Journal of Applied Finance & Banking, vol. 3, no.

2, 2013, 1-14
ISSN: 1792-6580 (print version), 1792-6599 (online)
Scienpress Ltd, 2013

Comparative Performance Study of

Conventional and Islamic Banking in Egypt

Mona Esam Fayed1

Abstract
The purpose of this empirical study is to analyze and compare the performance of Islamic
and conventional banking in Egypt and to find out which of the banking streams is
performing better than the other. To make appropriate comparative analysis, three Islamic
banks (Faisal Islamic Bank, ElBaraka Misr, and National Bank for Development) and six
conventional banks (National Bank of Egypt, Banque Misr, Bank of Alexandria, National
Societe Generale Bank, Arab African International Bank, Commercial International Bank)
were used during the period from 2008 to 2010. Financial ratios were estimated from
annual reports and financial statements. Seven financial ratios were used to gauge
profitability, liquidity and credit risk; and a model known as “Bank-o-meter” was used to
gauge solvency. Findings indicate the superiority of conventional banks over Islamic ones
in profitability, liquidity, credit risk management as well as solvency.

JEL classification numbers: G21

Keywords: Performance evaluation, Islamic banking, conventional banking, profitability,
liquidity, credit risk, solvency.

1 Introduction
Islamic banking started with the establishment of two financial institutions in Mit-Ghamr,
in the Nile Delta, and in Karachi from 1963-1967. In 1971, Nasser Social Bank was
established as the first bank whose establishment law prohibited interest-based activities. In
1974, an agreement was signed for the establishment of the Islamic Bank for Development

1
Assistant Professor, Faculty of Economics and Political Science, Economic Department, Cairo
University.
e-mail: monaesam@feps.edu.eg

Article Info: Received : November 4, 2012. Revised : November 29, 2012.

Published online : March 1, 2013
2 Mona Esam Fayed

in Jeddah. This bank was responsible for funding governments and started working in 1975.
In the same year, the real progress was made in this movement by the establishment of a
full- fledged Islamic bank with the name of Dubai Islamic Bank. By year 2011, the number
of Islamic financial institutions reached 500 banks, compared to 267 banks in 2003. Islamic
banking got popularity in light of its stability, as compared to conventional banking, during
the world financial crisis in 2008. It has also gained approval by international financial
institutions (IFI), professional bankers and the academic world. Islamic banking has
successfully established its identity and performed its operations distinct from its
conventional counterparts. It aims to promote and develop the application of Islamic
principles, laws and traditions to transactions of financial, banking and related business
affairs. Islamic banks, by doing so, will safeguard the Islamic communities and societies
from activities that are forbidden in Islam [1]. Now, Islamic banks are operating and
providing Islamic banking services in more than 57 countries all over the world.
Furthermore, their assets increased from 250 billion US dollars in 2004 to 319 billion US
dollars in 2005, that is with a growth rate of 27%. It is also estimated to be more than one
trillion US dollars by 2012. The Islamic banking industry’s world-wide annual growth rate
is between 15 and 20%, which is considered among the highest industry growth rates in the
world.
Although Egypt is considered the birthplace of Islamic finance, its growth has evidently
lagged. For under Mubarak’s 30-year rule, the country sought to enforce a more secular
financial system. According to a 2009 report by consulting firm McKinsey, Islamic
banking only accounts for 3 to 4 % of Egypt's $193 billion banking industry. That compares
with 46 % in the United Arab Emirates. However, following the Egyptian 25th of January
revolution, prospects are rising for Egypt to become a new hub for the booming Islamic
finance. The size of Islamic banking reached 95 billion pounds, with an increase of 2.3% as
of 2010. The amount of deposits at the Islamic banks reached 85 billion pounds,
constituting about 8.6% of total deposits at the Egyptian banking sector. Also, the amount
of Islamic finance reached 65 billion pounds, which is about 7.6% of that of the Egyptian
banking sector. There are now 14 Egyptian banks, with 211 branches, providing Islamic
banking services. They represent 9% of the total branches of banks in Egypt. Three of them
are totally Islamic banks, namely, Faisal Islamic Bank, ElBaraka Misr, and National Bank
for Development. The rest are conventional banks that either have Islamic branches or
provide Islamic banking products.
From here arises the importance of investigating the performance of Islamic banking in
Egypt, as compared to that of conventional banking. This is considered crucial for
depositors, bank managers, shareholders, investors and regulators in order to provide a
true picture of the financial position of Islamic and conventional banks in Egypt. A point
worth noting here is that that there is not a single Islamic bank enlisted among the top 100
banks of the world. In fact, the size of Islamic banks is one of the major obstacles of their
ability to interact efficiently in international markets, and keep up with increasing
developments in providing modern banking services. Therefore, it is indeed inevitable for
those in charge of the Islamic banking industry to explore future horizons with the aim of
having a clearer vision, predicting both obstacles and challenges and dealing with them
effectively.
Financial institutions are very important for any economy because they provide funds
needed to keep economies on the path of economic growth and development. Financial
ratios are indicators that reflect the financial health of any organization, including banks.
Ratio analysis, here, is not only important for depositors, but also for management to
Comparative Performance Study of Conventional and Islamic Banking in Egypt 3

