Literature Review

If we talk about the conventional banks, the primary source of revenue for them is Interest which
they charged on different products. Main component of leading the banks and promoting their
products is interest. Although there are many other sources of income for the bank like service
charges, transfer fee on the transactions, lockers facility, trade among international countries and
charges on provision of facilities (Hanif, 2010) In Muslims, the concept of Islamic banking is
growing more than conventional banking or if we compared this with non-Muslims countries. In
Islamic banking the main component of operations the interest is known as Haram as it increases
the sharing in ownership equity in the economic world (Hanif, 2010) says that interest is
predetermined cost of capital and in favors it revokes the employment in full.

Beck et al (2013) explains that Islamic banking is not only growing reputed in Muslim countries
but also in non-Muslim countries. Islamic banking is growing rapidly in term of players and
expansion scope. More than 70 percent countries followed Islamic Banking and working just as
side with the conventional banking also. Basic argument which he showed in study was Islamic
banking is not limited to Islamic countries only but has been vast its branches in non-Muslim
countries also.

As per Bader et al (2008) and Islam et al (2014) both found that Islamic system of banking
expanded at worldwide level with remarkable ratio, this happens only in last few of decades.
They also claim that in 1975 the Islamic branches were only 70 and reached to higher 300 in
number of year 2005. This chains did not stops but keep growing with much of potential and
dedication of work to number of 430 in year 2010 by covering up to the 75% countries.

Khan, 2010 claims that rate of growth for Islamic banking is about 15% in year 2008 and at that
time operating in merely 70 countries. This achievement was merely due to implementation of
Islamic banking rules and regulations and complying Shariah trade rules. As people mostly
Muslim believed that Interest is prohibited in Islam and this concept changes the mindset of
peoples towards Islamic banking system. Aggarwal and Yousef, 2000 the instruments which are
used in Islamic Banking system are as per religious ideology and uniqueness of muslim societies.
Both assumed that due to peoples believe in Islamic values the Islamic banking system is making
much progress instead of Conventional banking.

Chong and Liu, 2009 argued that theoretical perspective is different among both conventional
banking and Islamic banking. Due to Interest which is prohibited and Haram in Islam the
conventional banking is suffering loss. As per Musharka and Mudarabah the products are offered
purely on profit and loss sharing basis mean if profit is gained it would be distributed and if loss
comes it will be equally distributed among shareholders and partners. The factor of risk is also
low in Islamic banking as compared to the Conventional banking because it deals directly
sharing with the depositors. In recent crises of financial scenarios the Islamic banks were more
insured and in comparison with the conventional banks although these banks have crises at that
time.

As researched by Johns et al 2013 because of sharing with depositors the risk factor is decreases
in Islamic banks as compared to conventional banks. Sharing of profit and loss is not only
beneficial to the depositor but for the concern bank also. Market discipline is mandatory for the
Islamic banks in order to capture the retention of customers and increasing the deposit ratio to
the maximum of target. This discipline refers to the close observation and strict monitoring of
investment and borrower with an eagle eye to ensure clear reporting honestly for profit and loss.

Team of Beck, Kunt- & Merrouche 2013 reveals that theoretically we have no supportive
material which shows the effectiveness of cost or stability of it among both Conventional
banking and Islamic banking. The equity and investment deposit provides much control to the
depositors but in contrast it allows loose control of banks among borrowers. The depositor threat
of immediate withdraw is hereby removed and increase the riskiness. In addition, the Islamic
banking principles in view of transactions cracked by real transactions economically that
includes touching assets limited to use of instruments based on hedging.

Many studies have been made on comparing the Islamic system of banking with the conventional
banking For instance Iqbal 2001 says Islamic banks and conventional banks use comparative
study to complete the gap between 1990 and 1998, multiple hypothesis are supportive of a
researcher in order to obtain findings and fact that for analytical equations evaluated its
functional application in the experiment and achieved certain targets was the contrast with
conventional banking. If compared with Islamic banking well capitalized profitability and
staked. The use of strategies for making the banking process more profitable and earn more in
available resources can only be obtained in Islamic banking system.

