Professional Documents
Culture Documents
Your Sincerely
Osman Iqbal
ID# 17005
Department of Banking & Insurance
University of Dhaka
SUPERVISORS CERTIFICATE
This is to certify that the Internship Report on Retail Banking Operations of Commercial
Banks in Bangladesh: A Comparative Study between Agrani Bank Ltd and Al-Arafah Islami
Bank Ltd in the bona fide record at the report is done by Osman Iqbal, ID# 17005, as a partial
fulfillment of the requirement of Bachelor of Business Administration (BBA) degree from the
Department of Banking and Insurance, University of Dhaka.
The Report has been prepared under my guidance and is a record of the bona fide work carried
out successfully.
DECLARATION
I do hereby solemnly declare that the work presented in this Internship report has been
carried
out
by
me
and
has
not
been
previously
submitted
to
any
other
The work I have presented does not breach any existing copyright and no portion of this report
is copied from any work done earlier for a degree or otherwise.
I further undertake to indemnify the Department against any loss or damage arising from
breach of the foregoing obligations.
........................................
Osman Iqbal
ID# 17005
Department of Banking & Insurance
University of Dhaka
ACKNOWLEDGEMENT
At the very beginning I would like to express my deepest gratitude to the almighty ALLAH for
giving me the strength and the composure to finish the task within the scheduled time.
I would like to pay my gratitude to our course instructor Raad Mozib Lalon, Lecturer,
Department of Banking & Insurance, University of Dhaka, who has assigned me this task and
instructed in the right way and given me proper guidelines for preparing this report.
I am indebted to The Principle officer Md. Bashir Ahmed of New Market Branch of Agrani
Bank Limited who helped me to do my internship. I also like to thank all officers of New Market
Branch for giving me suggestions and facilitating my internship report.
I am grateful to my beloved Parents, friends and well-wishers for their inspiration that lead me to
go ahead.
Finally, I thank all the persons who have directly or indirectly contributed in preparing this
report.
This Report is not free from limitation. There might still be some minor mistakes including
typing errors despite utmost care, we apologize for these.
Osman Iqbal
------------------
EXECUTIVE SUMMARY
With the development of modern banking, banking industry is facing a new evergoing affiliation
called Islami Banking which has earned enormous popularity in recent times. Noticing the
popularity and lower default rate of islami banking, many conventional banks has started to open
their respective Islami Banking department. Consequently the competition become extensive
with growing popularity. Islami Banking operation is conducted under Shariaah Rule which is
directly supervised by Shariaah Committee. Products and services of Islami Bank or Branches
operated under Islami Shariaah are different than that of conventional banks. Usually Islami bank
provide loan (known as invest in Islami Shariaah) under profit/loss sharing or profit sharing, loss
bearing principle rather interest on principle amount basis. On the other hand conventional banks
offer loan and advance either paid after the expiration of fixed date in a lump sum or under the
agreement of installment payment. In case of deposit offering basic deposit of Islami banking can
be categorized as Mudarabah, Musharakah etc. while it can be categorized as Current account,
Savings account and fixed deposit account for Conventional banking.
As basic tools are different so their performance are also different from each other. Usually
banks operated under Islami shariaah principle faces lower default rate than that of conventional
banks because Islami banks require to provide close and extensive supervision of their
investments. Noticing this attractive lower rate of default, conventional banks are now moving to
Islami Banking.
Page 1 of 53
Although this study is based only upon one Islamic bank in Malaysia, the result has given some
insight on the example from outside the Middle East area. Similarly, utilizing Banking Efficiency
Model, Sarker (1999) claims that Islamic banks can survive even within a conventional banking
architecture in which PLS modes of financing is less dominated. Using Bangladesh as a case
study, Sarker (1999) argues further that Islamic products have different risk characteristics and
consequently different prudential regulation should be applied.
1.5 OBJECTIVE OF THE STUDY:
Principal objective of preparing this report is to compare the performance between islami banks
and conventional banks. To fulfil this objective, I will select few (five) of islami and few (five) of
conventional banks. Besides this objective my report will cover following objectives:
1.6 METHODOLOGY:
1.6.1 Research Type:
This research is a descriptive research which might involve some quantitative techniques to some
techniques. Thus the study requires both qualitative and quantitative techniques.
1.6.2 Types of Data:
To conduct the research, secondary sources of data will be appropriate. But in some extent, to
know differences between banking operation theory and actual practices in real world physical
visit of bank premises may be required. Then, this data will be considered as primary sources of
data.
Secondary sources of data will be as follows:
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While necessary data are being collected, I will use gathered data to find the performance of
these two types of banks. Comparison between performances will be done to reach in a
conclusion.
Accounting Ratio analysis tools will be used to measure and compare performance of these two
types of banks.
Page 4 of 53
Authorized Capital
15,000.00 Million
Paid Up Capital
8343.25 Million
Equity Capital
14,478.06 Million
Deposit
1,40,980.55 Million
Investment
1,25,715.39 Million
Number of Branches
Number of Shareholders
58,466
Page 5 of 53
Not only providing banking services, Al-Arafah Islami Bank has made a unique paradigm in case
of CSR activities. Al-Arafah Islamic International School & College and Al-Arafah Islami Bank
Library has been established patronized by the bank.
