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EXECUTIVE SUMMARY This report Measuring Three Islamic banking Performance using profitability model is prepared to fulfill the

partial requirement of Internship Working report of Business Administration Program of Independent University, Bangladesh. The topic of dissertation was selected upon consultation with course instructor of respective department.

The main aim of this report is to find out the profitability of the three Islamic bank in Bangladesh. These three banks are EXIM Bank, South East Bank, And Social Islamic Bank Limited. It is tried to rank those bank by measuring its five years financial performance and comparing with each other. The performance is measured by using profitability model. The profitability of the banks can be measured using the following indicators:

(i) Return on asset (ii) Return on equity (iii) Profit margin ratio

Introduction The growth of Islamic banking institutions has been phenomenal over the years. Today there are more than 500 Islamic banks and financial institutions world-wide with an asset base of about US$1 trillion (The Banker, 2009). The significance of Islamic banks in enhancing economic development is undeniable. Their role as shareholders and creditors of firms has increased the popularity and viability of Islamic banking in many countries, including Western ones. The size of Islamic banking operations is growing rapidly across the globe, at an estimated rate of 15 per cent annually. This demonstrates the acceptance of the Islamic finance model throughout the world. Generally, investors in conventional banks are primarily concerned with making profits, irrespective of Shari[ah principles. However, this is not the case with investors in Muslim Islamic finance. According to Shahul et al. (2003), most Muslim investors are not only concerned with the dividend and capital return from their investment, but also with the whereabouts of their investment, including where it has been invested. Such concern is in line with the Shari[ah principles (or Islamic law) which promotes justice and social welfare through obedience to Gods commandments. Wealth needs to be shared in a fair manner among the Muslims. In this study three Islamic Bank in Bangladesh EXIM Bank, South East Bank Limited (SEBL), And Social Islamic Bank Limited (SIBL) have taken. It is tried to find out which one is the heights profitable bank. And The position of EXIM Bank among them.

Literature Review: Bank performance in general can be evaluated using financial ratios such as liquidity ratios, profitability ratios and others (Sabi, 1996; Saleh and Zeitun, 2007; Samad and Hassan 1999). However, evaluating Islamic banks performance is far more complex and demanding as these banks performance is not only tested by their profitability level but also their relative compliance with Shari[ah principles.

Competition in the Islamic banking sector has intensified, mainly due to various internal factors (such as the banks management policy, firm ownership structure, investment and expenditure policies) and external factors (such as political environment, technological advancement and deregulation policies). Such competition influences the growth and performance of these banks. A diligent measurement or monitoring of the financial performance of Islamic banks can help to determine the banks potential capacity and prospects. This is vital for managerial and regulatory purposes as well. Bank regulators, depositors and managers have different needs and objectives. For example, depositors are concerned about the financial stability of a bank since a financially unsound bank does not guarantee good returns. Return On Assets (ROA) is considered one of the most popular ratios used to measure financial performance in the banking industry, it shows the ability of management to acquire deposits at a reasonable cost and invest them in profitable investments. This is reflected in the ROA, since investments and loans are the largest portion of banks assets, while interest on loans resembles the largest portion of the banks revenue and returns (Simpson and Kohers, 2002: 103,104,108). Some studies even go as far as to claim that ROA is the most meaningful financial indicator in the banking industry (Reger, Duhaime and Stimpert, 1992: 195). ROA has the advantage that it can be used for small firms which have a very small equity base, in which case ROE may be a bit misleading compared to ROA (Reger et al., 1992: 195).

ROA is considered to be highly correlated with ROE in the banking sector, where both give the same indication of performance in terms of the direction of financial performance movement, but differ in magnitude and interpreted analysis (Simpson and Kohers, 2002: 98, Castelli, Dwyer and Hasan, 2006: 9,10, Karr, 2005: 56-59).

Return On Equity (ROE) is one of the most commonly used bank financial performance measure. It can be found in much of the research surrounding bank performance as well as analyst reports and company financial results (Lindblom and Von Koch, 2002: 52,56). It is also seen as a simple method to calculate and measure past performance while giving a fairly good indicator of future ROE (Wilcox, 1984). Hopkins et al. (1997: 642) states that the ultimate measure of the strength of any financial institution is the ROE. It also helps to compare banks differing in size and structure. Use of ROE as a measure is primarily based on the assumption

that customer value creation is positively correlated to the financial performance [measured as ROE] of the bank (Lindblom et al., 2002: 48).