improve future performance of banks. Thus, the purpose of this study is to provide a full
picture of the financial position of the Egyptian banking sector, with both its Islamic and
conventional streams. Furthermore, it aims at making investors, management and
shareholders aware of the performance of Islamic banks as compared to that of
conventional ones. Accordingly, the study explores the performance of both streams of
banking (conventional and Islamic) in Egypt during the period 2008-2010. In order to
study performance, the population is divided into two portfolios namely, conventional and
Islamic banks to conduct the analysis. The financial analysis includes measures of
profitability, liquidity management, credit risk management and solvency. The suggested
indicators for profitability are: Return on Assets (ROA), and Return on Equity (ROE). As
for liquidity management, it could be compared using loan to asset ratio (NetLTA), and
loan to deposits and borrowings ratio (NetLD&B). Credit risk management indicators
include equity to loans ratio (EQL) and percentage of impaired loans to total loans
(IMLGL). Finally, to examine solvency, the bank-o-meter adopted by Shar, et al. (2010)
is used.
The study is planned as follows: After a comprehensive introduction, structural
differences between Islamic and conventional banks, as well as elements of Islamic
banking and finance are highlighted. A literature review of empirical studies on Islamic
banking is presented in section 4. Data and methodology are tackled in section 5. The
empirical results and analysis are discussed in section 6. Finally, section 7 concludes.

2 Structural Differences between Islamic and Conventional Banks

The financial transactions of commercial banks are based on interest and the concept of
the relationship between the debtor and the lender. Accordingly, the profit of a
commercial bank is the variance between the amount of interest that has been paid to the
depositors and the interest that has been charged to the borrowers [2]. Furthermore, other
financial transactions are provided by commercial banks, including letters of credit and
guarantees, and they also produce different kinds of derivatives.
On the other hand, the Islamic banking system works according to the concept of the
partnership that emerges between the banks and the depositors. It is a relationship of
profit and loss sharing (PLS) which allows both parties to go forward in owning physical
goods and undergoing trading processes [3]. The depositors in the Islamic banking system
are recognised as entrepreneurs. Therefore, Mudaraba, Musharaka, Murabaha, Ijarah, Bai
Muajal, Bi slam and prepaid purchase are considered the best substitutes for the Islamic
banks to avoid interest, which is clearly forbidden in Islam [4]. Four main rules govern
the investment behavior of Islamic banking, namely:
a. the absence of interest-based (riba) transactions;
b. the avoidance of economic activities involving speculation (ghirar).
c. the introduction of an Islamic tax, Zakat.
d. the discouragement of the production of goods and services which contradict the value
pattern of Islam (Haram).
4 Mona Esam Fayed