AGRANI BANK LIMITED
2.3 HISTORY & ESTABLISHMENT:
To provide international quality services in public sector and to maintain highest quality of
customer services, Agrani Bank Ltd was established in 1972 immediately after the independence
of Bangladesh. It is a state owned bank and formed by the composition of ex Habib Bank Ltd
and Ex-Commerce Bank Ltd. it was treated as a nationalized commercial bank from its
inception. But in 2007, it emerged as State Owned Commercial Bank and Private Limited has
been added to latter of its name. To be a public limited company, it took over the business, asset,
right and obligations of then Agrani Bank Ltd.
2.4 CORPORATE PROFILE AT A GLANCE:
Table 2.B: Corporate Overview: Agrani Bank Limited
Agrani Bank Limited
Date of the Registration
Authorized Capital
2500.00 Crore
Paid Up Capital
991.29 Crore
Operating Profit
1006.74 Crore
Deposit
34,868.00 Crore
Investment
17,6869.00 Crore
Number of Branches
889
Number of Employees
Agrani Bank Limited wants to be a pioneer bank among the state owned bank. To fulfil this
objectives, the bank already took initiatives to commence online banking throughout the country.
Page 6 of 53
Mudarabah
Accounts.
Mudarabah Education Savings Scheme
Accounts.
Mudarabah Special Savings (Pension)
Scheme Account.
Mudarabah Millionaire Scheme Account
Hajj/Umrah
Savings
etc.
Those are the very common deposit offering used throughout the banks operated under Islami
Shariah in Bangladesh. While analyzing these accounts, it is obvious that Islamic banks
mobilize its deposit mainly by three categories of deposit accounts:
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Alike Demand deposit of any other conventional bank, Islamic banks offer Current Account
under Al-Wadiaah principle. According to this principle, banks collect deposits with the
promise to repay them on demand without any prior notice. With the permission of customer,
banks use this fund at its own risk and hence depositors of such accounts are not allowed to
reap any share in profit earned by the banks.
Savings Account in Islamic Banks are conducted under Al-Wadiaah and Al-Mudarabah
principle. Al-Wadiaah means trusteeship where bank acts as a trustee for its customer.
According to Al-Wadiaah principle, the bank is given authorization to use the fund at its own
risk by the depositor. It is almost similar to Current Account or Demand Deposit except that
the bank guarantees full return of deposited fund with any profit voluntarily.
Mudarabah savings deposits give the banks exclusive rights to manage the deposits. The
profit or loss from the use of such deposit is shared between the banks and the depositors at a
pre agreed-upon ratio. Following this Mudarabah principle, two types of savings deposits
can be seen:
Savings under profit and loss sharing agreement (trustee profit sharing).
Savings under investment account.
The word Al-Mudaraba originates from the word Mudarib and means The Manager of
the fund. The bank in this case acts as a manager of customers funds. The depositors on the
other hand are known as Sahib-Al-Mal meaning the owner of the fund. Deposits accepted
on savings under the Profit and Loss sharing agreement is invested by the bank at its own
risk. Customers give authorization to the bank to invest funds and share profit or loss on
agreed proportions. Account holders of this type of account are required to maintain a
minimum balance in the account. The saving account under the Investment Account is also
known as a participatory account or a Profit or Loss Sharing (PLS) account. Depositors of
this type of account receive share of profit to the agreed ratio from their funds invested by the
bank. The profit and loss sharing also depends on the total amount deposited and the length
Page 8 of 53
of period the money is held by the bank. Depositors of an Investment Account are required to
give prior notice to the bank if they withdraw their invested funds under any special
circumstance. In such a case no share of profit is given for the amount withdrawn.
Islamic banks accept savings from customers as Quard E hasan interchangeably which can
be said as Benevolent loan from the customers. Depositors of this sort of savings deposits
receive financial or non-financial benefits from the bank.
With the ongoing improvement of modern banking, conventional banks started to offer
different multipurpose deposit accounts for customer. Modern banking are now far more
sophisticated than which can actually be seen in primary stages of bank evolvement. List of
most popular bank accounts in Bangladesh is shown below:
Deposit Accounts
Current Account
Savings Deposit Account
Savings Deposit Account
Current Deposit Account
Savings Account
Mudarabah Savings Account
Ezee Account
Triple Benefit Savings Account
Salary Account
Savings Bank Deposit Account
***Sources: http://bankinfobd.com
Basically deposits offered by conventional banks, can be categorized into three major group:
i. Current Account.
ii. Savings Deposit.
iii. Fixed Deposit.
Page 9 of 53
Current account are evolved to facilitate frequent cash requirement which are generally
offered to businessmen. Amount deposited under current account, interest is not given.
Account holder can withdraw money anytime by writing cheque over bank and thus it is
sometime called checkable deposit. Savings account, another type of checkable account
encourage people to save money from their income. Alike current account, this account
enable the account holder to withdraw money by writing checque. But bank put a limit on
frequency of withdrawal for a certain period. Usually this restriction is two (2) times in a
week. Interest is offered over the outstanding amount of deposit to the depositor. On the other
hand, fixed deposit ensures future constant earning who has large amount of idle money.
Banks require the depositors to withdraw the money at once when the term of deposit is
matured. Depositor will get back his deposited amount along with accumulated deposit.
Usually depositors are not allowed to withdraw money before maturity but if customer are in
need of withdrawing money, the customer will have sacrifice stipulated interest. As customer
are not allowed to withdraw money before maturity, sometimes it is called as Term
Deposit.
Farmers Account.
Student Account.