If we want to understand the performance of the bank we have to evaluate the internal and
external banking characteristics. The basic aim of bank is to increase the profitability with rise in
equity of shareholder, an finest mix of profits and hazard disclosure should pursued in order to
boost the productivity of bank. Hence there is need of strategically planning and proper measure
by the bank management to recognize objectives, goals and budget. Planning should cover both
internal and external dimension of performance. Innovations and regulations of financial services
and leading towards internal and external competitiveness being prominent if we evaluate
performance of banks. Internal performance is always evaluated through financial ratios and
external factors includes service quality to public and market share of the bank. Bashir et al
2003

Three Malaysian academics called Nor, Abdul Majid & Said 2005 examine the productivity
dimension of Malaysia's Islamic Banking. Two types of statistical analyses were conducted, both
generalized linear and semi-parametric, to determine the efficiency of both Islamic and
Conventional Banking. In the light of mathematical measures and ratios they find Islamic
banking performance rather than traditional banking.

Rosly and Bakar (2003) made comparison of effectiveness between both of banks with use of
empirical methods but other companies working in Malaysia were also included in this research.
Six profitability ratios were calculated mainly Return of Asset (ROA) and Return of Deposit
ratios (ROD) were prominent in study. They found ratios higher in Islamic Banks as compared to
Interest based banking and author describes its reason as overhead expenses are discounted in
Islamic banking which reduces its Cost of operations. As Islamic banking totally exclude Riba
from its products and operations and employ Micro economies and Size Economies. This goal
will be accomplished through focusing on legal issues and fulfillment of religious aspect for the
banking also.

Even though the Islamic banking sector is emerging, the above greater findings for Islamic
institutions in Pakistan may be clarified by the analytical conclusions of two scholars Demirgüç-
Kunt & Huizinga, 2000 which investigated that either the underdeveloped monetary structures
show more profitability but lower efficiency. Such results were revealed through the collection
of bank samples from different developed and developing countries around the world. The
authors’ estimated different productivity and efficiency ratios for the function alluded to above.
The regression results showed that greater bank growth lowers bank income but improves
productivity as the competition among many banks continues to increase.

These same results are disclosed in the report through Hassoune (2002) which was organized to
see that the distinction between the ROE and ROA ratios was based on how Islamic banks strive
to smooth their productivity and their results. It has contrasted Islamic modern banks from the
area of the Gulf Cooperation Councils. The findings show that the productivity of Islamic banks
is greater that of traditional banks. Banks with Islamic rules also considered being more credit
worthy and these free of interest banks are less vulnerable to Return on Assets ' recurring
existence’. Yet that does not give the best vision for future plans, as the key explanation for the
low productivity ratios is Muslim who deposits money in banks does not required profit on it.
Yet as the size of operations of every Islamic bank grows, it is not appropriate for all new
depositors to expect no return on their investment either. These depositors who may not demand
returns become a privilege for Islamic banks even if the whole economy is transformed as the
borrowing costs decline and as per the Islamic banking paradigm but the principle of profit and
loss sharing also tends to offset Returns on Assets by reducing shocks and this reduces the
structural risk of the banking sector.

Kuwaiti-born Siddiqui (2008) studied Islamic bank success in Pakistan. He picked Pakistan's
largest two Islamic banks, that is, the Islamic bank Meezan and Albaraka, and both measured
asset gains and profitability on equity ratios. The findings showed that those two banks '
productivity metrics were higher than the banking industry average. Meezan bank yielded much
more effective and good results than the other.
According to anexaminer & Ariss, 2010, who developed a model of Financial Institution from
thirteen famous countries around the world, the competitiveness between Islamic and traditional
banks worldwide. This paper argues that Islamic banks are at greater risk of credit (portfolio) as
their asset base consists primarily of advances along with loan although here is a substantial gap
among the efficiency of the two forms in banking sector. For Instance, Islamic banks are no more
competitive than traditional banks. The explanation is possibly that Islamic banking continues
since its developmental phase and has not reached its complete prospective. The report has
accomplished that it sees less competition from Islamic banks compared with worldwide
markets. It provide us fulfilled that banks with Shariah have demonstrated additional resistance
to worldwide fiscal crises as they spend more in physical estate to a certain extent than fiscal
resources for the reason that there is a rule in Shariah that you can't sell anything you don't own.

Olson and Zoubi 2008 proposed an investigate in which efficiency was evaluated between asset
quality and solvency of banks in global region. Sample of 141 interest based banks and 96
Islamic banks were considered. The research also examines accounting ratios for both type of
banking systems. Accounting information similar to results is valuable not only in developed
economies but also in emerging economies. The statistics showed virtually the same findings for
both types of banks and this is clear since the two types of banks work in the same financial
climate. In fact, the Finance Regulations are the same for both. Yet the operating characteristics
of both types of banking vary. Thus the findings show that Islamic banks are more competitive
but less effective than traditional banks. Islamic banks often carry more cash with them because
of the possibility of withdrawals by consumers.