3 Elements of Islamic Banking and Finance

Individual banks differ in their application. These differences are due to several reasons
including the laws of the country, objectives of different banks, individual banks
circumstances and experiences, and the need to interact with other interest-based banks.
However, there are salient features common to all Islamic banks. All Islamic banks have
three kinds of deposit accounts: current, savings and investment.
1. Current accounts: Current or demand deposits are virtually the same as in all
conventional banks. Deposit is guaranteed.
2. Savings accounts: Savings deposits operate in different ways. In some banks, the
depositors allow the banks to use their money but they obtain a guarantee of getting the
full amount back from the bank. Banks adopt several methods of inducing their clients to
deposit with them, but no profit is promised. In others, savings accounts are treated as
investment accounts but with less stringent conditions as to withdrawals and minimum
balance. Capital is not guaranteed but the banks take care to invest money from such
accounts in relatively risk-free short-term projects.
3. Investment accounts: Investment deposits are accepted for a fixed or unlimited period
of time. The investors agree in advance to share the profit (or loss) in a given proportion
with the bank. Capital is not guaranteed.
On the other hand, banks adopt several modes of acquiring assets or financing projects.
But they can be broadly categorized into three areas: investment, trade and lending.

I-Investment financing: This is done in different ways:

a) Musharaka, where a bank may join another entity to set up a joint venture, both parties
participating in the various aspects of the project in varying degrees. Profits are divided
on a pre-detemined basis, and any losses are shared in proportion to the capital
contribution.
b) Mudarabha, where the bank contributes with the finance and the client provides the
expertise, management and labor. Profits are shared by both partners in a pre- arranged
proportion, but when a loss occurs the total loss is borne by the bank.
c) Murabaha, was originally an exchange transaction in which a trader purchases items
required by an end user. The trader then sells those items to the end-user at a price that is
calculated using an agreed profit margin over the costs incurred by the trader. To be in
consonance with the principles of Islamic finance governing exchange transactions, every
Murabaha transaction must meet the following conditions: Murabaha transactions may be
undertaken only where the client of a bank wants to purchase a commodity. To make it a
valid transaction, it is necessary that the commodity is really purchased by the bank and
comes into the ownership and possession (physical or constructive) of the bank so that it
may assume the risk of the commodity. After acquiring the ownership and possession of
the commodity it should be sold to the client through a valid sale.
D) Ijarah, in the context of Islamic banking, can be defined as a process by which
“usufruct of a particular property is transferred to another person in exchange for a rent
claimed from him". In many respects, Ijarah resembles leasing as it is practiced in today's
commercial world. The distinguishing feature of this mode is that the assets remain the
property of the Islamic bank to put them up for rent every time the lease period terminates
so as not to remain unutilized for long periods of time. Under Ijarah, the bank, or the
leasing company, assumes the risk of recession or diminishing demand for these assets.
E) Istisna, is a second kind of sale where a commodity is transacted before it comes into
Comparative Performance Study of Conventional and Islamic Banking in Egypt 5

existence. However, it is necessary for the validity of Istisna that the price is fixed with
the consent of the parties. Also, the necessary specifications of the commodity are fully
settled between them.
F) Salam or Bay-Salaam, as it’s also called, is a sale whereby the seller undertakes to
supply some specific goods to the buyer at a future date in exchange for an advanced
price fully paid on the spot. Salam sale is suitable for the finance of agriculture operations,
where the bank renders great services to the farmers in their way to achieve their
production targets. Salam sale is also used to finance commercial and industrial activities,
especially phases prior to production and export of commodities. That is, by purchasing
them on Salam and marketing them for lucrative prices.