Max Saver.
Smart Saver.
Deposit Double Scheme (DDS).
Monthly Savings Deposit Scheme
(MSDS).
Millionaire Scheme Account (MSA).
Savings Account for Worker Women.
(SND).
Ezee Account.
Salary Account.
Freedom Fixed Deposit.
As the bank cannot earn interest by lending the money, therefore the Islamic banks have
to undertake investment to earn profit not only for the bank itself but also for the
Page 10 of 53
depositors in the investment account. Below are the investment procedures on the Islamic
principles:
A joint venture based on musharaka involves a partnership in which both the bank and its
customer-client contribute to entrepreneurship and capital.
The banks and their clients agree to join in a temporary participation (slight similar to
join ventrue) for effecting a certain operation within an agreed period of time. Both
parties contribute to the capital of the operation (assets and managerial expertise working
capital etc.) in varying degrees and agree to divide the net profit in proportions agreed
upon in advance. There is no set formula for profit sharing and each case is dealt with on
its own merits.
It is a partnership in profit whereby one party provides capital (rab al-maal-the bank) and
the other party provides the know how/labor (Mudharib).
In this procedure of investment, bank contributes all the financing (and customer
contributes only his managerial efforts or labor) and gets again an agreed proportion of
the profit actually realized. In both mudarabah and musharakah, both sides are entitled to
reap any profit depending on the actual performance of the operation. In the mudarabah
contract however, the mudarib (the partner offering his efforts) will lose nothing but his
labor (as the principle capital is not his) in case of financial loss resulting from normal
business conditions. The bank that has financed the capital bears all the finance risks.
This financial risk justifies the bank to claim his share in the profit. The client is however
held responsible for loss of capital, whether it be the result of his negligence or willful
act. To guard against the loss, the bank may require a security from the customer.
This is a procedure where a partner approaches the bank that certain items (commodity or
otherwise) be bought for him and he agrees to pay the bank later on, upon the fulfillment
Page 11 of 53
of the actual buying, an agreed percentage of profit. Until the partner fulfills his original
promise of rebuying the commodity, the risk remains with the bank which justifies the
profit. Banks can for a promise that the client has to satisfy the promise of rebuying the
commodities or to indemnify the damage arises from breaking the promise without
excuse. It is permissible for banks to take any cash or collateral security to guarantee the
implementation of the promise or to indemnify the damages.
The bank buys certain goods on post-delivery and pays the cost immediately or sells
certain goods on post-delivery and receives its cost immediately. In this sale, cost of
goods is fixed and paid in advance but the delivery of the sold items is postponed or
delayed up to a certain period. Similarly, the place of delivery, its expenses and quantities
of the sold goods should also be fixed and defined as they are conditions for such a sale.
Ijarah practice is very much similar to lease financing while Islamic banks conduct Ijarah
as interest free practices. During the life of the asset, the risk of ownership remains with
the bank, while the lessee is liable for misuse of the asset.
3.3.6 ISTISNAA:
The Arabic word Istisnaa means asking someone to manufacture. It may be further
defined and elaborated as a sale contract between the seller and the buyer for the sale of
an asset described in the sale contract and transacted before it comes into existence. To
fulfill its obligation, the seller can either manufacture/construct it by itself or can get it
manufactured/constructed by someone else to deliver it to the buyer on the date described
in the sale contract. The buyer can pay the sale price in lump sum at the time of signing
Page 12 of 53
Banks generate profit by offering loans and advances to deficit unit. The discrepancy
between interest rate charged on loan and interest rate offered on deposit is the income
for banks. Like deposit scheme, loan and advances can be categorized from different
dimensions. Loan can be classified by its maturity, the amount of loan granted, loan
covenants, the nature of payment etc. Basic form of loan and advances are discussed
below:
Any type of credit facility which involves direct outflow of banks fund on account of
borrower refers to funded credit facility. Funded credit facilities may be classified into
two forms; Loan and advances.
Though these types of credit facilities are primarily non-funded in nature but at any times
it may turn into funded facilities. These non-funded facilities are termed as contingent
liabilities. Major categories of these types of credit are; Letter of credit (L/C), Back to
Back L/C, Bid bond, Performance bond.
Demand loans are repayable on demand by the bank and no fixed installments are laid
down. It belongs to the short-term loan.
Term loan are granted for a specific period (2/5 years or over) and repayment is made in
installments. The term loan can also be repayable on demand if default occurs in
repayment of some eventualities, as listed in the agreement take place.
3.4.5 OVERDRAFT:
Page 13 of 53
Banks provide short-term finance by discounting bills, which is making payment of the
amount before the due date of the bills after deducting a certain rate of discount. The
party gets the funds without waiting for the date of maturity of the bills. In case any bill is
dishonored on the due date, the bank can recover the amount from the customer.
Most popular loan and advances services of conventional banks are shown below:
Home Line
Auto Loan
City Scholar
Home Loan Scheme
Corporation
Dutch-Bangla Bank Ltd
AB Bank Ltd.
The City Bank Ltd
Mercantile Bank Ltd
***Sources: http://bankinfobd.com
Home Loan
Car Loan
Travel Loan
Executive Loan
Education Finance Pack
Page 15 of 53
3.5 DIFFERENCE
BETWEEN
Establishing direct distinction between retail banking practices Islamic bank and
conventional bank too, will not be a prudent decision; as they are competing in extremely
different platform and various multidimensional perspective can be presented here to
distinguish. Key difference is that Islamic banks are based on Islami Shariah which
prohibits Riba or interes completely while conventional banks earn their profit from
interest.
ye shall not be dealt with unjustly" [2:279] which explain why commercial banking in an
Islamic framework is not based on the debtorcreditor relationship.
