Evaluation and Comparison of Financial Soundness of Islamic and Conventional Private Commercial Banks in Bangladesh: A CAMEL Approach

doi:10.34104/cjbis.020.01290140

Abstract

This article evaluates and compares the financial soundness of Islamic and conventional PCBs operating in Bangladesh based on the CAMEL approach over the period 2015 to 2019. For this purpose, the authors select a sample of 17 Conventional PCBs and 6 Islamic PCBs listed on the Dhaka Stock Exchange. In terms of composite CAMEL ratings, none of the banks is found to be strong or satisfactory in financial soundness in 2019. Out of 17 conventional banks, 13 of them are in a fair position i.e. having financial, operational, or compliance weakness and need more than normal supervision and regulation to address the deficiencies. Another 4 conventional banks are in a marginal position means that they are in serious financial problems and need close supervision and regulation. Ranking of conventional banks based on composite CAMEL ratings shows that Brac Bank Ltd. is in top position (Score 2.65) with Bank Asia Ltd. securing second position (score 2.7) while AB Bank Ltd., IFIC Bank Ltd, One Bank Ltd., and Mutual Trust Bank Ltd. are in the worst position with marginal status. Among 6 Islamic banks, 5 are in a fair position and only 1 in a marginal position in 2019. Shahjalal Islami Bank Ltd. secures the top position (Score 2.8) with fair status and Social Islami Bank Ltd. is in the worst position with marginal status. Independent sample test is used to see whether there is any significant difference between Islamic and Conventional PCBs concerning CAMEL parameters. The study finds that except for liquidity there is no significant difference in capital adequacy, asset quality, management quality, and earnings quality. The study also reveals that there is no significant difference in the average CAMEL ratings of two types of Banking. However, on average Islamic banks have better asset quality, management quality while conventional banks have better capital adequacy, earnings, and liquidity.

Highlights

According to the Organization of Islamic Cooperation (OIC) “Islamic banks is a financial institution whose status, rules and procedures expressly state its commitment to the principles of Islamic Shariah and the banning of the receipt and payment of interest on any UniversePG lwww.universepg.com of its operations.” The first Islamic bank in the modern worldwas established in Egypt named Mit-ghamr saving bank
Besides AB Bank Ltd., IFIC Bank ltd., Mutual Trust Bank Ltd. and One Bank Ltd. are in marginal status 2019
According to ownership structure, scheduled banks in Bangladesh can be classified into State-owned Commercial Banks (SCBs), State-owned Development Financial Institutions (DFIs), Private Commercial Banks (PCBs), and Foreign Commercial Banks (FCBs)

Summary

Introduction

According to the Organization of Islamic Cooperation (OIC) “Islamic banks is a financial institution whose status, rules and procedures expressly state its commitment to the principles of Islamic Shariah and the banning of the receipt and payment of interest on any UniversePG lwww.universepg.com of its operations.” The first Islamic bank in the modern worldwas established in Egypt named Mit-ghamr saving bank. According to the Organization of Islamic Cooperation (OIC) “Islamic banks is a financial institution whose status, rules and procedures expressly state its commitment to the principles of Islamic Shariah and the banning of the receipt and payment of interest on any UniversePG lwww.universepg.com of its operations.”. The first Islamic bank in the modern worldwas established in Egypt named Mit-ghamr saving bank. It was closed in1967 due to political reasons. Nasser Social Bank was established in 1971 in Egypt. Today there are more than 300 banks around the world that comply with Islamic shariah.i Islamic banks operate in more than 67 countries of the world with assets of more than 2.8 trillion dollars. Islamic banking industry accounts for one-fourth share of total deposit and investment of the entire banking industry at the end of the first quarter of 2019.ii

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Conclusion