1.

0 INTRODUCTION
Although modern Islamic banking is considered to be a recent development, Muslims were able to access
financial systems operating without interest since the beginning of Islamic history. The system was used
to organize resources, finance productive activities and meet consumer needs. This system has proven to
be quite effective during the development of Islamic civilization.

Islamic banks today exist in all parts of the world, and are looked upon as a viable alternative system
which has many things to offer. While it was initially developed to fulfill the needs of Muslims, Islamic
banking has now gained universal acceptance. Islamic banking is recognized as one of the fastest growing
areas in banking and finance. Since the opening of the first Islamic bank in Egypt in 1963, Islamic
banking has grown rapidly all over the world.

1.1 Islamic Banking in Bangladesh

Bangladesh has a unique Banking system with multiple types of Banking with Nationalized Commercial
Banks (NCBs), Private Commercial Banks (PCBs), Foreign Commercial Banks (FCBs), Islamic
Commercial Banks (ICBs), Specialized Development Banks and the Cooperative Banks.

The aspiration of Bangladesh to run a banking system based on Islamic principles moved closer to
becoming a reality in 1978, after the Organisation of the Islamic Conference (OIC) meeting of its member
countries’ foreign ministers. OIC recommended its members (including Bangladesh) to develop Islamic
banking systems of their own. Five years after that declaration, in 1983, the country’s first Shari’ah-
compliant bank, Islami Bank Bangladesh, was established. More banks have followed, including Al-
Arafah Islami Bank (opened in 1995) and Shahjalal Islamic Bank Ltd (2001).

Although the Islamic banking market in Bangladesh started with a very limited resource base, it has
shown strong growth throughout the past two decades to date. Its ongoing development signals a high
level of acceptance by the public in general.

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1.2 Shahjalal Islami Bank Bangladesh

Shahjalal Islami Bank Limited (SJIBL), an Islami Shariah based private commercial bank, was
established in April 01, 2001 as a public limited company and commenced commercial banking operation
in the same year. The bank has been operating under Companies Act 1994 and obtained permission from
Bangladesh Bank before commencement. The main activities of SJIBL are to offer Shariah based
commercial banking products and services to existing and prospective customers through 51 branches
over the country in line with the requirement of the Bank Company Act 1991. The bank has been also
operating brokerage business from 2008 under the license from Securities & Exchange Commission
(SEC) and acquired the membership of both bourses of the country (Dhaka Stock Exchange and
Chittagong Stock Exchange). Being listed with stock exchanges, the bank’s shares are traded all over the
year in capital market. The paid-up capital of SJIBL stood at Tk.2,740.09 million as on March 31,2010
against the authorized capital of Tk.4,000.00 million. The bank has been showing good performance in
financial and non financial areas having steady growth of overall business since inception. The bank has
good achievement in opening new branches, earning substantial profit, sustaining operational efficiency,
etc. The bank was promoted by a group of prominent local businessmen having exposure in RMG,
Insurance, Electronics, Education, etc.

1.3 Performance Review of Shahjalal ISlami Bank(2005-2009)

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SL Variable 2005 2006 2007 2008 2009

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1 Paid up capital 936 936 1872 2246 2740
2 No of Employees 340 377 555 878 1299
3 No of Branches 16 21 26 33 51
1220 1809 2261 3428
4 Total Deposit 47459
5 1 8 0
1059 1551 2061 3291
5 Investment(L&A) 43958
0 6 6 9
Classified Investments as % of Total
6 0.49 0.19 0.62 0.44 0.94
Investments
7 Gross Income 1621 2563 3589 5285 7117
8 Gross Expenditure 1119 1718 2274 3475 5076
9 Net Asset Value per share(tk) 79.26 129 169 161 179.8
10 Net Income (NI) 256 463 647 818 1071
11 Earnings per share(tk) 33.63 49.5 28.81 29.84 39.07
1444 2134 2834 4411
12 Total asset 58921
8 3 7 0
13 Return on Equity (%) 34.46 38.44 23.21 25.58 25.1
14 Return on Assets (%) 1.76 2.17 2.6 2.26 2.08
15 Cost of Fund (%) 9.76 10.83 10.4 10.99 11.07
16 Stock Dividend (%) - - 20 22 25

1.4 Methodology
 No primary sources have been used rather based on secondary sources using financial statements,
credit rating report, articles etc.
 This analysis uses operational variables related to items of balance sheet and income statement in
financial ratios analysis, credit rating, risk exposure etc.

