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CAMEL ANALYSIS FOR ISLAMIC AND CONVENTIONAL BANKS: COMPARATIVE STUDY FROM PAKISTAN Dr. Rehana Kouser Lecturer, Department of Commerce Bahauddin Zakariya University, Multan-Pakistan Email: rehanakousar@bzu.edu.pk Muhammad Aamir Ph.D. (Finance) Scholar International Islamic University, Islamabad E-mail: maamirbzu@edu.pk Huba Mehvish BS (Acc & Fin) Department of Commerce Bahauddin Zakariya University, Multan-Pakistan Email: Huba.rao@gmail.com Muhammad Azeem MBA (Finance) Scholar Department of Business Administration Air University, Multan-Pakistan Email: ranamuhammadazeem@gmail.com ABSTRACT Islamic banking is a recent phenomenon which is growing at a fast pace around the world even in Non-Muslim countries. Islamic rules of financing are based on Shariah principles of Islam. In Shariah, interest (Riba) is forbidden, thus Islamic banking is largely seen as interest-free banking. This study compares the financial performance of the interest-free and interest-based banks operating in Pakistan i.e. full-fledge Islamic banks and Conventional banks. Its aimed at investigating whether Pakistan has well established Islamic Banking system. Financial performance of these two categories is assessed using the CAMEL model. Banks with a large number of branches in Pakistan in each category are selected for the study. Total ten banks (equal from both categories) are included in the study with financial data of five years (2006-10).Statistical methods are comprised of Levenes test, t-test, and Mann-Whitney test. Inferences imply that yet Islamic banks in Pakistan do not have much robust financial health as compared to the conventional banking in country. There is strong need of awareness, improvements, and expansions in the Islamic Banking system of Pakistan. Government should formulate Islamic economic policies which may support the Islamic banking in Pakistan to a finest level. Keywords: Islamic Banking, Riba, CAMEL, Financial Performance, Shariah, Riba JEL Codes: G20, G21, G29 INTRODUCTION Financial sector in Pakistan consists of commercial banks, development finance institution (DFIs) and stock market, Islamic Banks, and their regulators. Previously the monetary sector was supervised and regulated by three institutions i.e., SBP, PBC (Pakistan banking council) and the CLA (Corporate Law Authority). The State bank of Pakistan acts as central bank of Pakistan, PBC used to monitors the presentation of nationalized commercial banks and Corporate Law Authority regulates the equity market. The Government of Pakistan nationalized all banks at the time of independence in 1947 to make credit ease and control over the financial sector for the betterment of the economy. The step of nationalization entirely exhausted the private sector from the banking business. The performance and efficiency of the banks was affected by Nationalization. The government has determined to modify the policy decision of nationalization to promote private sector participation after gauging the performance of nationalized institutions for a decade, promote competition among banks and enhance efficiency as a result the Banks (Nationalization) Act, 1974 was amended in 1991. The