II- Trade financing: This is also done in several ways. The main ones are:
a) Mark-up, where the bank buys an item for a client and the client agrees to repay the
bank the price and an agreed profit later on.
b) Leasing, where the bank buys an item for a client and leases it to him for an agreed
period. At the end of that period, the lessee pays the balance on the price agreed upon at
the beginning and becomes the owner of the item.
c) Hire –purchase, where the bank buys an item for the client and hires it to him for an
agreed rent and period. At the end of that period the client automatically becomes the
owner of the item.
d) Sell-and-buy-back, where a client sells one of his properties to the bank for an agreed
price payable now on condition that he will buy the property back after certain time for an
agreed price.
e) Letters of credit, where the bank guarantees the import of an item using its own funds
for a client on the basis of sharing the profit from the sale of this item or on for mark-up
basis.
III-Lending: Main forms of lending are:
a) Loans with a service charge, where the bank lends money without interest but they
cover their expenses by levying a service charge. This charge may be subject to a
maximum set by the authorities.
b) No-cost loans, where each bank is expected to set aside a part of its funds to grant
no-cost loans to needy persons, such as small farmers, entrepreneurs, producers, etc., and
to needy consumers.
c) Overdrafts, are to be also provided, subject to a certain maximum, free of charge.
Other banking services such as money transfers, bill collections, trade in foreign
currencies at spot rate etc., where the bank's own money is not involved, are provided on
a commission or charges basis. Islamic banks financing is granted on the basis of either of
three modes: sharing, sale or leasing.

4 Literature Review
While several good theoretical studies on Islamic banking are available, there is a serious
shortage of empirical studies. The most important reason for the lack of empirical studies
on Islamic banking is the lack of a long and consistent time series for Islamic banks.
There are so many variations in practices of reporting financial statements that
construction of a consistent time series is a project in itself.
6 Mona Esam Fayed

Existing studies in this area are classified into two groups. The first group includes studies
that assess the performance of Islamic banks using traditional financial ratios [5 – 8].
Some of those studies compared their results with conventional banks. The second group
of studies focuses on banks efficiency and utilizes frontier analysis approaches rather than
traditional financial ratios. Studies in this group can be divided into three folds: i) studies
that evaluate efficiency of Islamic banks [9 – 12], ii) studies that assess conventional
banks’ efficiency [13 – 15], and iii) studies that compare the efficiency of Islamic with
conventional banks [8, 16 – 18].
Awan (2009) [19] analyzed the vertical growth of Islamic banking and compared it with
its counterpart conventional banking. Six newly formed Islamic banks in Pakistan and six
conventional banks of the same size were selected for the purpose of comparison. Data
relating to their performance and profitability were collected from primary and secondary
sources from 2006 to 2008. The ratio analysis technique was applied to measure the
performance of key indicators of both Islamic and conventional banks. The results of the
study were very encouraging. Islamic banks outperformed conventional banks in assets,
deposits, financing, investments, efficiency, and quality of services and recovery of loans.
It predicted the bright future of Islamic banking in Pakistan.
Iqbal (2001) [20] used data for the 1990-98 period. For this study, a sample of twelve
Islamic banks was chosen. These banks together account for more than 75 percent of total
capital as well as total assets of "private" Islamic banks and thus form a very large sample
from a statistical point of view. Therefore, it can be safely assumed that the results
derived from this sample were representative of the "Islamic banking industry". For
comparative purposes, another sample of twelve conventional banks was chosen. These
banks were chosen from exactly the same countries from where Islamic banks were
chosen. An attempt was also made to choose banks roughly of the same size as the
Islamic banks. Several hypotheses and common perceptions about the practice of Islamic
banking have been tested. The performance of Islamic banks has been evaluated using
both trend and ratio analyses. For this purpose, some objective “benchmarks” for various
ratios have been developed for the first time. The performance of Islamic banks has also
been compared with a ‘control group’ of conventional banks. It was found that, in general,
Islamic banks have done fairly well during the period under study.
Jaffer and Manarvi (2011) [21] examined and compared the performance of Islamic and
conventional banks operating inside Pakistan during 2005 to 2009 by analyzing CAMEL
test standard factors, including capital adequacy, asset quality, management quality,
earning ability and liquidity position. The financial data for the study was mined from the
banks’ financial statements existing on state bank of Pakistan website. A sample of 5
Islamic banks and 5 conventional banks were selected to measure and compare their
performance. Each year the average ratios were considered, because some of the young
Islamic banks in the sample do not have 5 years of financial data. The study found that
Islamic banks performed better in possessing adequate capital and better liquidity position,
while conventional banks pioneered in management quality and earning ability. Asset
quality for both modes of banking was almost the same. Conventional banks recorded
slightly smaller loan loss ratios showing improved loan recovery policy whereas, UNCOL
ratio analysis showed a nominal better performance for Islamic banks.
Hanif, et al. (2012) [22] analyzed and compared the performance of Islamic and
conventional banking in Pakistan. For this study, a sample of 22 conventional banks and 5
Islamic banks were selected. Key performance indicators were divided into external and
internal bank factors. The external factor analysis included studying the customer
Comparative Performance Study of Conventional and Islamic Banking in Egypt 7