2.0 PERFORMANCE EVALUATION

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2.1 Variables Used in Evaluation:
Operational Variables:
200 200 200 200
Sl. Variable 2009
5 6 7 8
1 No. of employees 340 377 555 878 1299
2 No. of Branches 16 21 26 33 51
162 256 358 528
3 Gross Income 7117
1 3 9 5
111 171 227 347
4 Gross Expenditure 5076
9 8 4 5
5 Net Income 256 463 647 818 1071
*figures in million taka

2.2 GROSS INCOME & NET INCOME

2.2.1 Impact of income variables on financial Performance

Particulars 2005 2006 2007 2008 2009
Return on Assets (%) 1.76 2.17 2.6 2.26 2.08
Return on Equity (%) 34.46 38.44 23.21 25.58 25.1
0.69031 0.67030 0.63360 0.65752
Cost to Income ratio 0.713222
5 8 3 1
Earnings per
33.63 49.5 28.81 29.84 39.07
share(tk)

Variable
No. of employees
No. of Branches
Gross Income
Gross Expenditure
Net Income

Here, ROA has been increasing from 2005 to 2007 and then decreasing.ROE was increasing in 2005 and
2006 then it declined and fluctuated a bit. Cost to income ratio was decreasing upto 2007 and then it
started increasing.EPS was increasing in first two years and then declined and again increasing.

200 200 200 200

Sl. Variable 2009
5 6 7 8
1 Gross Income 162 256 358 528 7117

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 1 3 9 5
2 Net Income 256 463 647 818 1071
*figures in million taka

From this table, we see that, these ratios have been fluctuating from 2005 to 2009 and these fluctuations
can be well explained by our assigned operational variables.

• From the graph we can see that ROE has experienced a sharp decline whereas ROA did not.
Because in ROE calculation, equity was constant before and after 2007 (entered public market in
2007) whereas the numerator net income was increasing. That is why it had increasing trend in all
the years except in 2007.
• ROA has shown relatively stable trend over time because its asset side was increasing and net
income also increasing which made it to fluctuate less than ROE.
• Gross income was increasing because of increasing human resource and markets which were
causing the bank to generate more cash flows than ever before. As a result, net income was
increasing.
• Gross income has two types of impact on profitability ratios. First, increased gross income lowers
the value of cost to income ratio. But increase in the value of this ratio may be a result of large
percentage increase in gross expenditure. Second, higher gross income generates higher net
income
• Increasing net income caused ROA and ROE to increase as long as the percentage increase in net
income was higher than percentage increase in total assets and equity individually.

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 • EPS was increasing for these five years because net income was increasing and the sudden
decline is due to issuing shares in the public market.

Productivity ratio: Resource utilization or asset turnover = Gross income/Total Assets, representing
productivity of bank resources
Efficiency ratio: Total Income/General and Administrative Expenses, representing the operational
efficiency of the bank,

Particulars 2005 2006 2007 2008 2009

Productivity ratio 0.112195 0.120086 0.12661 0.119814 0.120789

Efficiency ratio 1.448615 1.491851 1.578276 1.520863 1.402088

Variable
No. of employees
No. of Branches
Gross Income
Gross Expenditure
Net Income

As these ratios, represents productivity of bank resource and efficiency of the bank, they are important
indicator of bank performance. Any alteration in the variables that have been assigned to us will change
these ratios to differ lot.

• Productivity ratio will be affected if gross income and total asset become affected. As gross
income is increasing from 2005 to 2009, the ratio will increase. So, bank performance is
supposed to look better because it will indicate more productivity. But the denominator total asset
is also increasing since the bank is expanding its size through last 5 years.

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 • With increasing no. of employees Shahjalal bank is having increasing trend of gross expenditure.
Although gross expenditure was increasing, this increase was offset by the increase in gross
income which caused the ratio to be increasing for 3 years and after that the ratio was
deteriorating. So, Shahjalal Bank was performing better in first 3 years than subsequent 2 years.