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procedure of privatization/ denationalization of Nationalized Commercial Banks (NCBs) have also been in progress. The State bank of Pakistan has also determined to improve its role as a regulator of banking segment. While an initial step, banks were advised by the SBP to set quarterly recovery targets, suggest their growth reports and devise strategies to get better future revival in 1993. In addition, disclosure standards were revised by the State bank of Pakistan in 1997 and SBP directed banks to submit their annual accounts on innovative format as according to the international accounting practices. Due to the financial sector reforms there are many changes have taken place in commercial banks; in pre-reform age banking sector was conquered by government possession. The share of public sector banks has decreased considerably and banking industry has become competitive in a result of reforms. Consequently, commercial banks working in a developing country, that is Pakistan, are chosen for this study. The subject of competence of commercial banks has got huge significance because of the financial sector reforms approved out by government of Pakistan. The ordinary supposition is that increasing financial performance will lead to improved functions and activities of the organizations which underpin much of the financial performance research and discussion. The issue of financial presentation and research into its dimension is well highly developed within management and finance fields. It can be argued the institution size, asset management, and the operational efficiency these are three principles to make better the performance of financial organization. Till now, there has been less published research to discover the collision of these factors on the financial performance of the commercial banks. 1.1. Commercial Banking in Pakistan The conventional banking started in Italy in middle ages (1000-1350AD). According to an estimate, it can be said that the most famous Italian bank was the Medici bank which was set up by Giovanni Medici in 1397. (Wikipedia, 2011). Later, the phenomenon spread across Europe and many commercial banks came into existence in 16th and 17th century. During the nineteenth century, commercial banks evolved into large entities mainly supervised by Jewish community because of their influence in the financial market. The commercial banks were involved in public lending and trading. At that time, major banks in Europe and United States were founded and led by Jews. During the century, the banks introduced the paper money concept instead of trading in gold and silver. The main idea was that any person having paper money could claim the equivalent amount of gold or silver stored as the reserves of the bank. Before 1947, the financial sector of Pakistan was dominated by branches of British banks. After the partition, the State Bank of Pakistan was founded in 1948. The main responsibilities of the State Bank of Pakistan were to establish the monetary and supervisory policies. During the sixties, specialized development institutions such as Industrial Development Bank of Pakistan and Agriculture Development Bank of Pakistan were emerged. Later, in 1974, the Government of Pakistan nationalized all banks operating in the country and a Pakistan Banking Council was established. Before its dissolution in 1997, the Pakistan Banking Council was considered to be a banking holding company with limited supervisory powers. Afterwards, the State Bank of Pakistan became the sole regulatory authority of banks and financial institutions of Pakistan. In this role, the State Bank of Pakistan has done excellent efforts in making the financial institutions and banks profitable. Currently, the conventional banks in Pakistan can be categorized into the following four groups: Privatized banks National commercial banks Private banks Foreign banks There are a total of 22 foreign banks, 25 domestic commercial banks (private, privatized and nationalized) operating in Pakistan while a number of specialized banks are working. 1.2. Prologue to Islamic Banking Islamic banking is a complete system based on Islamic rules of financing. Before 20th century, it has been regarded as an abstract concept. Now various types of model based on Islamic mode of financing is available. It all started in Egypt in early sixties where a small setup was created in a local bank (the MytGhamr Savings Bank). Since then Islamic banking and financial framework has developed into a complete financial system. The basic requirement of Islamic banking and financial institutions is the compliance with Shariah. This concept has been widely spread nowadays. In the early days, the Islamic banks were facing serious challenges regarding their reputation and intentions. There was a kind of mistrust in general public. Now, Islamic banks and financial institutions have gained a lot of respect in the community. All this is possible due to their growth and stable