Using sets of ratios is highly preferred rather than using individual ratios. Sets of ratios allow managers to gain fruitful insight and information regarding factors affecting bank financial performance. A number of ratio sets, systems and schemes are based on ROE and aim to trace ROE into its component ratios to achieve the benefits of a complete picture of the banks performance. Most of these systems are based on the Dupont System of Financial Analysis but with slight modifications or adaptations. One of these systems is Schierenbecks Basic ROE Scheme (further referred to as the ROE Scheme or ROE Analysis Tool). This model has been chosen for its overall ability to combine a complete image of the banks performance, as well as the ease of obtaining the information needed to calculate its ratios. It also has the advantage of including the ROA in its Analysis thus combining both previously mentioned measures and their advantages. The Conventional ROE Analysis is presented here as shown in Kalhoefer and Salem (2008).

Methodology:
Data collection:

In this report secondary data is collected. Secondary data is collected from the annual report of these three banks from the year 2006 to 2010.

Analysis: I the analysis ROA (Return on Asset), ROE (Return on Equity), and profit margin is used to find out the profitability. And Investment income, Investment expense, deposit, loans and advance, non performing investment is used to find the banks performance. ROA: Return on asset determines the amount of net income produced on a firms asset by relating net income to total

ROE: The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

Return on Equity = Net Income/Shareholder's Equity

Net Profit Margin: Net Profit Margin measures the net income of a firm as a percent of its revenue.

Net Profit Margin = Net Income/Total Revenue.

Investment income for the Islamic bank is the income bank generates by loan out or Islamic investment.

Investment Expense is the expense Islamic bank pay out to its depositor.

Deposit is the investment, an Islamic bank get from its customers.

Loans and Advance is the money bank took from other financial institution.

Nonperforming Investment is the difference between classified and unclassified investment for the bank.

Findings:

By using Profitability Model.

ROA Name Of The Bank 2006 Exim Bank South East Bank SIBL 1.73% 1.66% 0.30% 2007 2.00% 1.90% 0.50% 2008 1.83% 1.09% 0.70% Year 2009 2.19% 1.66% 1.10% 2010 3.54% 2.37% 1.17% Average 2.26% 1.74% 0.75%

4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2006 2007 2008 Year ROA 2009 2010 Average

Exim Bank South East Bank SIBL

In here three banks five year average is 1.58%. EXIM bank is in the top position then South East bank, and SIBL is in the bottom position. But SIBLs ROA is up warding where both EXIM and SEBLs ROA went down in 2008. So, it can be said EXIM bank is doing well in here.

ROE Name Of The Bank 2006 Exim Bank South East Bank SIBL 21% 17.98% 7.60% 2007 23.03% 19.90% 8% Year 2008 21.98% 12.06% 11.80% 2009 25.22% 16.51% 12.70% 2010 27.86% 19.41% 15.31% Average 23.82% 17.17% 11.08%

30% 25% 20% 15% 10% 5% 0% 2006 2007 2008 Year ROE 2009 2010 Average Exim Bank South East Bank SIBL

In here three Banks five years average is 17.36%. Once again EXIM Bank is doing well comparing with other two Bank. SIBL and SEBLs ROE went down in 2008 when EXIM Bank also maintaining the top position.

Profit Margin Name Of The Bank 2006 Exim Bank South East Bank SIBL 32.29% 33.43% 12.41% 2007 33.00% 32.03% 14.75% Year 2008 30.90% 21.96% 17.17% 2009 38.15% 31.92% 26.45% 2010 45.12% 24.05% 24.42% Average 38.23% 27.40% 21.36%

50.00% 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2006 2007 2008 Year Profit Margin 2009 2010 Average

Exim Bank South East Bank SIBL

In here three banks average is 29.00%. Once again EXIM bank is doing better. Both SIBL and SEBLs Profit margin went down in 2008 and 2010 where EXIM Bank is maintaining up warding trends.

So, after measuring the profitability model it can be said that EXIM Bank is maintaining top profitability position comparing SEBL and SIBL. So it is profitable to invest money in EXIM bank Limited.