The other principle pertaining to financial transactions in Islam is that there should not be
any reward without taking a risk. This principle is applicable to both labor and capital. As
no payment is allowed for labor, unless it is applied to work, there is no reward for capital
unless it is exposed to business risk. Thus, financial intermediation in an Islamic
framework has been developed on the basis of the above-mentioned principles.
Consequently financial relationships in Islam have been participatory in nature. But in
conventional banking financial relationship is debtor-creditor in nature.
Key differences between these types of banking are discussed below in a nut shell:
Table 3.C: Difference between Conventional Banking and Islamic Banking in terms of
Retail Banking Services
Conventional Banking
The investor is assured of
a predetermined rate of
interest.
It aims at maximizing
(entrepreneur).
It also aims at maximizing profit but subject to
profit
it
back
any
and
Shariah restrictions.
with
compounding interest is
without
restriction.
Lending
money
getting
Islamic Banking
In contrast, it promotes risk sharing between
(penalty
and
compounded interest) in
case of defaulters.
interest
on
capital.
While disbursing
cash
made.
No such beautiful loan
exists
in
conventional
behind
granting
***Sources: Hasan, Zulfiqar, and Ayesha Saimun. Principles of Islamic Economics. Dhaka: University Publications, 2012.
Ratio analysis is a strong accounting tool used to determine company performance from
multidimensional perspective.
Broadly ratio analysis is the process of systematically manipulating figures from the
financial statements of a company to produce information that are used as part of
investment decision making process. It is the application of arithmetic on financial
information that is contained in the annual report of a business entity.
It provide meanings to absolute figures: Most numbers that are found in the financial
statements of companies will be vague and meaningless if a scientific method of ratio
analysis is not performed on the figures.
For example, PS of 2.30 will not make much if there is no information on what EPS was
for last year or what the earnings per share of companies of similar sizes are.
Accurate planning and forecasting for managers: Through ratio analysis one can find a
trend and based on that trend, a manager can project and have an idea about future ups
and downs. A manager can take a contingency position for coping with upcoming
downfall.
As a basis of decision making: The output of ratio analysis can be used as a basis for
making investment decision making. An investor who can find himself more suitable to
make decision whether to invest in a particular project or not, only after conducting ratio
analysis.
For analyzing strengths and weakness: Through ratio analysis, management can find out
department or division that is not relatively doing well and then take some corrective
actions.
To analyze change in the form of trend: Professional investors always say that the trend
is your friend. This trend is found using ratios and ratio analysis.
In spite of having notable significance, ratio analysis technique is not free from limitation
like any other mathematical analysis tools. This limitation has degraded its area of
application to some extent. A researcher must keep it mind while interpreting calculated
ratios. He must be more careful before making a decision based on ratio analysis as it
cannot triumph over some drawbacks.
Ratios deal mainly in numbers they dont address issues like product quality, customer
service, employee morale and so on (though those factors play an important role in
financial performance).
Ratios largely look at the past, not the future. However, investment analysts will make
assumptions about future performance using ratios.
Ratios are most useful when they are used to compare performance over a long period of
time or against comparable businesses and an industry this information is not always
available.
Financial information can be massaged in several ways to make the figures used for
ratios more attractive. For example, many businesses delay payments to trade creditors at
the end of the financial year to make the cash balance higher than normal and the creditor
days figure higher too.
In my report I will calculate profitability ratio, liquidity analysis ratio, activity analysis
ratio, capital structure ratio and capital market analysis ratio. All the categories have
some similar ratios under its respective headings:
ROA=
Net Income
Average Total Asset
ROCE =
Profitability Ratio
Net Income
Average Common Shareholders Equity
Profit Margin =
Net Income
Sales
Debt to Equity=
Tier-I
Net Income
No of Commonshare Outstanding
Total Debt
Total Stockholders Equity
Capital
Ratio
Capital
Ratio
Current Ratio =
Current Asset
Current Liabilities
***Sources: https://www.cpaclass.com
Agrani Bank Ltd and Al-Arafah Islami Bank Ltd based on accounting ratio analysis. To
fulfil this objective a comparative study on ratio analysis of these two banks are discussed
below. Mainly strength of retail banking services and capital adequacy of these two banks
are emphasized here.
To make a valid comparison, I have collected data from the year of 2009 to 2013. I have
calculated ratios for both banks in same numerical unit.
CURRENT RATIO:
We all know current ratio measures the ability to fulfil most liquidity demand of a bank.
It is calculated through dividing current asset by current liabilities of a bank. Both current
asset and current liabilities includes the most current asset and debt of a bank which must
be matured within one year.
Current Ratio
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
2009
2010
Agrani Bank Ltd
2011
2012
2013
From the above graph, we get a clear indication about the liquidity position of these two
banks. We can see here that Agrani had a steady growth rate during five years time
period while Al-Arafah Islami Bank faced a significance fluctuation between 2009 and
2010. Current ratio of Agrani Bank Ltd grows on an average 4% growth rate though it
had slight downfall in 2010 and 2012. On the other hand Al-Arafah Islami Bank faced a
peculiar type of growth between the year of 2009 and 2010because in that year the bank
possessed significantly lower amount of current liabilities. If we do not consider the
unusual change of 2010, we got average 18% growth for the rest of three years. But it
would not be valid conclusion comparing between these two ratios of these two banks
because intentionally data of one year is omitted. But if we consider the change of 2010,
we get almost 110% growth for Al-Arafah Islami Bank Ltd. But we do not conclude
based on that ratio.
