Md Nurul Islam Sohel :
There is a direct relationship between the level of development in a financial system and economic development in general. Banking industry of our country has 2.67% contribution in GDP. Let’s not underestimate this contribution overlooking the point that banking is an intermediary business. Apart from this direct contribution in GDP, this industry has significant indirect role through financing in literally each and every sector of the economy. Of course, the main source of this finance is not the banks’ equity rather the deposits from individuals. Banks have just mediated the whole process. There are two main groups in every society, those who have surplus money but are not able to or do not want to invest on their own and those who are able to operate as producers, but do not have enough money to invest. Here lies the importance of banks shouldering responsibility of collecting surplus money from savers/depositors and allocating it to producers/borrowers.
As of September 2014 out of 56 scheduled banks, 39 Private Commercial Banks (mainstream 31 and Islamic 8) are holding majority share (64% in deposit and 71% in advances) of banking sector in Bangladesh. In 8,948 bank branches of our country, the amount of deposit (excluding inter-bank) is Tk. 6,62,389 crore in 6,84,81,351 deposit accounts. The amount of advances has stood at Tk. 4,84,253 crore in 98,05,634 accounts. Islamic Banks’ (including Islamic banking branches and windows) total deposits have stood Tk.1,38,373 crore (21% of country’s total deposit); total credits/investments Tk.1,17,101 crore (24% of country’s total credit). At present 26,526 people are working in 900 Islamic branches and windows of 23 commercial banks comprising 856 branches of 8 full-fledged Islamic banks, 19 Islamic banking branches of 8 conventional commercial banks and 25 Islamic banking windows of 7 conventional commercial banks. HSBC has discontinued their Islamic banking operation in Bangladesh. Janata Bank Ltd. has taken permission from the Central Bank for operating Islamic Banking Window but yet to start activities.
In this write up, five year (2009-2013) data from audited annual financial statements of 30 Private Commercial Banks (23 mainstream and 7 Islamic) have been analyzed. To maintain the time consistency of data nine fourth generation banks have been excluded. Due to lack of available data from Islamic banking branches or windows only 7 full-fledged Islamic banks (excluding Union Bank Ltd.) have been considered in this analysis.
The data shows that Islamic banks are growing faster than mainstream banks. This has resulted the increasing market share of Islamic banks and decreasing market share of mainstream banks. In 2009 Islamic banks had 28% market share and mainstream banks had 72% market share in credit comprising general loans and bills purchased & discounted. In 2013 this rate is 30% for Islamic and 70% for mainstream. Due to shariah restrictions Islamic banks can’t participate in government securities such as treasury bills and bonds. To maintain a level playing field in this regard, the central bank has allowed Islamic banks to keep SLR at 5.50% against mainstream banks’ 13%. During this time (2009-2013), general loans of Islamic banks have grown at an average rate of 22 and that of mainstream banks at 19%. Bills purchased & discounted of Islamic banks have also grown at a faster rate of 31% which is 19% in case of mainstream banks.
Islamic banks had 26% market share of total assets in 2009 and in 2013 this has increased to 27% reducing mainstream share by 1%. During this period, the total assets of Islamic banks have grown at an annual average rate of 24 and mainstream banks have had 21% of growth in assets.
In 2013 Islamic banks’ market share of deposit has increased to 28% from 26% in 2009 resulting 2% market share loss by the mainstream banks. Islamic banks’ deposit has grown at average rate of 23 and deposit of mainstream banks has grown at 20%. Cost free deposit of Islamic banks has grown at an average rate of 26 and that of mainstream banks has grown at 23%. The cost bearing deposit of Islamic banks has also grown faster (at 23%) than 19% of mainstream banks.
Since 2009 Islamic banks have gained 3% market share in equity (paid up capital and reserves) putting this rate 24% in 2013. Mainstream banks had 79% equity market share in 2009 and it reduced to 76% in 2013. Equity of Islamic banks has grown at a faster rate of 29% which is 23% in case of mainstream banks. During this time mainstream banks have had higher average growth rate of 30% in paid up capital but Islamic banks have had lower growth rate of 24%. In reserves Islamic banks have had 37% rate of growth and mainstream banks have had 19%.