behavior and perception about both Islamic and conventional banking. Internal factor
analysis included measures of differences in performance of Islamic and conventional
banks in terms of profitability, liquidity, credit risk and solvency. Nine financial ratios
were used to assess profitability, liquidity and credit risk; and a model known as
“Bank-o-meter” was used to assess solvency. In terms of profitability and liquidity,
conventional banking leads. However, in credit risk management and solvency
maintenance Islamic banking dominates. Motivating factors for customers of Islamic
banking were the location and Shari’a compliance, while in case of conventional banking
it was the wide range of products and services.
Rosly and Abu Bakar (2003) [23] found that Islamic banking scheme (IBS) banks in
Malaysia have recorded higher return on assets (ROA) as they were able to utilize
existing overheads carried by mainstream banks. As this lowers their overhead expenses,
it was found that the higher ROA ratio for IBS banks did not imply efficiency. It was also
inconsistent with their relatively low asset utilization and investment margin ratios. This
finding confirmed the contention that Islamic banking that thrives on interest-like
products (credit finance) was less likely to outshine mainstream banks on efficiency terms.
Although Islamic credit finance products may have complied with Shariah rules, their
lack of ethical content was not expected to motivate IBS banks to strive for efficiency
through scale and scope economies.
Safiullah (2010) [24] emphasised on the financial performance analysis of both streams of
banks to measure superiority. The study indicated that financial performance (business
developments, profitability, liquidity and solvency, commitment to economy and
community, efficiency and productivity) of both streams of banks is notable. Study results,
based on commitment to economy & community, productivity and efficiency, signified
that interest-based conventional banks were doing better than interest-free Islamic banks.
But performance of interest-free Islamic banks in business development, profitability,
liquidity and solvency was superior to that of interest-based conventional banks. That is,
comparatively Islamic banks were superior in financial performance to that of
interest-based conventional banks.
Samad (2004) [25] examined the comparative performance of Bahrain’s interest-free
Islamic banks and the interest-based conventional commercial banks during the post-Gulf
War period with respect to (a) profitability, (b) liquidity risk, and (c) credit risk. Nine
financial ratios were used in measuring these performances. Applying Student’s t-test to
financial ratios for Islamic and conventional commercial banks in Bahrain for the period
1991-2001, the paper concluded that there was no major difference in performance
between Islamic and conventional banks with respect to profitability and liquidity.
However, the study found that there exists a significant difference in credit performance.
Siraj and Pillai (2012) [26] investigated the presence, if any, of similarity in growth of
chosen performance indicators of conventional and Islamic banks in the Gulf Cooperation
Council (GCC) region. The study selected six Islamic banks and six conventional banks.
A comparative study was undertaken based on performance indicators such as Operating
Profit Ratio (OER), Net Profit Ratio (NPR), Return on Asset (ROA), Return on Share
capital (ROCA) and Return on Total Equity (ROE). Inferences based on analysis revealed
better performance of Islamic banking during the study period. The analysis revealed that
Islamic banks are more equity financed than conventional banks. ANOVA showed the
presence of a significant relationship in movement of selected financial indicators.
Conventional banks registered growth in revenue during the period, but could not achieve
improved profitability on account of higher provisions towards credit losses and
8 Mona Esam Fayed