PROFIT MARGIN:
Profit margin which is synonymously known as net profit ratio is a powerful tool for
measuring profitability of a bank. Net Profit Margin measures the percentage of profit
earned by using one taka of sales which is calculated through dividing net profit by sales.
It also measures the ability of a bank to generate profit from sales.
Profit Margin
30.00%
20.00%
10.00%
0.00%
2009
-10.00%
2010
2011
2012
2013
-20.00%
-30.00%
-40.00%
-50.00%
-60.00%
Agrani Bank Ltd
If we look over the chart, we have a more volatile chart for Agrani Bank Ltd than that of
Al-Arafah Islami Bank Ltd. Growth rate of Agrani Bank Ltd is almost -180%, but this
numerical figure would be a misleading indication to interpret because we can notice here
that in the year of 2012 Agrani Bank Ltd had an abnormal amount of loss. On this year
Agrani bank faced a significant amount of loss and this percentage is almost -50.32%.
This abnormal amount of decrease effects the whole average ratio for five years and it
stood up at almost -180%. On the other hand the situation for Al-Arafah Islami Bank is
much better. During the five years growth rate it had typical ups and downs, no unusual
increment or degrade can be seen here. The ratio grows almost 26%. So from this stand
point Al-Arafah Islami Bank enjoyed more stable profit during five years time period.
Banks earnings is calculated based on interest paid on deposit and interest received on
loan and advances. As Islamic banks can never deal with interest its earnings is
calculated through profit paid on deposit account and profit received on investments. This
earnings can be calculated by Net Interest Margin Ratio (NIM). In fact NIM is the
modified version of net profit ratios. Because it divides net interest or profit by net
interest/profit earnings asset and thus it measures the ability of a banks asset to earn
profit.
2010
Agrani Bank Ltd
2011
2012
2013
While analyzing the graph a much more clear depiction is found. As we already know
that Agrani Bank Ltd has faced significant amount of loss in 2012, then it has the lowest
NIM ratio on that year. Though the bank has faced a downfall trend in 2011 and 2012
alongside a significant loss in 2012, it successfully maintained a steady growth rate for
NIM which stood as 12.98%. This success become possible to achieve as the bank
successfully paid its interest and also recovered it interest on loan even if having
difficulties in net profit. On the contrary Al-Arafah Islami Bank had a usual growth rate
in the year between 2010 and 2012 like earlier year. In 2011 the bank hold a very lower
amount of earning asset and thus in that particular year NIM ratio has significantly risen
up.
In 2011 earnings asset was almost 1.5 times net profit margin while on the typical years
this figure was almost 23 time of net profit margin. Due to this abnormality Al-Arfah
Islami Bank has almost 297.21% average growth rate for NIM ratio.
To measure the efficiency of asset utilization, bank managers usually use ROA ratios
which are derived from dividing net earnings by average assets. The greater the ratio, the
better indication of asset utilization. From the chart mentioned below, we can make a
valid comparison between two selected banks. We already know that in 2012, Agrani
Bank Ltd has faced a significant amount of losses and for this reason the bank faced a
negative trend in ROA ratio. Apart from this incidents the bank showed a positive growth
on ROA. Balancing the negative ROA occurred in 2012 with the rest of the year we can
see that Agrani Bank Ltd has a growth rate of -2.14%. This growth rate would not be
negative if the negative ROA did not exist in 2012.
Return on Asset
4.00%
3.00%
2.00%
1.00%
0.00%
2009
-1.00%
2010
2011
2012
2013
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
Agrani Bank Ltd
So as a whole Agrani Bank is showing a satisfactory steady growth rate for ROA. While
considering Al-Arafah Islami Bank, we do not get any satisfactory result with a
decreasing growth rate of -4.00%. This poor result has been occurred in average though
in 2010 the bank had a very satisfactory upward trend. But the decreasing trend of rest of
the year finally offset the upward trend.
Return on Equity is a profitability ratio which measure the banks ability to earn profit for
its shareholders. The ratio is calculated through dividing net profit by average
shareholders equity. The higher the ratio, the better percentages of return will go for its
shareholders. It is an important measurement for a banks profitability. Return on Equity
ratio for Agrani Bank Ltd is showing a decreasing trend like the same reason causes the
decreasing trend of Return on Asset ratios. By analyzing the graph below we can see that,
this ratio for Agrani Bank is showing a diminishing growth though the bank tried to
recover it earlier state during the last year of calculation. Return on Equity for Agrani
Bank Ltd is showing almost an average of -755% growth rate. This abnormal numerical
figure has been produced due to the significance fall of return on equity ratio in 2012.
ROE
100.00%
50.00%
0.00%
2009
-50.00%
2010
2011
2012
2013
-100.00%
-150.00%
-200.00%
-250.00%
-300.00%
Agrani Bank Ltd
Return on Equity for Al-Arafah Islami Bank is much more encouraging than that of
Agrani Bank Ltd. Though ROE of Al-Arafah Islami Bank is showing a decreasing trend
but it possess lower fluctuation compared to that of Agrani Bank. Average growth rate of
Al-Arafah Islami Bank Ltds ROE ratio is almost 11.72% which is quite satisfactory.
