hypothesis Significance
D/E 0.974013953 H1 rejected Insignificant
CAR 0.522933839 H2 rejected Insignificant
TETA 0.002255775 H3 accepted Significant
CIR 0.000338543 H4 accepted Significant
IDR 0.547270699 H5 rejected Insignificant

Table: 4.6(c) Summary of the test of hypothesis (IB)

Conventional Banks
Variables P-value Hypothesis Significance

D/E 0.496656071 H1 rejected Insignificant

CAR 0.009834361 H2 accepted Significant
TETA 0.030688817 H3 accepted Significant
CIR 0.001443107 H4 accepted Significant
IDR 0.039632283 H5 accepted Significant

Table: 4.6(d) Summary of the test of hypothesis (IB)

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 Chapter Five

Findings and Recommendations

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5.1 Major Findings

The information from the financial reports has been gathered to make a comparison between
Islamic banks and conventional banks using ratio analysis. After a comparative study of
profitability, credit performance, management, and operating efficiency some essential facts are
identified.

From the descriptive statistics, it appears that Islamic banks have slightly higher means for ROE
and CAR, indicating better performance in those areas compared to conventional banks. However,
conventional banks have lower standard deviations for most variables, suggesting more stable and
consistent performance.

The correlation matrices suggest that the variables in both banks are not highly correlated,
indicating that each variable is providing unique information for predicting ROE.

In the regression analysis, it was found that the variables of TETA, and CIR were significant
predictors of ROE in Islamic banks and the variables of CAR, TETA, CIR, and IDR were
significant predictors of ROE in Conventional banks. However, the coefficients and standard errors
for these variables were different for the two types of banks, indicating that the relationships
between the variables and ROE are not the same for both types of banks.

Some Specific Findings include

1. The mean ROE for Islamic banks is slightly higher than conventional banks (9.8448 vs 9.73),
but the standard deviation is much lower for Islamic banks (1.85 vs 2.92). This indicates that
the performance of Islamic banks is more consistent than conventional banks.
2. The mean D/E ratio for Islamic banks is higher than conventional banks (14.76 vs 11.68),
indicating that Islamic banks rely more on debt financing than conventional banks.
3. The mean CAR for Islamic banks is slightly higher than conventional banks (13.378 vs 14.61),
indicating that Islamic banks have a better capital adequacy ratio than conventional banks.
4. The mean TETA for Islamic banks is lower than conventional banks (5.8814 vs 7.44),
indicating that Islamic banks are less risky than conventional banks.
5. The mean CIR for Islamic banks is higher than conventional banks (56.585 vs 49.85),
indicating that Islamic banks have higher operating expenses than conventional banks.
6. The mean IDR for Islamic banks is much higher than conventional banks (88.825 vs 19.69),
indicating that Islamic banks have a larger portion of their assets financed by deposits than
conventional banks. This is likely due to Islamic banks not being allowed to charge interest on
loans, and instead relying on profit-sharing arrangements with their clients.

5.2 Recommendations
Based on the analysis conducted, here are some recommendations to improve the performance of
both Islamic and conventional banks:
1. Improve the management of debt-equity ratio (D/E) - Debt-equity ratio (D/E) is an important
financial indicator that shows the level of debt financing compared to equity financing. A high
D/E ratio may indicate that the bank is heavily relying on debt, which can lead to financial
instability. Therefore, both banks should aim to maintain a healthy balance between debt and
equity financing.

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2. Focus on improving the capital adequacy ratio (CAR) - The capital adequacy ratio (CAR) is a
measure of a bank's ability to absorb losses. A higher CAR indicates that the bank is better
equipped to withstand economic shocks. Both banks should focus on maintaining a healthy
CAR to reduce the risk of insolvency.
3. Increase efficiency in asset management - Efficiency in asset management is crucial for both
Islamic and conventional banks to improve their performance. This includes improving the
management of non-performing loans and increasing the return on investment.
4. Enhance risk management practices - Both banks should also focus on enhancing their risk
management practices to reduce the risk of financial losses. This includes developing
comprehensive risk management frameworks, monitoring risks on an ongoing basis, and
implementing appropriate risk mitigation strategies.
5. Invest in technology and innovation - Both Islamic and conventional banks should invest in
technology and innovation to improve their competitiveness and enhance the customer
experience. This includes implementing digital banking services, improving online banking
security, and leveraging artificial intelligence and machine learning to enhance decision-
making processes.
6. Islamic banking is based on the principles of transparency and accountability, and improving
these standards could strengthen public trust in the banking sector. Both Islamic and
conventional banks in Bangladesh could work towards improving their transparency and
accountability standards, such as by disclosing their financial performance and risk
management practices.
7. The government and regulatory authorities should provide incentives for new Islamic banks to
enter the market, such as offering tax breaks or reducing regulatory barriers. It is also important
to ensure that Islamic banks are subject to the same regulatory standards as conventional banks
to create a level playing field. Additionally, promoting awareness among customers about the
benefits of Islamic banking could increase demand and promote competition in the market.
8. Like Islamic banks, conventional banks could benefit from improving their transparency and
accountability standards. This could include disclosing more information about their financial
performance, risk management practices, and governance structure. Conventional banks could
also benefit from implementing stricter ethical and corporate governance standards.

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5.3 Conclusion
Based on the findings of the study, it can be concluded that Islamic banks have slightly better
performance in terms of profitability and capital adequacy compared to conventional banks.
However, conventional banks appear to have more stable and consistent performance due to their
lower standard deviations. The correlation matrices suggest that each variable provides unique
information for predicting ROE in both types of banks.

The regression analysis showed that the significant predictors of ROE differ for Islamic and
conventional banks, with different coefficients and standard errors, indicating that the relationships
between the variables and ROE are not the same for both types of banks.

Furthermore, Islamic banks rely more on debt financing and have higher operating expenses than
conventional banks. However, they are less risky and have a larger portion of their assets financed
by deposits due to their reliance on profit-sharing arrangements with clients.

Overall, the findings suggest that there are significant differences between Islamic and
conventional banks in terms of their financial performance, risk profiles, and funding sources.
Therefore, it is essential to evaluate them separately and consider their unique characteristics while
making comparisons or investment decisions.

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