Performance Measurement:

Name Of The Bank Exim Bank South East Bank SIBL 2006 2007

Deposits Year 2008 2009 2010 94949.4 Average 60839.3 74928.71 27292.64

35032.02 41546.57 58833.06 73835.46

46056.18 55474.05 68714.67 96669.05 107729.6 16170.51 19753.94 24099.82 31588.16 44850.76

120000 100000 80000 60000 40000 20000 0 2006 2007 2008 Year Deposits 2009 2010 Average Exim Bank South East Bank SIBL

In here three banks average deposit collection is 54353.55 million taka. According to the graph EXIM is collecting heights amount of deposit rather than other two banks. Though three banks deposit collection is up warding, EXIM is in the top position. So EXIM is performing well in here.

Investment Income Name Of The Bank 2006 Exim Bank Southeast Bank SIBL 3808.09 5107.78 1898.66 2007 4943.47 6408.96 2092.95 2008 6575.38 7530.74 2732.26 Year 2009 8147.11 8962.10 3078.97 2010 9606.18 10257.04 3886.18 Average 6616.046 7653.32 2737.80

12000 10000 8000 6000 4000 2000 0 2006 2007 2008 Year Investment Income 2009 2010 Average

Exim Bank Southeast Bank SIBL

In here three banks average investment income is 5669.058 million taka. SEBL is in the top position. EXIM Bank is in the second position but up warding and very close to SEBL. So EXIM Bank is developing in here.

Investment Expense Name Of The Bank 2006 Exim Bank South East Bank SIBL 2953.61 4044.63 1596.61 2007 3587.54 4852.5 1705.05 Year 2008 4807.49 6210.7 2071.38 2009 5942.86 7843.24 2063.62 2010 6020.05 4580.85 2435.02 Average 4662.31 5506.38 1974.34

10000 8000 6000 4000 2000 0 2006 2007 2008 Year Investment Expense 2009 2010 Average

Exim Bank South East Bank SIBL

In here three banks average expense is 4047.677 million taka. SEBL were in the top position till 2009 but went in second position in 2010. But EXIM bank is maintaining a linear slope. It means EXIM banks expense is controlled.

Non Investment Income Name Of The Bank 2006 Exim Bank South East Bank SIBL 1159.48 1658.33 303.19 2007 1464.49 2261.51 514.61 Year 2008 1781.43 2719.39 630.82 2009 2236.5 4740.36 702.29 2010 4117.77 5814.29 1181.93 Average 2151.934 3438.78 666.57

7000 6000 5000 4000 3000 2000 1000 0 2006 2007 2008 Year Non Investment Income 2009 2010 Average

Exim Bank South East Bank SIBL

In here three banks non investment income is 2085.759 million taka. SEBL is doing very well in here. EXIM Bank is in the second position. Net Income Name Of The Bank 2006 Exim Bank South East Bank SIBL 650.29 909.88 75.14 2007 930.84 1222.97 133.08 2008 1096.63 887.23 221.76 Year 2009 1694.09 1870.18 454.3 2010 3476.01 2763.14 643.02 Average 1569.572 1530.68 305.46

4000 3500 3000 2500 2000 1500 1000 500 0 2006 2007 2008 Year Net Income 2009 2010 Average

Exim Bank South East Bank SIBL

In here three banks average net income is 1135.237 million taka. Both EXIM and SEBL are maintaining almost same net income in here. But SEBLs expense is getting higher that is why EXIM came out in the top position in the year 2010.

Conclusion: By observing overall performance and profitability of three banks, EXIM Bank is in the top position. Then SEBL is in the second position, SIBL is in the third position. EXIM banks both investment income and noninvestment income is good and the expenses are controlled. That is why EXIM Bank is maintaining top position. In year after year they are trying to improve themselves by establishing a sound capital base. They are trying to make their products and services more attractive to the customers. Also, they are rewarding their shareholders by enhancing their wealth and attracting more investors by their bank performance.

Reference:
Ahmed Mohamed Badreldin (October 2009), Measuring the Performance of Islamic Banks by Adapting Conventional Ratios

Dr. Kamath G. Bharathi, (2010), The Intellectual Capital Performance of Banking Sector in Pakistan Mudiarasan Kuppusamy, Ali Salman Saleh and Ananda Samudhram, (2010), Measurement of Islamic Banks Performance Using a Shari[ah Conformity and Profitablity Model Muhammad Ayub Siddiqui1 and Adnan Shoaib, 2010) Measuring performance through capital structure: Evidence from banking sector of Pakistan Bokhari, S. (1998). History and Evolution of Privatization in Pakistan. Paper presented at the National Seminar on Privatization held on Sep. 18-19.

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