Market ShareMainstream (23) vs. Islamic (7)
Mainstream (23) Islamic (7)
2009 2013 2009 2013
Credit 72 70 28 30
Asset 74 73 26 27
Deposit 74 72 26 28
Equity 79 76 21 24
Total Income 78 74 22 26
Operating Profit 79 75 21 25
Net Profit 84 75 16 25
Islamic banks’ higher growth in assets and liabilities has also been reflected in the increasing market share in financial performance. Islamic banks have increased their market share in total income comprising interest/ investment income and non- interest/income from 22% in 2013 to 26% in 2009. From 2009 to 2013, total income of Islamic banks has grown at average rate of 28% and mainstream banks’ at 21%. During this time, interest/investment income share of Islamic banks has increased from 25% to 29% with average growth rate of 31% against mainstream banks’ 24%. In non-investment income the market shares between Islamic and mainstream remain unchanged that is 14% and 86%. The non-investment income of both these groups of banks has grown at almost same rate i.e., Islamic banks 19% and mainstream banks 18%.
In 2013, Islamic banks had only 5% market share in income from shares and securities and in 2009 it was 3%. The reason is Islamic banks have less exposure to government securities due to shariah considerations. Moreover, they have less investment in share market. Islamic banks’ share of Income from commission remained almost unchanged at 24%. Islamic banks have experienced higher rate of average growth 17% in income from commission and this rate is 13% in case of mainstream banks. In other operating income there is almost no change in market share of both Islamic banks (19%) and mainstream banks (81%).
Islamic banks’ market share in operating profit has increased from 21% in 2009 to 25% in 2013. In contrast, mainstream banks’ share has decreased from 79% in 2009 to 75% in 2013. During this time, the average growth rate was 12% for mainstream banks and 27% for Islamic banks.
Islamic banks’ market share in net profit after tax has increased from 16% in 2009 to 25% in 2013. In contrast, mainstream banks’ share has decreased from 84% in 2009 to 75% in 2013. During this time, the average growth rate was 11% for mainstream banks and 28% for Islamic banks.
The total income of mainstream banks comprises 71% from interest income and 29% from non-interest income. In case of Islamic banks investment income has 84% contribution and non-interest income has 16% contribution. The data clearly shows that Islamic banks are more dependent on investment income than mainstream ones. If we dig deep into the elements of non-investment or non-interest income, it is evident that mainstream banks mostly depend on income from shares and securities (50%) but Islamic banks’ income from shares & securities has only 13% contribution to it. Furthermore, for non-investment income Islamic banks mostly depend on commission income (69%) and mainstream banks have only 36% contribution to it. In other operating income the rate of contribution has less difference of 4% (18%-14%) between Islamic and mainstream banks.
Contribution to Non-investment IncomeAverage of 2009-2013
Mainstream (23) Islamic (7)
Income from Shares & Securities % 50 13
Income from Commission % 36 69
Other Operating Income % 14 18
Total 100 100
Against regulatory requirement of 10% Capital Adequacy Ratio (CAR), mainstream banks maintained at 11.34% and Islamic banks did 10.52%. Due to capital short fall in ICB Islamic Bank this rate is a bit worse in Islamic banks. Average NPL to Equity ratio of mainstream banks is 19% and that of Islamic banks is 32%. Mainstream banks’ ‘Liquid Asset to Short Term Liabilities’ is 71% against Islamic banks’ 36% meaning mainstream banks have had more liquid assets than Islamic banks. The reasons behind this situation are Islamic banks don’t participate in call money market and they have less exposure in share market investment. Islamic banks ‘Borrowing Liabilities to Total Liabilities’ is 3% as against Mainstream banks’ 4% meaning Islamic banks have less borrowed liabilities than mainstream banks. Average ‘Advance Deposit Ratio’ is 84% in Mainstream banks against the Central Bank’s ceiling 85%. Islamic Banks ‘Investment Deposit Ratio’ is 90% which is as same as the ceiling of 90%.