One of the important measurement of capital adequacy for a bank is debt to equity ratio.
It shows the percentages of a banks financing which came from outside sources
compared to insider sources and thus measures the leverage or riskiness of the bank. If a
bank is more leveraged that means higher debt to equity ratio, it is assumed that the bank
is more risky to borrow money from outsider sources of financing. In this circumstances
lender become unwilling to grant loan to such a bank or demand higher interest rate even
if the lender grants the loan. The higher magnitude of this ratio does not come alone with
drawbacks, there is an advantages for having this ratio higher. If a bank has more debt
capital compared to equity capital it can enjoy tax deductible advantages come in the
form of lower amount of tax needed to pay. When we look over the graph below, a most
amazing fact can be noticed. In every year Agrani Bank Ltd which is a state owned bank
in Bangladesh has much more debt to equity ratio than that of Al-Arafah Islami Bank Ltd.
Most likely reason for this circumstance can be presented as Agrani Bank Ltd is a state
owned bank and every state owned bank is back by government and central bank so the
bank does not feel any risk to borrow from outside sources. This fact is most prevalent
here. Another fact to be noticed here that the change occurred in the year of 2012 for
Agrani Bank Ltd.
Debt to Equity
60
51.82
50
40
30
20
17.71
10
12.6
0
2009
15.85
12.45
6.56
2010
Agrani Bank Ltd
7.91
2011
9.63
2012
11.46
9.76
2013
We already noticed that in 2012 Agrani Bank Ltd faced significant amount of losses. We
can assume here that this loss might happen for this significant amount of borrowings
which result a significant amount interest cost to be paid. This interest cost ultimately
deducts the profit could be earned. On the contrary this ratio for Debt to Equity ratio for
Al-Arafah Islami Bank is much more stable and has a decreasing trend of -1.06% on an
average. It indicates the lower dependence on outside borrower of banks management. In
a reverse way it is an indication of greater self-dependency to provide capital of the bank.
A/D RATIO:
Loan to Deposit Ratio is synonymously known as A/D ratio or Advance to Deposit ratio
is a powerful tool to measure bank liquidity. It is simply found through dividing advance
or loan by deposit. It is a very important indicator for bank because if the ratio is too high
which indicates bank will face liquidity problem and it has not enough fund in its hand to
meet customer demand. On the contrary if the percentage is too low, it harms profitability
of a bank. So as a decision maker of a bank, a manager must be prudent about this issue.
By observing the graph, it is obvious that this ratio for both of the two banks are too high
which indicates both of the bank may face liquidity problem in near future. But with the
compilation of current ratio we can get a clearer picture about the liquidity of these two
banks. A/D ratios above 60% is considered as a sound ratio for banks.
A/D Ratio
100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
94.21%
73.51%
93.43%
79.13%
89.07%
76.95%
90.56%
88.74%
72.72%
58.21%
2009
2010
Agrani Bank Ltd
2011
2012
2013
When we look over the current ratios of these two banks, we see that both of the banks
are in a sound position during the last five years. So we can conclude that both of the
banks will not face liquidity problem for the higher percentage of A/D ratios, rather they
will reap benefit of this percentages. It is a demonstration of proper loan management.
Managements are good enough to produce enough loan from the funded collected in the
form of deposit.
Tier-I capital ratio is a part of capital adequacy ratio. It makes a comparison between a
banks core capital and banks risk weighted asset. Banks core capital is the measure of
financial adequacy and thus known as Tier-I capital. This ratio is calculated through
dividing total equity by risk based asset. Sometimes revaluation reserve is being deducted
from total equity. Total equity includes retained earnings, current year earnings and other
equity reserve. From the chart shown here we get a clear picture about the capital
adequacy of these two selected banks. If we look over the chart for Agrani Bank Ltd, we
can see that the bank successfully maintained a steady growth during five years time
period. We have seen in earlier ratio analysis that, Agrani Bank Ltd has faced net loss in
2012, Tier-I capital ratio for that year was negative. Apart from this little wrench, the
bank always maintain an amazing upward trend which was verily stable during the years.
As the bank is a state owned bank, it will not be great concern for the banks
management. When we look over the graph for Al-Arafah Islami Bank Ltd, we get a
more hopeful picture. During this fiver years
2010
2011
2012
2013
-5.00%
-10.00%
Agrani Bank Ltd
time period. The bank maintained a steady growth rate -5.7%. Though the growth rate is
negative but it would not be a much concern due to its little magnitude.
Another dimensional capital adequacy ratio is Tier-II capital ratio, though it is less
reliable than Tier-I Capital ratio. It is also known as supplementary capital ratio. Under
Basel-I, Tier-II capital includes revaluation reserve, general provisions and subordinated
debt. It is calculated in the same process of calculation Tier-I capital ratio. Tier-II capital
is being divided by risk weighted asset. If we look over the chart for Agrani Bank Ltd, we
see that this graph is almost similar to Tier-I capital ratio. Like Tier-I capital ratio, this
ratio has a negative magnitude in the year of 2012. Apart from this year, this ratio was
showing upward growth rate during the five years time period. On the other hand, Tier-II
ratio for Al-Arafah Islami Bank Ltd is much more stable that of Agrani Bank Ltd. Tier-II
capital ratio is showing 5% positive growth rate which is quite satisfactory.