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system. The financial instruments used by Islamic banking have been developed significantly from asset and liability point of view. The developed financial instruments are in the form of certificates with short-term maturities or in the form of investment funds. Islamic banks are present in nearly 70 countries in the world (Ayub, 2002). The concept of Islamic banking is currently spreading in two areas. At one hand, Islamic banks are being operating in parallel to conventional banks which generally are interest-based while on the other hand, efforts are being made to implement Islamic banking on country level. The Islamic banks are generally offering a minimal set of services and they do not participate in money market transactions. Currently, Islamic money market is operating in countries like Bahrain, Malaysia and some other countries of Gulf region in addition to conventional money market. Recently, a memorandum of understanding is signed between Bahrain, Saudi Arabia, Malaysia, Indonesia, Brunei and Sudan on the establishment of first International Financial Market with the participation of Islamic Development bank(Ayub, 2002). A liquidity management center is also operating in Bahrain with the objective to provide liquidity to Islamic banks in their needs and is in coherence with the Shariah. The Government of Pakistan, Iran and Sudan have introduced Islamic system of financing on country level. In Saudi Arabia, due to the legislation, banks are not permitted to perform Riba based operations although there are a small number of Islamic banks in the country. A number of countries have also made amendments in their legislation by taking Saudi Arabia as an example. The Islamic institutions and banks can be further divided into two categories: Islamic commercial banks and Islamic investment institutions. Islamic financial institutions are becoming more popular. The current assets of Islamic banks and financial institutions are over $200 billion and the growth rate is 10%-15% per annum (Ayub, 2002). It is observed that Islamic banking is a small but a dynamic market. Moreover, it is spread across the globe and is not just limited to Middle East and South East Asia. This concept is also present in USA, UK and many other European countries. Many such institutions are present there since long. Some conventional banks have also their Islamic banking subsidiaries. A large number of banks in the world are now offering Islamic financial products and participating in capital market transactions. It is interesting to note that there is also an Islamic Market Index in Dow Jones. The deposits with Islamic banks are growing fast. It has been observed that Islamic banks are utilizing their funds efficiently and have introduced novel methods of financing and investment which are secure and lucrative. Islamic Shariah has explained a set of rules and principles for Islamic financial system. The rules and principles are guidelines for all kind of business, economic and commercial transactions for individuals as well as for institutions. The rules not only describe the way transactions should be made but also define the limits which should be crossed in any case. Rules are based on the notion of justice, mutual help, free consent and honesty avoiding fraud, misinterpretation and misstatement of facts. The rules also define the limits beyond which the contracts between parties are invalid. These limits are defined in terms of Riba 1, Gharar2, Jahl3, Maysir4 and Qimar5(Ayub, 2002). Any action beyond these limits is prohibited in Islam and is against the spirit of Islamic financial system. According to Federal Shariat Court of Pakistan, the profits generated from the interest on the accumulated capital when the actual investment is safe and intact falls in the category prohibited by the rules of Islamic Shariah. All transactions involving interest payments are strictly prohibited. Moreover, exchange transactions of money or any form of money like gold or silver must be hand-to-hand and equal for equal. If transactions are not done in this manner, it is subjected to all rules relating to Riba. There are two main types of Riba (Ayub, 2002). Riba Al-Nasia: It refers to loan transactions. It is also termed as Riba Al-Quran. Interest notions in modern banking transactions fall in this category. It can be defined as the kind of loans where specified repayment period and an amount in excess of capital are predetermined. Riba Al-Fadl: It refers to sale transaction. It is also termed as Riba Al-Hadees. An example of this kind Riba is the transaction of low quality goods in exchange of high quality good. Our beloved Holy Prophet (Peace Be upon Him) has said. Every loan that draws interest is Riba.

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At another point, Prophet Muhammad (Peace Be Upon Him) said: sell gold in exchange of equivalent gold, sell silver in exchange of equivalent silver, sell dates in exchange of equivalent dates, sell wheat in exchange of equivalent wheat, sell salt in exchange of equivalent salt, sell barley in exchange of equivalent barley but if a person transacts in excess, it will be Riba. However, sell gold for silver anyway you please on the condition it is hand-to-hand (spot) and sell barley for dates anyway you please on the condition that it is hand-to-hand(spot). One of the famous Sahabi Fazala Bin Obaid defines Riba as: Every load that draws profit is one of the forms of Riba. According to Abu Ishaqaz Zajjaj, a famous Arab scholar, Riba is defined as: Every loan that draws more than its actual amount is Riba; (Usmani, 2002). 1.3. Islamic Banking in Pakistan Islamic banking, labeled as interest-free banking, has earned a lot of attention in recent years. The most important pillar of Islamic finance is eliminating the interest from transactions. Unlike commercial banking, where interest is earned on all transactions, Islamic banking makes them interest-free. The banking system in Pakistan is currently more oriented towards the implementation of Islamic banking which is based on the rules defined by Islamic economy system. In comparison to the interest based banking systems, Islamic banking makes all sorts of profits and loss and move deposits but follows the rules of Shariah at the same time. The most lucrative features of Islamic banking are: Mudarabah, Musharakah, Murabahah, Eenah, Ijara and Salam. The use of interest-free financing modes has gathered a lot of attentions from community and is a success. In Pakistan, interest-free banking started in early 1980s. The main idea is to share profit and loss. Since July 1985, government of Pakistan has declared those banks dealing in Pak Rupee as interest-free. Pakistan banking system has witnessed an era where all deposits were labeled interest-free and all banks implemented a profit and loss sharing scheme. But the foreign banks were exempted. The State Bank of Pakistan (SBP) has stated twelve modes of interest-free financing which has been categorized in three classes. The Federal Sharia Court described, however, the procedure adopted by banks in Pakistan as un-Islamic implemented since July 1985. In a ruling made by the court in 1999, it declared that all types of interest based transactions are Riba which is not allowed in Islam and the court ordered the government to put an end to interest charges. Majority of the financial institutions cautioned the government on the interest-free system and some foreign banks threatened to stop their operations in the country. Thus, the government and other financial institutions appealed to the Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan (Lodhi & Kalim, 2005). On December 23, 1999, the Shariat Appellate Bench (SAB) of the Supreme Court of Pakistan rejected the appeals and stated that interest-based system must come to an end by June 30, 2001. In conclusion, the court said that the current financial system must be radically changed in a manner to make it in accordance with the Shariah. The Commission for Transformation of Financial System (CTFS) was established in January 2000 in the State Bank of Pakistan. The purpose was to prepare model contracts and financial instruments for the new system. Based on work and discussion, the CTFS submitted two interim reports in October 2000 and May 2001 respectively. The goal was to identify some prior actions and measures in order to prepare the ground for transformation of the current financial system and finding a financial system in accordance to the Shariah. The commission presented its final recommendations to the government in August 2001; Lodhi & Kalim (2005). The Commission for Transformation of Financial system suggested that in order to introduction of Shariacompliant financial system, some preliminary works should be done which include legal infrastructure, awareness and training programs for banks and their clients and an effective media advertisement for the awareness of general public. Despite the obvious efforts of the government, Islamic banking in Pakistan could not be practiced in its true essence and it still poses many challenges, mostly in implementation phase (Ayub, 2002). 2. LITERATURE REVIEW Literature related to the performance measurement of financial institutions, is included in the study at two different levels; international scenario and national.