impairment losses. The performance indicators were affected by financial crises as may
be noted from the recessionary trends since 2007.
Usman and Khan (2012) [27] evaluated the comparative financial performance of Islamic
and conventional banks. Profitability and liquidity ratios of Islamic banks (Mezan Bank
Ltd, Bank Islamic and Albaraka) and conventional banks (Faysal Bank, KASB and Bank of
Khyber) were used during the period from 2007 to 2009. The sampled banks were selected
on the basis of almost having equal weight of invested capital and number of existing
branches. To make substantially noteworthy results, paired sample t-tests were used. The
results showed that Islamic banks have high growth rates and profitability over the
conventional banks. Moreover, Islamic banks had high liquidity power over conventional
banks.

5 Data and Methodology

The ratio analysis is a method of calculating and interpreting financial ratios to asses bank
performance. In order to compare performance of Islamic and conventional banks in
Egypt for the period of 2008-2010, the study uses inter-bank analysis for 3 Islamic and 6
conventional banks, as reported in table 1.
Table 1: Sample of Islamic and Conventional Banks
Islamic Banks Conventional Banks
Faisal Islamic Bank National Bank of Egypt
ElBaraka Misr Banque Misr
National Bank for Development Bank of Alexandria
National Societe Generale Bank
Arab African International Bank
Commercial International Bank

The study evaluates inter-bank performance of Islamic and conventional banks in term of
profitability, liquidity, credit risk and solvency. Banks performances are measured on set
critical factors that are thought to be specific to performance of any bank. The required
ratios are calculated and necessary arithmetical and statistical workings are done to see
the performance year wise. After all the workings, there are separate values for every
bank year wise. Then, means and standard deviations are computed to measure the
performance sector wise. This gives two comparative values for each portfolio i.e. Islamic
and conventional banks on key performance indicators (KPIs), which are the basis of the
conclusion. Main source of data used in the study is secondary data extracted from
financial statements of banks. The study uses seven financial ratios to evaluate bank
performances. These ratios are grouped under four broad categories.
1. Profitability
It is one of the widely used performance indicators to measure the performance of any
business. Like all other businesses, banks earn profit when their income is more than their
expenses. Profitability ratios depict banks overall performance and efficiency. In this study,
Comparative Performance Study of Conventional and Islamic Banking in Egypt 9

profitability is measured by Return on Assets (ROA), which is equal to Net Profit/Total

Assets. ROA has been used in a lot of studies to measure the performance of banks [25, 28,
29]. Another ratio is Return on Equity (ROE), which is equal to Net Profit/Equity. ROE
measures the efficiency of banks in making profits from every unit of shareholders equity
[30]. The higher the ROE, the more efficient the bank performance is.
2. Liquidity
Maintaining liquidity in all circumstances is one of the major challenges that banks face.
Liquidity of a bank means the ability of a bank to meet the financial obligations as and
when due. Liquidity is a prime parameter of banking risk. It is measured by Net Loans to
Asset Ratio (NetLTA) calculated as Net loans/Asset Ratio. This ratio shows the percentage
of loans that are rooted in assets. The higher this ratio, the lower is the banks liquidity and
thus the more risky a bank is to higher defaults. Another ratio used is Net Loans to Deposits
and Borrowing (NetLD&B), which is equal to Net Loans/Total Deposits and Borrowing.
This ratio depicts the percentage of total deposits and borrowings that are entrenched into
non-liquid asset. The higher the LDBR, the higher is the chance that bank faces liquidity
risk.
3. Credit Risk
Credit risk is the risk of loss that arises from a borrower’s inability to meet his obligations.
For any financial institution measuring and managing credit risk is very important. The first
ratio used to gauge credit risk is Total Equity to Net Loans (EQL), which is equal to Total
Equity/Net Loans. EQL provides equity as a cushion to take in or adjust loan losses faced by
a bank. The higher the ratio of EQL, the higher is the capacity for a bank in absorbing loan
losses. The second parameter used is Impaired Loans to Gross Loans (IMLGL), calculated
as Impaired Loans/Gross Loans. This ratio indicates the percentage of nonperforming loans
or doubtful loans to gross loans that a bank has on its books. This ratio also assesses the
quality of assets or loans of the bank. The lower the ratio of IMLGL, the better is the
asset/credit performance of the bank. The ability to predict weakness and reliability of
banks in financial distress is of vital importance to central banks, creditors and equity
investors.
4. Solvency
When a bank goes insolvent, creditors often lose a portion of principal and interest
payments, while equity investors can potentially lose all of their investment. To measure
solvency of banks, a model, known as Bank-o-meter developed by Shar, et al. (2010) [31] is
used. Bank-o-meter has a quality that it uses minimum parameters and gives more accurate
results on solvency of banks. Shar, et al (2010) [31] used the following parameters in this
model:
S = 1.5* CA+1.2*EA +3.5* CAR+0.6*NPL+0.3*CI+04*LA
where ‘S’ stands for solvency
CAR stands for capital adequacy ratio
CA stands for capital assets ratio
EA stands for equity to assets
NPL stands for non-performing loans to loans
CI stands for cost to income
LA stands for loans to assets
10 Mona Esam Fayed