4.00%
3.00%
3.00%
1.37%
1.16%
1.28%
1.57%
2010
2011
2012
2013
-4.00%
-6.00%
-6.00%
-8.00%
Agrani Bank Ltd
***Sources: Annual Report
Sales
Regression Equations
Y(sales) = + bx(deposits)
I will derive two regression equation where I will show the relationship between deposit
and sales. In second equation I will show the relationship between deposit and
profitability. For the purpose of the study, loan/investment of different particular year will
be assumed as Sales.
Before going to analyze mathematical data, it is very crucial to have a clear concept about
regression analysis. I will try to find out following parameters:
Constant (): The alpha or constant parameter measures the extent to which change in
dependent will occur regardless with the change in independent variable.
Slope (): Slope measures the degree to which change in dependent variable will occur
for the change occurred in independent variable.
I have decided to conduct hypothesis test to evaluate the relationship found in regression
analysis. It is very essential tool to assess the accuracy of mathematical model. Through
regression model, we can show the underlying relationship between dependent and
independent variables. But whether the relationship already build up is really true or not
can be assessed by hypothesis testing. Thus no mathematical model is said to be
completed without hypothesis testing.
Before going to conduct hypothesis testing, I need to define both Null Hypothesis and
Alternate Hypothesis.
Null Hypothesis: The Null hypothesis (H0), stated as the null, is a statement about a
population parameter, such as the population mean, that is assumed to be true. The null
hypothesis is a starting point. Through hypothesis test, it is tested that whether the value
stated in the null hypothesis is likely to be true. It is assumed that no hypothesis exists
(null or zero) in population parameter and therefore population parameter is true.
Reason for testing null hypothesis is that it is assumed that null hypothesis is wrong and
what is the wrong in null hypothesis will be stated in Alternate Hypothesis.
To conduct hypothesis testing, I need to follow a series of structured steps. These are:
1) State the Null Hypothesis (H0) and the Alternate Hypothesis (H1).
2) Select a Level of Significance.
In hypothesis testing region of rejection and do not reject are determined through the
decision rule. To reach in a conclusion test statistics are compared with decision rule. If
test statistics lies within the region of rejection, the Null hypothesis becomes rejected.
I have derived two regression equations for two banks. Comparative discussion of
regression equation for both of the banks are discussed here.
We know that banks generate loan and advances from deposit collected from its
customers. For that reason it is most likely to have a strong relationship between these
two variables. By the first regression equation, I have tried to find the magnitude of the
equation for both of the banks.
REGRESSION EQUATION:
While we concentrate over the regression equation of Agrani Bank Ltd, we see that is
almost 2558 unit. The magnitude of is considered as constant and thus does not change.
It concludes that Agrani Bank ltd will be able to generate 2558 unit of sales or loans even
if it failed to generate any single amount of deposits. Such amount of sales will be
generated by the bank regardless of the situation in every year. is considered as slope
intercept, which measure the sensitivity of independent variables with dependent
variable.
20000
18000
16000
14000
12000
Sales
10000
8000
6000
4000
2000
0
10000
15000
20000
25000
30000
35000
40000
Deposit
When we look over the equation of Agrani Bank Ltd, we notice that is almost 0.494
unit which implies that 1 unit of deposit collection will make the bank able to generate
0.494 unit of sales. In other words, the bank will generate almost 50 (49.4) Taka of loan
by collecting 100 Taka of deposit.
On the other hand and are almost 2741.30 unit and 0.8825 unit respectively for AlArafah Islami Bank. While analyzing the equation, we can see that Al-Arafah Islami
Bank can generate more sales that that of Agrani Bank Ltd regardless of collected
deposit. This situation become obvious by observing and magnitude of for Al-Arafah
Islmai Bank is higher than that of Agrani Bank Ltd. When we consider or sensitivity,
we see that Al-Arafah Islami Bank is also prominent here. The bank can generate almost
90 (88.25) Taka of sales by using 100 Taka of deposit which is about 40 Taka greater than
that of Agrani Bank Ltd.
140000
120000
100000
80000
Sales
60000
40000
20000
0
20000
40000
60000
80000
Deposit
On the whole we can conclude here Al-Arafah Islami Bank is more efficient to generate
sales from its deposit than Agrani Bank Ltd and its deposit causes much changes in its
sales generation.
table:
Table 5.B: Pearson Correlation: Coefficient of Correlation (R):
Net
Sales
Depos
it
Com
ment
Pearson Correlation
Net Sales
Deposit
Net Sales
Deposit
1.00
0.937
1.00
0.999
0.937
1.00
0.999
1.00
We can notice that Correlation Coefficient for Agrani Bank Ltd is 0.937 or 93.7% while it
is 0.999 or 99.9% for Al-Arafah Islami Bank. That means dependent variable sales or
loans and advances are being changed 93.7 unit due to 100 unit change of independent
variable Deposit. Statistically this relationship is called strong positive relationship which
means deposit and net sales move in the same direction. Most similar picture can be
found in case of Al-Arafah Islami Bank Ltd. Coefficient of Correlation for this bank is
also positive and it stands very close to 100%. So if amount of deposit increases for both
of the banks, these two banks can increase its net loans and advances.