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Given the significance of the banking sector to economic development, it was important for the banking sector to measure financial performance of banks. This can help in the restructuring of sick banks and take appropriate measures to ensure sustainable economic growth. In this section, the critical analysis of some studies that the efficiency of the banking sector in several countries measured. 2.1. Comparison of Islamic and Conventional Banks: International Studies (Alkassim, 2005) Has compared and analyzed the profitability of Islamic and conventional banks in Gulf cooperation council region. The study was conducted balance sheet and income statements of 14 Islamic banks and 8 conventional banks, both operating in Gulf cooperation council region, over the period 1997-2004. A regression analysis was performed on the nine parameters influencing the bank performing. The nine parameters used in the analysis were: return on asset, return on equity, net interest margin, loans, assets, equity, expenses, deposits and non-interest expense. The authors found that Islamic banks were well-capitalized and lending in Islamic banks promote profitability. The high expenses in conventional banks made them less-profitable. However, the asset quality of conventional banks was found to be better than Islamic banks. (Olson &Zoubi, 2008) provides a method to compare Islamic and Conventional banks based on the financial characteristics only. They collected data from 141 conventional banks and 95 Islamic banks during the period 2001-2005. They employed T-test, logit model and neural networks on indicators from financial statements of the banks for the analysis purpose. Based on their analysis, it has been found that conventional and Islamic banks can be discriminated on the basis of certain financial measures such as profitability, efficiency and asset quality indicators. An investigation of competitive conditions in Islamic and conventional banking on a global level is done by (Ariss, 2010). The author also assessed the implications of prevailing structures on bank profitability. The author investigation included 58 Islamic and 192 conventional banks operating in 13 different countries of the world. He employed traditional measures of concentration, H-statistics, the linear index and multivariate analysis for the comparison. The author claimed that Islamic banks allocate the greater share of their assets to financial activities in comparison to conventional banks. Moreover, Islamic banks are more capitalized than conventional banks. A recent study on the analysis of efficiency and performance of Islamic bank when compared to private and public sectors conventional banks (Akhtar, Raza, Orangzeb, &Akram, 2011). In the analysis, nine financial ratios have been used which include ratios of profitability, liquidity risk and credit risk. The ratios have been applied on the financial statements for the period 2006-2010. The analysis is performed by using trend analysis tool. The authors found that there is no significant difference between Islamic banks and conventional banks in case of profitability while divergence is observed in cases of liquidity and credit performance. Gilbert, Meyer, Vaughan (2000) examined the role of the camel model for monitoring the Bank's downgrade. A comparison of investments made by Islamic banks and conventional banks in various countries of the world is presented in Figure. It can be seen that, in Gulf countries, the investments made by Islamic bank are more growing significantly. In countries like Pakistan, Indonesia, Bangladesh, Sudan, Tunisia and Indonesia, the conventional banks are still in dominant position. 2.2. Comparison of Islamic and Conventional Banks: Studies from Pakistan Iqbal (2001) compares Islamic and conventional banking in the nineties and the 12 banks surveyed. He studied the development of Islamic banking in the years 1990-1998, the annual growth rates of some key variables such as the capital of Islamic banks, the total value of investments in total deposits, total assets and the determination of income. It used to analyze the relationship as the ratio of capital, liquidity ratio, the proportion of use, cost / benefit analysis of profitability, return on assets and equity and found that the performance of two assets (ROA) and return on capital equity (ROE) for the Islamic banks are much higher than traditional banks and the two terms are, respectively, 2.3 and 22.6 percent for Islamic banks to 1.35 percent and 15 percent for banks. He concluded that the revenues from favorable for Islamic banks with international standards of traditional banks those depositors of amounts of capital and guarantees to reduce the risk of Islamic banks, savers bear. Therefore, the depositors of Islamic banks expect a higher return to compensate for the additional risk. (Awan, 2009) has studied the differences between Islamic and conventional banks in Pakistan and found that traditional banks are now giving financial services to 11 percent of people in Pakistan, and the remaining 89 percent indicating that there is a huge market for Islamic banks. Now it depends on how Islamic banks take the advantage of this potential market. It is suggested that Islamic banks need to obtain information about the advertising campaigns, target the average people, improve their products, and financial benefits. They have their