The average ‘Return on Asset’ is 1.62% in Mainstream banks and in Islamic banks this rate is 1.28 meaning Mainstream banks are maintaining their asset slightly more efficiently. On the other hand, data shows that Islamic banks are able to maintain their equity a bit more efficiently than mainstream banks as Islami banks’ ‘Return on Equity’ is 17.56% and mainstream banks’ 17.29. It is also seen that mainstream banks are a bit more efficient in terms of ‘Total Expenditure to Total Income’. In Islamic banks this rate is 72% and in mainstream banks this rate is 71%.
Though the NPL growth rate is almost same in both groups of banks, the credit growth is higher in Islamic banks than in mainstream banks. The NPL of mainstream banks has grown at an average rate of 33% against their credit growth rate of 19% and in Islamic banks the NPL has grown at 23% against investment growth of 22%. The rate of ‘NPL to Loan’ is 2.24 in mainstream banks and in Islamic banks this rate is 2.82.
From growth and market share perspectives it is evident that Islamic banks are growing faster than mainstream banks. As a result, Islamic banks are gaining more share but mainstream banks are losing. In terms of efficiency and asset quality the difference between these groups is quite mixed and not that much significant in difference. Islamic banks are doing better in terms of asset backed transactions free from interest and any kind of speculation.
Moreover, Islamic banks have edge over other banks in terms of faith based banking in our country. For that very reason, more and more commercial banks are now showing their enthusiasm to be converted to Islamic ones. So, to meet this growing demand of the people the respective authorities need to pay more attention to upgrade the regulatory platforms and other issues. Of course, to have much more sustainable contribution to the economy Islamic banks need to think about adopting the profit and loss sharing approach. To do that a concerted effort from all stakeholders is a must. Are we ready to go ahead?
There is a direct relationship between the level of development in a financial system and economic development in general. Banking industry of our country has 2.67% contribution in GDP. Let’s not underestimate this contribution overlooking the point that banking is an intermediary business. Apart from this direct contribution in GDP, this industry has significant indirect role through financing in literally each and every sector of the economy. Of course, the main source of this finance is not the banks’ equity rather the deposits from individuals. Banks have just mediated the whole process. There are two main groups in every society, those who have surplus money but are not able to or do not want to invest on their own and those who are able to operate as producers, but do not have enough money to invest. Here lies the importance of banks shouldering responsibility of collecting surplus money from savers/depositors and allocating it to producers/borrowers.
As of September 2014 out of 56 scheduled banks, 39 Private Commercial Banks (mainstream 31 and Islamic 8) are holding majority share (64% in deposit and 71% in advances) of banking sector in Bangladesh. In 8,948 bank branches of our country, the amount of deposit (excluding inter-bank) is Tk. 6,62,389 crore in 6,84,81,351 deposit accounts. The amount of advances has stood at Tk. 4,84,253 crore in 98,05,634 accounts. Islamic Banks’ (including Islamic banking branches and windows) total deposits have stood Tk.1,38,373 crore (21% of country’s total deposit); total credits/investments Tk.1,17,101 crore (24% of country’s total credit). At present 26,526 people are working in 900 Islamic branches and windows of 23 commercial banks comprising 856 branches of 8 full-fledged Islamic banks, 19 Islamic banking branches of 8 conventional commercial banks and 25 Islamic banking windows of 7 conventional commercial banks. HSBC has discontinued their Islamic banking operation in Bangladesh. Janata Bank Ltd. has taken permission from the Central Bank for operating Islamic Banking Window but yet to start activities.
In this write up, five year (2009-2013) data from audited annual financial statements of 30 Private Commercial Banks (23 mainstream and 7 Islamic) have been analyzed. To maintain the time consistency of data nine fourth generation banks have been excluded. Due to lack of available data from Islamic banking branches or windows only 7 full-fledged Islamic banks (excluding Union Bank Ltd.) have been considered in this analysis.