• If we compare between these two ratios and their corresponding graphs, we see that productivity
ratios, we see that both ratios have been showing an upward trend up to 2007. They decreased in
2008 and increased in subsequent year.

2.2.2 Impact of Income Variables on Credit Rating

• CRISL Rating- CRISL offers two types of ratings-Long term and Short term. Long term
ratings are valid for maximum one year while short term rating carries a validity of
maximum of six months.

Credit rating report by Credit Rating Information and Services Limited (CRISL) of the bank is:

**Rating: Based on Financials up to Dec. 2009

{Interpretation: AA/AA- = High safety & ST-2 = High Grade}

CRISL rating is based on capital adequacy, asset quality, management, earning prospects,
liquidity funding. These represent important aspects of a bank’s operation; reflect the bank’s financial
condition, overall operating soundness and compliance with supervisory regulations. There are some
other factors for this rating such as size of the bank/FI, capacity of external fund mobilization, corporate
governance, application of information technology, regulatory environment and compliances, Basel-2
compliances etc.

Gross income and net income affect these rating in such ways-

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 • If gross income increases then net income will also increase. This increase in net income will be
added to shareholders equity in balance sheet. As a result, capital adequacy requirements will be
partially affected and will reflect better performance through higher rating.
• Increased income may be used as loan or investments in assets. But this investment in such areas
has to be carefully handled and monitored. Thus, better rating on asset management can be
achieved.
• In performance rating, management expertise and competence matters a lot which can be best
reflected by increased gross and net income. Assessment of management ability largely depends
income variables.
• Higher sustainable earnings bring higher rating for the bank. This has become easier for Shahjalal
Islami Bank through upward trend of income.
• Liquidity can be ensured if the bank can lock itself with higher income as it happened for
Shahjalal ISlami Bank. So, considering better liquidity position, The bank achieved higher rating.

2.2.3 Risk Exposure

Variables Risks Increasing income from 2005 to 2009 states that-
Credit Risk • Higher income means that the bank has been able to
recover its funds or default risk is low
Gross Income & Liquidity • Higher income means that the bank can have liquid cash
Net Income Risk or investments to honor any withdrawal from depositors
Operational • Higher income indicates efficiency in economies of scale
Risk and scope which reflects reduced operational risk.

Further analysis states that since Shahjalal Islami Bank is enjoying upward trend of gross and net income,
so its-
• Credit risk will also be there because of increased loan and investment services.
• Liquidity risk might increase since its deposit is growing and increased income will be used in
lending and investments
• Increased income might be used in different investment opportunities with different price risk
levels.

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 • Bank’s income is generally vulnerable to interest rate risk (spread) but higher income reflects it as
tolerable. But high deposit and loans might lock the bank with interest rate risk if market rates
fluctuate.
• Increased gross income and net income reflects careful operational activities with low risk. In
future, if economies of scale and economies of scope is ensured then gross expenditure will be
lower.

2.3 NO. OF EMPLOYEES & NO. OF BRANCHES

200 200 200 200
Variable 5 6 7 8 2009
No of Employees 340 377 555 878 1299
No pf Branches 16 21 26 33 51

• The no of branches are increasing to meet the upward demand and to serve the quality service.

• The bank is trying to expand their business so that they can reach the more customers by opening
new branches in convenient places otherwise they will lose clients and thus have to enjoy reduced
profit.

• The no of employees are increasing in every year. The reason behind this is the no of branches is
also increasing in every year. So that they need more employees to give the quality service and
also maintain the demand properly.

2.3.1 Impact of No. of branches on financial Performance:

Year 2005 2006 2007 2008 2009

661.8 738.8 792.9
Total Investment per Branch 8 6 2 997.55 861.92
762.8 861.4 869.9 1038.7
Deposit per Branch 1 8 2 9 930.57
Net Income per Branch 16.00 22.05 24.88 24.79 21.00
101.3 122.0 138.0
Gross Income per Branch 1 5 4 160.15 139.55
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 From the graph, we see that credit (investment) per branch was increasing in all years except
2009. Because, in this year the bank has set a huge number of branches.
 Deposit per branch is slightly higher than credit per branch. It means that the bank utilizes most
of its deposits in investment which can lead it to liquidity risk.
 It is notable that both credit and deposit follows a similar trend indicating a sign that the
management revises its investment strategy on the basis of deposit.
 Gross income per branch was also in a rising trend except in 2009 because of huge expansion.
 The gap in the graph between gross income and net income per branch was getting slightly larger
upto 2008. This can be attributed to high rise in gross income and gross expenditure because net
income is relatively over time.