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branches in small towns and villages, where people have a strong commitment to financial products, without interest and less competitive with those of urban areas. In a highly relevant and recent study conducted in Pakistan (Jaffa &Manarvi, 2011), the authors have used CAMEL technique to compare the performance of Islamic and conventional banks in Pakistan over the period 2006-2009. The sample of the study includes 5 Islamic banks (Meezan bank, Al-Baraka Islamic bank, Dubai Isalmic bank, Bank Islami Pakistan and Dawood Islamic bank) and 5 conventional banks (Allied Commercial bank, Muslim Commercial bank, Standard Chartered bank, Habib bank and Al-Falah bank). The annual reports of the banks have been used for data collection. Debt to equity and Capital to risk assets ratios are used to determine the Capital adequacy of the bank. The trend analysis of debt to equity ratio showed that the Islamic banks started with debt but gradually increased equity over the study period while conventional banks steadily relied on the debt financing. The trend analysis of capital to risks assets showed that Islamic banks had maintained their financial soundness over the study period and are far better than conventional banks in this regards. The overall asset quality of Islamic banks was found to be better than conventional banks while it has been found that conventional banks maintained good asset/loan quality performance. In comparison, the conventional banks have been found to have good management quality ratio and good earnings over the study period. The liquidity analysis of Islamic and conventional reveals that Islamic banks have better liquidity position. Ahmad, Rehman, &Saif(2010) compared Islamic banks and conventional banks in Pakistan based on the service quality and customer satisfaction. A dataset of 720 bank customers are included in the study. The customers are grouped in two categories: Islamic bank and conventional banks. Each customer was approached personally and data was collected by filling out questionnaire. Pearson correlation and regression test were applied to find out the correlation between service quality and customer satisfaction. The authors have found that there is a strong relationship between service quality and customer satisfaction in Islamic banks as compared to conventional banks in Pakistan. A comparative study on Meezan bank and 5 other conventional banks working in Pakistan during the period 2003-2007 is presented in (Moin, 2008). The author analyzed the performance based on financial ratios i.e. profitability, liquidity, risk & solvency and efficiency. He found that, during the study period, Meezan bank remained less profitable, more solvent and less efficient. But at the same time, the bank is improving considerably indicating convergence with the performance of the conventional banks. 3. RESEARCH METHODOLOGY Following research methodology is used in the study. 3.1. Research Question Research is aimed at distinguishing financial performance of banks in Pakistan using CAMEL ratios, between categories of Islamic and conventional to check their operating status. It is conducted to investigate whether Pakistan (being an Islamic Republic) has well established Islamic banking structure. Formally stated research question is Financial health of Islamic banks is better than Conventional ones? 3.2. Variables of the Study The following variables of CAMEL rating system are used in this work to compute the performance of a bank. Capital adequacy: It is based on following measures. Dependency Ratio Capital to Asset Ratio Debt to Asset Ratio = Donation and Grants/Total Performing Assets = Capital/Total Performing Assets =Total Liabilities/Total Performing Assets