The data shows that Islamic banks are growing faster than mainstream banks. This has resulted the increasing market share of Islamic banks and decreasing market share of mainstream banks. In 2009 Islamic banks had 28% market share and mainstream banks had 72% market share in credit comprising general loans and bills purchased & discounted. In 2013 this rate is 30% for Islamic and 70% for mainstream. Due to shariah restrictions Islamic banks can’t participate in government securities such as treasury bills and bonds. To maintain a level playing field in this regard, the central bank has allowed Islamic banks to keep SLR at 5.50% against mainstream banks’ 13%. During this time (2009-2013), general loans of Islamic banks have grown at an average rate of 22 and that of mainstream banks at 19%. Bills purchased & discounted of Islamic banks have also grown at a faster rate of 31% which is 19% in case of mainstream banks.
Islamic banks had 26% market share of total assets in 2009 and in 2013 this has increased to 27% reducing mainstream share by 1%. During this period, the total assets of Islamic banks have grown at an annual average rate of 24 and mainstream banks have had 21% of growth in assets.
In 2013 Islamic banks’ market share of deposit has increased to 28% from 26% in 2009 resulting 2% market share loss by the mainstream banks. Islamic banks’ deposit has grown at average rate of 23 and deposit of mainstream banks has grown at 20%. Cost free deposit of Islamic banks has grown at an average rate of 26 and that of mainstream banks has grown at 23%. The cost bearing deposit of Islamic banks has also grown faster (at 23%) than 19% of mainstream banks.
Since 2009 Islamic banks have gained 3% market share in equity (paid up capital and reserves) putting this rate 24% in 2013. Mainstream banks had 79% equity market share in 2009 and it reduced to 76% in 2013. Equity of Islamic banks has grown at a faster rate of 29% which is 23% in case of mainstream banks. During this time mainstream banks have had higher average growth rate of 30% in paid up capital but Islamic banks have had lower growth rate of 24%. In reserves Islamic banks have had 37% rate of growth and mainstream banks have had 19%.
Market ShareMainstream (23) vs. Islamic (7)
Mainstream (23) Islamic (7)
2009 2013 2009 2013
Credit 72 70 28 30
Asset 74 73 26 27
Deposit 74 72 26 28
Equity 79 76 21 24
Total Income 78 74 22 26
Operating Profit 79 75 21 25
Net Profit 84 75 16 25
Islamic banks’ higher growth in assets and liabilities has also been reflected in the increasing market share in financial performance. Islamic banks have increased their market share in total income comprising interest/ investment income and non- interest/income from 22% in 2013 to 26% in 2009. From 2009 to 2013, total income of Islamic banks has grown at average rate of 28% and mainstream banks’ at 21%. During this time, interest/investment income share of Islamic banks has increased from 25% to 29% with average growth rate of 31% against mainstream banks’ 24%. In non-investment income the market shares between Islamic and mainstream remain unchanged that is 14% and 86%. The non-investment income of both these groups of banks has grown at almost same rate i.e., Islamic banks 19% and mainstream banks 18%.
In 2013, Islamic banks had only 5% market share in income from shares and securities and in 2009 it was 3%. The reason is Islamic banks have less exposure to government securities due to shariah considerations. Moreover, they have less investment in share market. Islamic banks’ share of Income from commission remained almost unchanged at 24%. Islamic banks have experienced higher rate of average growth 17% in income from commission and this rate is 13% in case of mainstream banks. In other operating income there is almost no change in market share of both Islamic banks (19%) and mainstream banks (81%).
Islamic banks’ market share in operating profit has increased from 21% in 2009 to 25% in 2013. In contrast, mainstream banks’ share has decreased from 79% in 2009 to 75% in 2013. During this time, the average growth rate was 12% for mainstream banks and 27% for Islamic banks.