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2.3.2 Credit Rating
Credit Rating Year
CRISL Short 2009
Shahjalal Islami Bank Long term
term
Limited
AA ST-2

 These ratings are based on capital, asset, management earnings, and liquidity. etc
 Shahjalal Islami Bank has achieved higher rating in most recent year which obviously can be
partly or a little bit attributed to number of branches.
 Branch was increasing in these years. With these increases there was increase in total assets,
market size, deposit, investment and expenditure.
 As market size, deposit, asset and investment increased then net income and liquidity position
also got better,
 Shareholders equity capital strengthened (because increased income transferred to retained
earnings) and asset in the form of investments, fixed assets etc.
 It means that management was also able to control these well diversified branches and
corresponding cash flows.

2.3.3 Risk Exposure

 Operational Risk-By increasing number of branches, Shahjalal to some extent has been able to
ensure economies of scale. As a result, their operational risk is somewhat hedged.
 Liquidity risk-With increased number of branches, the bank has increased the total amount in tis
deposit and investments. If efficient allocation of funds can be allocated in these deposit and
investment accounts in terms of maturity then the bank can hedge its liquidity risk. Otherwise
situation will be somewhat different.
 Credit risk- Since the size of investment has grown up with number of branches; the credit risk
is likely to accompany this huge amount of investment. But the trend of income and other
profitability ratios appear to be upward which a good signal is.

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2.4.1 Impact of No. employees on financial Performance

Year 2005 2006 2007 2008 2009

Total Investment per 31.1 41.1 37.1 37.4
employee 5 6 5 9 33.84
35.9 47.9 40.7 39.0
Deposit per Employee 0 9 5 4 36.54
Net Income per Employee 0.75 1.23 1.17 0.93 0.82
Gross Income per Employee 4.77 6.80 6.47 6.02 5.48

 From the graph, we see that credit and deposit per employee fluctuated a lot in these years.
Meaning that credit, deposit and employee were not increasing smoothly.
 In 2nd year (2006), credit and deposit per employee increased a lot which that credit and deposit
raised a lot more than number of employees did.
 In later years, these two lines had a decreasing trend. It means that management became sincere
about quality of their service provided to clients. That is why, number of employees had been
increasing more that credit and deposit did.
 Gross income per employee went through a slight decreasing trend after 2006 meaning that they
were concentrating on service quality rather than profit margin.

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  It is also notable that net income per employee, just like in case of branches, shows a relatively
smooth trend in all of the four graphs.
 This differential also indicates that gross expenditure per employee has also been adjusted in such
a way that fluctuation in gross income per employee influences net income per employee a little
bit.

2.4.2 Credit Rating

Credit Rating Year
CRISL Short 2009
Shahjalal Islami Bank Long term
term
Limited
AA ST-2

 No. of employees could have indirect influence for the bank in achieving the stronger rating.
 In large diversified business area, with so many deposits and investments, gross expenditure was
supposed to be out of boundary.
 Risks associated with loans and investments, liquidity, operational risk were supposed to rear
head.
 But skilled human resources with innovative management controlled these negative forces.
 As a result, bank’s exposure to risk and other variable operational costs were reduced.
 One more important thing is that maintain a consistent profit margin is lot more difficult task.
Shahjalal Islami Bank maintained this at a cost of increasing number of employees.

2.4.3 Risk Exposure

 Operational Risk-To achieve operational efficiency, the bank has been increasing its employees.
As a result, any processes would take would take shorter time than ever before. Customers will be
more benefitted.
 Liquidity risk-As number of employees is growing it will add up to gross expenses which will
act as catalyst in case of maturity mismanagement between deposit and investment. But skilled
employees might be helpful in scrutinizing the situation.
 Credit risk- Perceived higher credit risk, if persists, would be handled by growing number of
employees which will result in lower credit risk.