Asset Quality: This area of CAMEL method is based on following measures. Loan Loss Provision Ratio Portfolio in Arrears Loan Loss Ratio Reserve Ratio = Loan Loss Provision/Average Performing Asset = Balance of Loans in Arrears/Value of Loans Outstanding = Amount Written off/Average Loans Outstanding = Loan Loss Reserve/Value of Loan Outstanding

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Management Capability: It is based on following measures. Number of Active Borrowers per Credit Officer Number of active borrowers per management staff Portfolio per Credit Officer Cost per Unit of Money Lent Cost per Loan Made

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= Number of Active Borrowers/Number of Loan Officers = Number of Active Borrowers/Number of Management Personnel (e.g. Loan Officers) = Value of Loans Outstanding/Number of Loan Officers = Operating Cost/Total Amount Disbursed = Operating Cost/Number of Loans Made

Earnings: It is based on following measures. Return on Performing Assets Return on Average Total Assets Financial Cost Ratio Administrative Cost Ratio Operating Self-Sufficiency Ratio Financial Self-Sufficiency Ratio = Financial Income/Average Performing Assets = Financial Income/Average Total Assets = Financial Cost/Average Performing Assets = Administrative Expenses/Average Performing Assets = Financial Income/Financial & Administrative Expenses + Provisions = Financial Income/Financial & Administrative Expenses + Provisions + Imputed Cost of Capital Including Grants & Donations)

Liquidity: It is based on following measure. Current Ratio = Projected Cash Inflow/Projected Cash Outflow(for a six month period)

3.3. Research Hypotheses Based on the research question and the methodology implemented, the following hypotheses are deliberated: H1: Capital adequacy of Islamic banks is significantly higher than the conventional banks. H2: Asset quality of Islamic banks is significantly higher than the conventional banks. H3: Management capability of Islamic banks is significantly better than the conventional banks. H4: Earning quality of Islamic banks is better than the conventional banks. H5: Liquidity of Islamic banks is better than the conventional banks. 3.4. Sample of Study At present 5 full-fledged Islamic Banks and 24 Conventional Commercial Banks are operating in Pakistan. Total 14 banks, four Islamic Banks and four pure Conventional Banks have been included into the sample of this research study. All the Islamic banks are selected but four largest Islamic banks on the basis of number of branches has been selected. Equal number of banks is taken from each category for a healthy comparison. Four Pure Conventional Banks that have been included into the sample are: Allied Bank Limited JSBank Limited KASB Bank MY Bank ( Former Bolan Bank) Four Islamic Banks that have been included into the sample are: Meezan Bank Limited Bank Islami Pakistan Limited Al-Baraka Islamic Bank Dubai Islamic Bank Pakistan Limited 3.5. Selection criteria Banking sector of Pakistan is divided into seven sectors which are Islamic sector, public sector, private sector, foreign banks, development financial institution, specialized banks and micro finance banks. However we used to classify banks again in three categories pure Islamic banks, pure conventional banks and mixed banks (those conventional banks that have Islamic branches). This division is according to SBP publication. Total

