A Comparative Evaluation of Profitability of Conventional Banks versus Islamic Banks in Bangladesh

Abstract

Generally two types of banking system exist in Bangladesh: conventional banking system and Islamic banking system. The conventional banking system consists of interest based banking system. On the other hand Islamic banking system is free of interest. As a result their profitability also differs. The purpose of this study is to compare the profitability of conventional banking system with that of Islamic banking system. Total 270 bank-years are considered as sample from the 30 listed banks of DSE of which 23 are conventional and 7 are Islamic banks during the period of 2010 to 2018 (3rd quarter for 2018). The result of this study is that conventional banks are more profitable than Islamic banks. Conventional banks’ Return on Assets (ROA) and Profit Expense Ratio (PER) is significantly higher than those of Islamic banks but there is no significant difference in Return on Equity (ROE). Moreover it is also found that for conventional banks Total Equity to Total Assets (TETA) and Deposit to Total Assets (DTA) significantly affect ROA but for Islamic banks only Total Equity to Total Assets (TETA) affects ROA significantly. For conventional banks Deposit to Total Assets (DTA) affects ROE significantly and for Islamic banks Total Equity to Total Assets (TETA) and Debt Equity Ratio (DER) affects ROE significantly. This result may help these two sectors to know their position so that they can improve their present conditions. Besides, the regulatory authority will find it easier to incorporate new rules and regulations for those banking system. Further research can be done using the data of other countries where Islamic banking system exists.