The Bank Muamlat Indonesia (Shariah financial institution) conducted a case study to compare
its competitiveness, flexibility, vulnerability and price stability to either the modern financial
institutions of Indonesia. For the specified reason the author (Suyanto, 2009) were using the
proportions that used numerous qualitative analyzes on the collected data. Its findings indicated
there's no discrepancy of importance between the BMI's competitiveness and the savings-based
banking; however the findings show that the Islamic bank's liquidity is comparatively smaller.
Third of variables were also not significantly different from traditional banks.

A research conducted by Indriani 2008 for analyzing the fast pace in Islamic banking, twenty
five banks were included from Indonesia among which two banks were based on purely Islamic
banking system. Rest of twenty two! half were based on interest based and half on interest free
banking services. Descriptive statistics and techniques for the analysis of regression were used to
analyze the results and it was found that Islamic banks are vulnerable to lower profit-rate risk.
That is because the Islamic banks are more skeptical regarding their investment returns (It is loan
that the bank disburses). The analyst argued that the "Net Profit Margin" is a major element that
determines the banks ' income risk. The report suggests banks with shariah principles doing
better performance than traditional ones. This performance is highly affected by the credit risk
and the benefit rate risk. On other side Islamic bank is growing and for this reason the risk is
reduced.

Indeed, Naceur (2003) utilized Profit for Resources (Return on Assets) also mesh Premium Edge
for deciding the gainfulness of banks in Tunisian number of 10, somewhere in the range of 1980
and 2000. As in different investigations, interior and outside factors were utilized. Inner factors
contemplated were overhead costs, absolute resources, capital proportion and advance and
liquidity proportion. Outer factors utilized were full scale monetary estimates, for example, gross
domestic product development, expansion and money related configuration. Outcome illustrate
that Net Interest Margin is adversely identified with dimension, this may proposes to enormous
bank will in universal lower like premium edges. Additionally, high net premium edges will in
general be related with banks that hold enormous money and have huge overhead costs. Large
scale monetary pointers have no effect on productivity to banks in Tunisian.

Danesh (2007) published a study of the general competitiveness of Islamic banks to their
Ordinary Partners at the Inlet Participation Gathering (GCC) during the period 2000-2006, using
the non-parametric DEA drawings. The test looks at the determinants of the success of Islamic
Financial using the approach of a second-step relapse process. When all is said in done, the
examination shows that the DEA effectiveness scores recommend that Islamic Business Banks'
proficiency is unconcerned with that of Regular Business Banks. Besides, the relapse
investigation suggests that Islamic financial proficiency in the GCC markets is uninterested. In
any case, Islamic Banks were seen as moderately productive in 2006. Furthermore, Discount
banks are proficient, regardless of whether it was Islamic or Regular.

Separated is further (Al-Ajlouni, 2009) by surveying Islamic banks ' capacity to tackle the needs
and difficulties of globalization related to finance, in order to personally intensify and limit usual
chances and hazards. The exploration prescribes the need to reinforce involvement among JIBs
and other Islamic banks abroad and reinforce the influential role of young workers in the
requisite main reforms, while shifting the responsibilities of (Shari'ah sheets supervision) from
Islamic banks to national banks (Focal Shari'ah supervision) to become.

(Badreldin 2009) This paper assesses this lack of applying initiatives. It then changes a ROE
Inspection System used in conventional banks as of now, to the present developed Islamic Banks
model and checks its suitability and assesses its usefulness. The discoveries suggest that such an
modified model be very fruitful for use in Islamic banks, and offer much better analysis and
correlation principle within the context relevant to Islamic income.

Furthermore, for the period 1994-2001, Ahmad and Hassan (2007) applying money-related
proportional measures to explain the primary organizational parallels between Islamic and
Customary Banks in Bangladesh. The inquiry presumes that Islamic banks should have their own
between bank currency showcase in addition to a generated auxiliary monetary market in order
to develop a fair connection between Islamic and Traditional banks. Because Islamic Banks work
under the customary financial rules, the exam further suggested that Islamic Banks should have a
free expert for administrative purposes other than Islamic law.