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2.5.1 GROSS EXPENDITURE

Year 200 200 200 200 2009

5 6 7 8

Gross Expenditure 111 171 227 347 5076

9 8 4 5

As we see from the chart that from the year 2005 to 2009 the expenditure of Shahjalal Islami Bank has
increased. The expenditure has increased due to expansion of company, its branches and employment of
more employees.

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2.5.2 Impact on Financial Performance

 Even though the expenditure has gone up over the year but it is easily acceptable because bank
has increased its branches and number of employees. So, it also gives a sign of good performance
of the bank.

 The number of employees has increased as days passed. In 2005 it was only 340 where at 2009 it
become 1299. For this newly employed persons banks operational cost has increased. Bank has
established their branches in various places. For newly established branches, the operational cost
has gone up.

 With increased number of expenditure, capital of the bank has also gone up. But in real scenario
we find that percentage(%) change of gross margin was greater than percentage(%) change in
gross expenditure over the years. As a result company’s performance indicate a positive sign.

 Company’s asset management becomes more efficient over the years. Gross expenditure of
Shahjalal Islami Bank has gone up but it didn’t gone up that much of asset has increased over the
five years. if we take a close look over the percentage change in asset over the years and
percentage change in expenditure over the years that will give us a good idea about the
performance.

Here we can see that in 2007 asset has increased by 33% and in 2008 by 56% where expenditure
increased by 30% and 50% respectively. So, it can be said that bank has earned more précised
asset management.

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 2.5.3 Credit Retings

Credit Rating Year

CRISL Long 2009
Shahjalal Islami Bank Short term
term
Limited
AA ST-2

 These ratings are based on capital, asset, management earnings, and liquidity. Etc
 Shahjalal Islami Bank has retained a good position in the rating in the recent years where
expenditure has a huge part to contribute. They have increased their asset a lot where in
comparison their expenditure has increased less.
 Their number of brunches and employees has increased whereby they have been able to hold their
gross expenditure from being out of their hand.

2.5.4Risk Exposure:

 Operational risk: As their gross expenditure has gone up because of their increased number of
branches, employees and various activities, their operational risk also has gone up a wide margin.

 Liquidity risk: Due to higher expenditure of Shahjalal Islami Bank, they have to bring money
from their liquid asset side to spend. As a result their current asset side become weaker and
increase the risk of liquidity balance. If there is a huge demand of withdrawal or demand for loan
then it will become tougher for them to manage the liquid amount.

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3.0 COMPARISON AMONG VARIABLES

200 200 % 200 % 200 % 200

Sl. Variable % change
5 6 change 7 change 8 change 9
No. of 129
1 340 377 10.88% 555 47.21% 878 58.20% 47.95%
employees 9

2 No. of Branches 16 21 31.25% 26 23.81% 33 26.92% 51 54.55%

162 256 358 528 711
3 Gross Income 58.11% 40.03% 47.26% 34.66%
1 3 9 5 7
Gross 111 171 227 347 507
4 53.53% 32.36% 52.81% 46.07%
Expenditure 9 8 4 5 6
107
5 Net Income 256 463 80.86% 647 39.74% 818 26.43% 30.93%
1
**calculation= {(year 2 data-year 1 data)/year 1 data}*100

 In our assigned variables we see that, they have direct or indirect relation to income statement and
balance sheet. Such as gross income, gross expenditure and net income are direct items of income
statement. No. of employees will cost more administrative expenses so it is related to income
statement in a passive manner. On the other hand, no. of branches will require high cost which
affects income statement results. No. of branches also constitutes assets of the bank so it is related
to balance sheet.
 In 2006, no. of branches increased by 31.25% but no. of employees increased by 10.88%
meaning that in 2005 there were more than enough employees. This year gross expenditure and
gross income increased by more than 50% which result in a net income of 80%, which is the
highest from 2005-2009. Meaning that increase in no. of branches generated more cash flows
from expanded market size with relatively lower expenditure.
 In 2007, increase in no. of employees is twice of the increase in no. of branches. Increase in gross
income and expenditure is lower than increase in 2006. The most important thing is, net income
increased by 39.74% which has decreased a lot than that of 2006 but this slower increase can be
attributed to reduction in increase of no. of branches.
 In 2008, all the percentage increases are higher than that of 2007 except net income. Most
probably, increase in gross income could not offset the increase in other three variables since all
of them incur costs. As a result, net income’s increase becomes slower.