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conventional banks are eight we selected four banks according to the network. Four banks with largest number of branches are selected. Total Islamic banks are four, we selected all of these. 3.6. Data Collection Both the tools of data collection i-e primary as well as secondary methods have been in order to get required information for analysis. The major source of primary data was interview from the official staff of banks. Similarly multiple sources were used to collect the secondary data. This data was collected from the following sources: Financial reports of all the Islamic as well conventional banks of the study. Library of the State Bank of Pakistan. Different periodical data issued by the State Bank of Pakistan on Islamic Banking. Data from the KSE Different News Papers, Research Journals and Books on Islamic Banking and Finance. 3.7. Period of study Research is comprised of five years data i.e., 2006-10. The exact reason for choosing this period is that of the four Islamic banks in Pakistan since 2006, and annual and quarterly national accounts generally cover this period. Meezan Bank is the only Islamic bank that has completed its five years 2008, and the rest by 2010, and all the traditional banks in this study, more than five years of his life, so we chose the study period (2006-2010). 4. Data Analysis T-test is frequently used for hypotheses testing to compare the means of two groups or categorizes. In this study, Independent samples t-test is used to accept or reject the formulated hypothesis. However before conducting the test of means comparison, Levens test for equality of variances is conducted. Levenes test is prerequisite for the comparison of means. F-stat accompanied by a p-value is computed to test whether both of the populations have equal variance or not. Normally in case of unequal variances, nonparametric tests are used. For two independent samples test, in nonparametric approaches, Mann-Whitney test is used to compare the means of two populations. W-stat is used to check whether mean of a population is greater or lesser than the other. 5. Findings and Conclusions Islamic banking is a financial system based on Islamic rules of financing. This concept has been widely spread today. Various types of model based on Islamic mode of financing are available these days. The basic requirement of Islamic banking and financial institutions is the compliance with Shariah. In this study, we have studied the Islamic banking and its counterpart-conventional banks. The comparison of performance of pure Islamic banks, and conventional banks in this study is based on CAMEL model. It is an appropriate and good model to evaluate the financial and managerial assessment of financial institutions. CAMEL stands for Capital adequacy, Asset quality, Management, Earnings and Liquidity as explained earlier in previous sections. Data analysis and empirical findings as provided in the Panel 1, and 2, suggest that Islamic banks not have the financial performance better than the conventional banks. In all the cases p-value is less than the selected significance level 5%. Only in case of loan loss ratio it is significance, which is also against our hypothesis that ratio is better than for Islamic banks. Statistical findings as provided by t-test and Mann-Whitney tests how that there is not sufficient evidence that performance of Islamic banks is better than the conventional banks. Test used for comparison of means is one tail i.e. whether a particular ratio is greater for the Islamic banks gains the hypothesis, there is no significant difference between the ratios of two categories of banks. In this way all the hypotheses of the study are rejected. No ratio of the Islamic banks is better than the conventional banks. We conclude the study with following implications: Islamic banks are not operating at the level of conventional banks. The reason may be Pakistan has adopted conventional banking since its existence and the operational level (No. of branches) of conventional banks are bigger then Islamic banks. Although the Financial and operating performance of Islamic banks has increasing trend but slow in comparison of conventional banks. There is need of awareness for Islamic financing and banking products. Government should adopt the policies based on Islamic economic system. Governmental institutions should be financed from Islamic banks. By adopting above mentioned recommendations performance of Islamic banks can be improved. For future researches, following enhancements can be made for example sample of study is composed of 4 full-fledge