Islamic banks’ market share in net profit after tax has increased from 16% in 2009 to 25% in 2013. In contrast, mainstream banks’ share has decreased from 84% in 2009 to 75% in 2013. During this time, the average growth rate was 11% for mainstream banks and 28% for Islamic banks.
The total income of mainstream banks comprises 71% from interest income and 29% from non-interest income. In case of Islamic banks investment income has 84% contribution and non-interest income has 16% contribution. The data clearly shows that Islamic banks are more dependent on investment income than mainstream ones. If we dig deep into the elements of non-investment or non-interest income, it is evident that mainstream banks mostly depend on income from shares and securities (50%) but Islamic banks’ income from shares & securities has only 13% contribution to it. Furthermore, for non-investment income Islamic banks mostly depend on commission income (69%) and mainstream banks have only 36% contribution to it. In other operating income the rate of contribution has less difference of 4% (18%-14%) between Islamic and mainstream banks.
Contribution to Non-investment IncomeAverage of 2009-2013
Mainstream (23) Islamic (7)
Income from Shares & Securities % 50 13
Income from Commission % 36 69
Other Operating Income % 14 18
Total 100 100
Against regulatory requirement of 10% Capital Adequacy Ratio (CAR), mainstream banks maintained at 11.34% and Islamic banks did 10.52%. Due to capital short fall in ICB Islamic Bank this rate is a bit worse in Islamic banks. Average NPL to Equity ratio of mainstream banks is 19% and that of Islamic banks is 32%. Mainstream banks’ ‘Liquid Asset to Short Term Liabilities’ is 71% against Islamic banks’ 36% meaning mainstream banks have had more liquid assets than Islamic banks. The reasons behind this situation are Islamic banks don’t participate in call money market and they have less exposure in share market investment. Islamic banks ‘Borrowing Liabilities to Total Liabilities’ is 3% as against Mainstream banks’ 4% meaning Islamic banks have less borrowed liabilities than mainstream banks. Average ‘Advance Deposit Ratio’ is 84% in Mainstream banks against the Central Bank’s ceiling 85%. Islamic Banks ‘Investment Deposit Ratio’ is 90% which is as same as the ceiling of 90%.
The average ‘Return on Asset’ is 1.62% in Mainstream banks and in Islamic banks this rate is 1.28 meaning Mainstream banks are maintaining their asset slightly more efficiently. On the other hand, data shows that Islamic banks are able to maintain their equity a bit more efficiently than mainstream banks as Islami banks’ ‘Return on Equity’ is 17.56% and mainstream banks’ 17.29. It is also seen that mainstream banks are a bit more efficient in terms of ‘Total Expenditure to Total Income’. In Islamic banks this rate is 72% and in mainstream banks this rate is 71%.
Though the NPL growth rate is almost same in both groups of banks, the credit growth is higher in Islamic banks than in mainstream banks. The NPL of mainstream banks has grown at an average rate of 33% against their credit growth rate of 19% and in Islamic banks the NPL has grown at 23% against investment growth of 22%. The rate of ‘NPL to Loan’ is 2.24 in mainstream banks and in Islamic banks this rate is 2.82.
From growth and market share perspectives it is evident that Islamic banks are growing faster than mainstream banks. As a result, Islamic banks are gaining more share but mainstream banks are losing. In terms of efficiency and asset quality the difference between these groups is quite mixed and not that much significant in difference. Islamic banks are doing better in terms of asset backed transactions free from interest and any kind of speculation.
Moreover, Islamic banks have edge over other banks in terms of faith based banking in our country. For that very reason, more and more commercial banks are now showing their enthusiasm to be converted to Islamic ones. So, to meet this growing demand of the people the respective authorities need to pay more attention to upgrade the regulatory platforms and other issues. Of course, to have much more sustainable contribution to the economy Islamic banks need to think about adopting the profit and loss sharing approach. To do that a concerted effort from all stakeholders is a must. Are we ready to go ahead?
