Comparative Analysis of Classified Loan and Provision for Loan between Islamic Banks and Conventional Banks of Bangladesh

Abstract

Bank is the center and base of economic activities of modern times. Without banks economic activity of any country can't run properly. Therefore nowadays every country has different kinds of banks to run its economic activities. Bangladesh has different kinds of banks like conventional banks, Islamic banks, foreign banks, government banks etc to run its economic activities. At present Bangladesh have seven Islamic banks and twenty three conventional banks. Financial strength of these banks is very important for economic growth of the country. If banks are financially weak then it has negative impact on the country's economy, on the other hand if banks are financially strong then it has positive impact on the country's economy. So defining the financial strength of these banks is very important. There are lots of factors by which financial strength of banks are determined. One of the factors is loan. Determining the performance of loan maintenance of a bank, it is possible to identify the financial strength of a bank. Now the performance of loan maintenance depends on various factors like classified loan, provision for loan etc. this report focuses on these two factors to compare the financial strength between Islamic banks and conventional banks of Bangladesh. This report shows that ratio of classified loan to total loan of Islamic banks is above 10% over the five years, whereas ratio of classified loan to total loan of conventional banks is below 5% over the five years. It is clear that ratio of classified loan is not satisfactory for Islamic banks, but it is satisfactory for conventional banks. The main reason for high ratio of classified loan of Islamic banks is ICB Islamic Bank has above 50% loan as classified loan over the last five years. This indicates conventional banks are more effective in loan maintenance than Islamic banks. Another indicator of loan maintenance is provision for loan. The report shows amount of provision for loan is increasing over the last five years for both Islamic and conventional banks. The positive thing of high provision is credit risk of banks is reducing but the negative thing is profitability of banks is reducing. If profitability of banks reduces for having high provision, it indicates that banks loan maintenance is not good. By analyzing two factors it shows that banks are not performing well in loan maintenance. The report also shows the relationship of classified loan with different variables in the regression analysis part. Classified loan is positively related with total loan, total asset & age and adversely related with total deposit, net profit and no of branches. It indicates if total loan, total asset & age increases then classified loan increases, whereas if total deposit, net profit & no of branches increases then classified loan decreases. As the loan maintenance of the two banking industry of Bangladesh is not satisfactory, therefore banks should take necessary steps to improve the condition for the welfare of the economy.