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Islamic banks, and 4 conventional banks. Many more banks are operating in Pakistan. Thus, inclusion of all those banks would lead to a better analysis. For example by adding the government banks and foreign banks, we can compare performance among these categories. Its global impact may be studied by including Islamic banks operating in different countries of the world. In this study, banks are compared based on the information provided by CAMEL method. Many other methods like ORAP, PATROL are also proposed and may be used for comparison. REFERENCES Ahmad, A., Rehman, K., & Saif, M. I. (2010). Islamic Banking Experience of Pakistan: Comparison between Islamic and Conventional Banks. International Journal of Business and Management, 5 (2), 137-143. Akhtar, W., Raza, A., Orangzeb, & Akram, M. (2011). Efficiency and Performance of Islamic Banking: The Case of Pakistan. Far East Journal of Psychology and Business, 2 (2), 54-70. Alkassim, F. A. (2005). The Profitability of Islamic and Conventional Banking in the GCC Countries: A Comparative Study. Ariss, R. T. (2010). Competitive Conditions in Islamic and Conventional Banking: A Global Prespective. Review of Financial Economics, 19, 101-108. Awan, A. G. (2009). Comparison of Islamic and Coventional Banking in Pakistan. Proceeding of 2nd COMSATS International Business Research Conference. Department of Management Sciences, COMSATS Institute of Information Technology, Lahore, Pakistan. Ayub, M. (2002). Islamic banking and finance: Theory and Practice.State Bank Printing Press.Karachi Pakistan Iqbal, M. (2001). Islamic and Conventional Banking in the Nineties: A Comparative Study. Islamic Economic Studies, 8(2), 1-27. Jaffa, M., & Manarvi, I. (2011, February). Performance comparison of Islamic and Conventional banks in Pakistan. Global Journal of Management and Business Research, 11 (1), 61-66. Lodhi, S. A., & Kalim, R. (2005). Strategic Directions for Developing an Islamic Banking System. The Pakistan Development Review, 44(4 Part II), 1003-1020. Moin, M. S. (2008). Performance of Islamic Banking and Conventional Banking in Pakistan: A Comparative Study.School of Technology and Society, University of Skovde. Olson, D., & Zoubi, T. A. (2008). Using Accounting Ratios to Distinguish Between Islamic and Conventional Banks in the GCC Region. International Journal of Accounting, 43, 45-65. Usmani, M. I. (2002). Meezan's Bank Guide to Islamic Banking. Karachi: Darul Ishaat. Gilbert, R. A., Meyer, A. P. & Vaughan, M. D. The Role of a CAMEL downgrade model in Bank surveillance.Working paper 2000-021A. Retrieved from http://research.stlouisfed.org/wp/2000/2000021.pdf Panel-1: Levene's Test for Equality of Variances Category Capital Adequacy Ratio Capital to Asset Ratio Debt to Asset Ratio Asset Quality Loan Loss Provision Ratio Portfolio in Arrears Loan Loss Ratio Reserve Ratio Management Capability Number of Active Borrowers per Credit Officer Number of Active Borrowers per Management Staff Portfolio per Credit Officer Cost per Unit Money Lent F-stat .542 4.536 4.998 46.569 30.185 5.121 76.853 49.709 1.233 .002 pvalue .466 .040 .031 .000 .000 .029 .000 .000 .274 .964 Inference Drawn Variances are equal for both groups of Data. Variances are not equal for both groups of Data. Variances are not equal for both groups of Data. Variances are not equal for both groups of Data. Variances are not equal for both groups of Data. Variances are not equal for both groups of Data. Variances are not equal for both groups of Data. Variances are not equal for both groups of Data. Variancesare equal for both groups of Data. Variances are equal for both groups of Data.

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Economics and Finance Review Vol. 1(10) pp. 55 64, December, 2011 Available online at http://www.businessjournalz.org/efr
Cost per Loan Made Return on Performing Assets Return on Average Total Asset Financial Cost Ratio Administrative Cost Ratio Operating Self-Sufficiency Ratio Liquidity Current Ratio 31.991 3.899 1.568 .184 1.230 7.231 19.101 .000 .056 .218 .670 .274 .011 .000

ISSN: 2047 - 0401

Earnings

Variance is not equal Variancesare equal for both groups of Data. Variancesare equal for both groups of Data. Variancesare equal for both groups of Data. Variancesare equal for both groups of Data. Variances are not equal for both groups of Data. Variances are not equal for both groups of Data.

Panel-2: Comparison of Mean CAMEL Ratios Category Capital Adequacy Ratio Capital to Asset Ratio Debt to Asset Ratio Asset Quality Loan Loss Provision Ratio Portfolio in Arrears Loan Loss Ratio Management Capability Reserve Ratio Number of Active Borrowers per Credit Officer Number of Active Borrowers per Management Staff Portfolio per Credit Officer Cost per Unit Money Lent Cost per Loan Made Earnings Return on Performing Assets Return on Average Total Asset Financial Cost Ratio Administrative Cost Ratio Operating Self-Sufficiency Ratio Liquidity Current Ratio t/w stat -0.83 230 425.5 215 548 486.5 210 210 -4.47 -1.55 230 0.27 0.41 0.72 1.04 409 310 pvalue 0.793 w< 410 0.343 w< 410 0.001 0.02 w< 410 w< 410 1 0.935 w< 410 0.395 0.341 0.239 0.153 w< 410 w< 410 Inference Drawn Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is higher for Islamic Banks. Ratio is higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks. Ratio is not higher for Islamic Banks.

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