And 50<S<70. All banks having 'S' value greater than 70 are solvent and termed as super
sound banks, while those having 'S' value below 50 are not solvent. The area between 50
and 70 is defined as gray area because of the susceptibility to error classification [31, 32].

6 Empirical Results and Analysis

Results of the financial analysis are presented in table 2, covering the four core areas of
profitability, liquidity, credit risk and solvency through simple sectorial averages for both
streams of banking.
Table 2: Financial Performance of Islamic Versus Conventional Banking
Performance Islamic Conventional Comments
Measures Banks Banks
Profitability Conventional
ROA -1.37% 1.5% Banks lead in
ROE -28.7% 20% profitability
Liquidity Conventional Banks
NetLTA 48.43% 43.77% lead in liquidity
NetLD&B 53.37% 55.3% management
Credit Risk Conventional Banks
EQL 14.88% 15.23% lead in credit
IMLGL 36.11% 15.42% risk management
Solvency 1.15 1 Islamic Banks lead
in
solvency
management

From the previous table, it is clear that conventional banks lead in the majority of the
performance indicators. Profitability, whether measured by ROA or ROE, is higher in
conventional banks. This indicates that assets of conventional banks are capable of
yielding more return than Islamic ones. Also, conventional banks appear to be more
efficient in generating profits from every unit of shareholders equity.
Liquidity risk of portfolios of both banking streams is depicted by NetLTA and
NetLD&B ratios. NetLTA ratio of Islamic banks exceeds that of conventional banks. This
indicates that conventional banks are more liquid than Islamic ones, showing that the
latter are more tied up in loans. As for the NetLD&B ratio, it is slightly higher in
conventional banks. This shows that conventional banks face more liquidity risk than
Islamic banks. However, overall liquidity management of conventional banks is better
than Islamic banks.
Comparative Performance Study of Conventional and Islamic Banking in Egypt 11

Two different indicators were used to measure credit risk of Islamic and conventional
banking; namely, EQL and IMLGL. EQL of conventional banks is slightly more than that
of Islamic banks. This shows that conventional banks are more proficient than Islamic
banks in absorbing loan losses. IMLGL of Islamic banks is much higher than that of
conventional banks. This depicts the fact that the quality of assets or loans of the Islamic
banks is worse than that of conventional banks. Credit risk performance of conventional
banks is better than that of conventional banks.
Finally, solvency of both banking streams, measured by the Bank-o-meter, reflects the
insolvency of the whole banking sector. However, the Islamic banks have a slightly
higher value.
In this study, it was not only traced out which banking medium is performing ahead of the
other, but it was also traced out which of the banks in each banking stream is performing
better than all others in terms of profitability, liquidity, credit risk and solvency. This is
explicitly depicted in table 3.
Table 3: Leading Banks in each Banking Stream
Performance Leading Islamic Leading Conventional
Measures Banks Banks
Profitability
ROA Elbaraka Misr Commercial International
Bank
ROE Elbaraka Misr Commercial International
Bank
Liquidity
NetLTA National Bank for Banque Misr
Development
NetLD&B National Bank for Banque Misr
Development
Credit Risk
EQL Faisal Islamic Bank Bank of Alexandria
IMLGL Elbaraka Misr National Societe Generale
Bank
Arab African International
Bank
Commercial International
Bank
Solvency National Bank for Banque Misr
Development