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  In 2009, % increase in no. of branches almost became doubled of 2008 whereas other three
variables excluding net income increased by a lower percentage than that of 2008.And Net
income increased at a slightly higher percentage. This might be result of mixed fluctuations or
due to some other reasons.
4.0 FUTURE OF ISLAMIC BANKING IN BANGLADESH
Future of islami banks in Bangldesh can esily be predicted by looking at the performance review of
shahjalal islami Bank. Shahjalal Islami Bank is one of the top banks in among the islami banks
conducting business in Bangladesh. It has already shown a very bright prospect as a financial institution.
They have been able to increase their net income, assets, branches, number of employees, return on asset,
return on equity etc. In recent years they have been able to attract the customers a lot and have earned AA
in credit rating for their performances in recent years.

In comparison to commercial banks, their service is still less sophisticated and more traditional. If they
can improve their technological sides then they have a very good future. Their number of branches didn’t
increase too much. By revising their strengths and weaknesses, this bank will easily be able to capture
larger market share in banking industry.

Same applies for all other islami banks in Bangladesh. All of them have good prospects because people
in Bangladesh are mostly influenced by religion. That is why all the islami banks, having lower number
of branches enjoying better profit than conventional banks. This advantage has been perceived by other
conventional banks. That is why, they are opening separate wings only for islami banking. It is clear that
in next coming years, islami banks in Bangladesh will be in intense competition because some other bank
will start this banking and still this particular banking will about more profits for the banks.

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5.0 CONCLUDING REMARKS
Throughout the study it has been seen that Shahjalal Islami Bank has been maintaining an upward trend
of performance. They are placed on the top in the list of most profitable banks in Bangladesh, though are
smaller than any commercial bank in terms of branches. As an Islamic shariah based bank, they do not
conduct business with interest which leads them to disadvantageous position in competition with
commercial bank but one advantage is that they are not directly related to interest rate risks. But still they
are more profitable than any other bank. Shahjalal Islami Bank should formulate policy to appreciate its
strengths offset disadvantages to ensure its growth and expansion and make greater contribution towards
economic development of Bangladesh.
In a nutshell, we can say that the bank’s performance is improving over time and if this trend remains
consistent in future, it will enjoy a gigantic position in the field of competition.

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6.0 REFERENCES
1. Crisl Credit Rating report,
[http://www.crislbd.com/Document/AllRatings/SJIBL_100410_352_1.pdf]

2. Financial Statements of Shahjalal Islami Bank 2007-2009

[www.shahjalalbank.com.bd/]

3. An EarlyWarning System for Islamic Banks Performance by MAHMOOD H. AL-

OSAIMY,Associate ProfessorAHMED S. BAMAKHRAMAH, Professor Economics
Department - Faculty of Economics and Administration,King Abdul-Aziz University - Jeddah -
Saudi Arabia.[ http://www.cba.edu.kw/elsakka/171-Al-Osaimy_06.pdf]

4. Islamic Banking by Mohamed Abdelhamid, Department of Economics Carleton University,

[http://www.nzibo.com/IB2/Abdelhamid.pdf]

5. INTER-TEMPORAL PERFORMANCE:DOES BANK-SIZE MATTER?AN ANALYSIS OF

UTAH BANKS by Abdus Samad, Lowell M. Glenn, Fazlul Miah.Banks and Bank Systems /
Volume 1, Issue 2, 2006

[http://www.businessperspectives.org/journals_free/bbs/2006/BBS_en_2006_02_Samad.pdf]

6. The Efficiency of Islamic Banks:Empirical Evidence from the MENA andAsian Countries
Islamic Banking Sectors By Su_an, Fadzlan, Mohamad, A.M Noor and Muhamed-Zulkhibri ,
Abdul Majid. [http://mpra.ub.uni-muenchen.de/19072/4/MPRA_paper_19072.pdf]

7. Country Focus: Islamic finance progress in Bangladesh, 01 January, 2009.

[http://newhorizon-islamicbanking.com/index.cfm?section=features&action=view&id=10865]

8. CAMELS Rating of Banks – Bangladesh, Published 25 February 2008

[http://www.reportbd.com/blogs/11/CAMELS-Rating-of-Banks---Bangladesh.html]

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