0.877
0.998
From the above table, we can conclude about the validity of the model for both of the
banks. We can see that independent variable deposit can explain almost 87.7% of the
variability of dependent variable for Agrani Bank Ltd and this percentage is almost
99.8% for Al-Arafah Islami Bank. So for both of the banks my independent variables are
sufficient enough to predict the variability of independent variable.
Adjusted R2 measures the necessity of including more independent variable in the model
to have more accurate prediction. If value of Adjusted R2 exceed the value of R2, it
indicates that we need to insert more independent variable and thus R 2 will reach in a
magnitude to the extent value of adjusted R 2 is prevailing now. So if we have Adjusted R 2
greater than R2, then independent variables are not sufficient enough and thus the model
will not be valid.
0.860
Adjusted R2
0.998
From the table, Adjusted R2 for Agrani Bank Ltd is lower than R 2 (0.860 < 0.877) and is
equal to R2 (0.998 = 0.998), so models are accurate for both of the banks. The model will
not give better result if more independent variables are entered.
Total sum of squares is divided into two parts; Sum of Squared due to Regression (SSR)
and Sum of Squared due to Error (SSE). Addition of SSR and SSE compose SST. So:
SST
SSR + SSE
Model
Regres
Squares
sion
Residu
Total
124983
716.411
al
Sum of
17502713.811
142486430.222
Model
Regres
sion
Residu
al
Total
Mean Square
124983716.411
Sum of
135709
39279.090
49.9
86
Mean Square
13570939279.
23621795.762
13594561074.8
52
Si
2500387.687
8
Al-Arafah Islami Bank Ltd
Squares
090
3374542.252
Si
402
1.56
Mean square is an important component for the analysis of variance. It measures the
average variation occurred by independent variable and also by the error. From the table
we can see that SSR and MSR for both of the bank is greater than SSE and MSE. It
indicates that the estimated regression equation provides a better fit for the observed data.
If SSE or MSE exceed SSR or MSR we could not draw such a conclusions.
STEP-1: STATE THE NULL HYPOTHESIS (H0) AND ALTERNATE HYPOTHESIS (H1):
Through Hypothesis testing model, I tried to test whether any significant relationship
exist or not between the dependent and independent variable. So, Null Hypothesis and
Alternate Hypothesis can be written as:
variable)
variable)
While inputs are given in SPSS software, I have used confidence level as 95%,
synonymously which implies as significance level () as 5% or 0.05 (100%-95%) for
both of the bank. That means I am accepting 5% error of this calculation.
As I have shown simple regression analysis, so I have to use T-Statistics to find the
parameter. Another Test Statistics F-Test shows the aggregate relationship of independent
variable with dependent variable and it is not applicable here. T-Statistics can be found:
(1/S1)
(0.494/0.070)
T-
Statistics
7.070
(0.883/0.014)
63.416
Both of values are found by SPSS software. To reach the conclusion, we have to consider
degrees of freedom which is:
Here,
df = (n-p-1)
So degrees of freedom (df) for both of the bank is 7 and it is similar. As I am going to test
whether any relationship exist between independent variable and dependent variable or
not, so it is a two tailed test.
If
Situation
t(df,
)
Calculated
Statistics
If
t(df,
Calculated
>
T)
<
T-
Decision
Accept the Null Hypothesis (H0)/Reject the Alternate
Hypothesis (H1)
Statistics
t(7,.05) = 2.365
T-Statistics =
Al-Arafah Islami
7.070
t(7,.05) = 2.365
Bank Ltd
T-Statistics =
T-Statistics
Decision
63.416
From the above table we can make a clear conclusion. We can see that Null Hypothesis
(H0) is rejected for both of the banks. It synonymously indicate to accept the Alternate
Hypothesis (H1). Our Alternate Hypothesis (H1) was the conclusion that significant
relationship exists between dependent variable and independent variable. Finally it is
clear that the change of deposit amount significantly affect the change of loan amount for
both of the banks.
6.1 FINDINGS:
Based on data analysis and theoretical discussion a somewhat clear conclusion can be
made. If we look over ratio analysis, we have a very clear vision about my selected two
banks. Consider liquidity ratio and profit margin ratio, we can see Al-Arafah Islami Bank
is enjoying higher percentages of ratio than that of Agrani Bank Limited. Alongside, all
the ratios of Al-Arafah Islami Bank are more stable than that of Agrani Bank Limited.
Another clear indication can be found by looking over A/D ratio. This ratios were also
higher than that of Agrani Bank ltd and also stable during five years time period. So
looking over all the ratios it is clear that Al-Arafah Bank Ltd is in a better position than
that of Agrani Bank Ltd in terms of ratio analysis.
6.2 CONCLUSIONS:
BIBLIOGRAPHY
from http://www.cpaclass.com/fsa/ratio-01a.htm.
Dar, H. (2003), Handbook of International Banking, UK: Edward Elgar, Chapter 8.
Hasan, Z., & Saimun, A. (2012). Principle of Islamic Economics (pp. 192-202). Dhaka:
University Publications.
Hisham Yahya, M., Muhammad, J., & Razak Abdul Hadi, A. (2012). A comparative study
on the level of efficiency between Islamic and conventional banking systems in Malaysia.
International Journal Of Islamic And Middle Eastern Finance And Management, 5(1),
48-62.
Samad, A., and M. K. Hassan (1999), The Performance of Malaysian Islamic Bank
During 1984-1997: An Exploratory Study, International Journal of Islamic Financial
2015,
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