7 Conclusion
This paper compares the financial performance of 3 Islamic and 6 conventional banks in
Egypt during the period 2008-2010. The comparison of financial measures, expressed in
terms of various financial ratios, indicates the superiority of conventional banks over
Islamic ones in profitability, liquidity, credit risk management and solvency. The findings
indicate that Islamic banks still have a long way to go.
The experience of Islamic banking in Egypt presents an aberration from the theoretical
12 Mona Esam Fayed

framework of Islamic finance and a clear deviation from its objectives. The gap between
the theoretical foundations and practice can be attributed to a set of obstacles Islamic
banks are facing; for example:
1. Shortage of experts in Islamic banking
2. Absence of accounting and auditing standards special to Islamic banks
3. Lack of uniform standard of credit analysis, especially for PLS schemes
4. Potential conflicts with the Central Bank
5. Potential conflict between conventional and Islamic banks
6. PLS-financing is unpopular with both Islamic banks and clients
7. PLS is not suitable for short term financing or for the non- profit sector
8. There is a lack of developed Islamic financial products, institutions and markets
9. Lack of knowledge of Islamic financial products
However, several solutions could be suggested to overcome some of these obstacles. To
avoid shortage of experts in Islamic banking, training institutions can be established to
qualify Islamic banking staff. The proposed center may take the form of a university or an
academy to teach Islamic banking sciences. The purpose of such academy is to prepare,
train, and graduate banking cadres that are practically and scientifically qualified for
working in Islamic Banks.
The sound efforts of the Accounting and Auditing Association of Islamic Financial
Institutions cannot be neglected in the field of developing the accounting and auditing
aspects of the Islamic financial institutions. This is evident in its introducing these aspects
and their applications by providing training opportunities. However, the Association
needs to acquire some sort of professionalism to enforce the application of the said
regulations and standards.
Moreover, potential conflicts with the Central Bank need more understanding and support
from the side of such supervisory bodies through certain effective measures. For example,
there should be a special department in the Central Bank to inspect, audit, and supervise
Islamic banks dealings. The policies of monetary reserves and the credit ceilings should
be reconsidered. There is also a great need for designing models and periodical data
sheets required from Islamic banks in agreement with the Central Bank, to satisfy both the
supervisory objectives and the nature of Islamic banking system.
Concerning the potential cooperation between conventional and Islamic banks, several
ways could be suggested to strengthen and deepen this relation. This could be done
through increasing and expanding joint investments between both systems, whether on the
governmental level or the mutual one subject to the regulations and rulings of Islamic
Sharia. Also, through increasing the automation between the two systems, so that Islamic
banks can move forward. And, finally, through establishing an advanced network for
financial banking, as well as domestic and international markets conditions, to support the
objectives of the two systems.
Last, but not least, there should be some sort of coordination among all the Islamic
banking units operating in the Islamic and non-Islamic countries on how to face the
problem of knowledge and informative advertising. Cooperation should focus on
organizing joint exhibitions to promote and market Islamic banking products and services
and introducing different modes of finance. The Islamic banking current infrastructure
can be used, such as The General Council for Islamic banks and financial institutions, the
Islamic Development Bank, and the Islamic Financial Services Council in Malaysia. In
addition to this, traditional advertising techniques will also be useful, such as the
Comparative Performance Study of Conventional and Islamic Banking in Egypt 13

audio-visual methods, direct contact with bank clients, as well as the photographed
advertising leaflets and brochures that are sent by mail to clients and placed in the bank
halls.

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