The University of Dodoma University of Dodoma Institutional Repository http://repository.udom.ac.tz

Business Master Dissertations

2017 Comparison study on the financial performance between Islamic bank and convectional banks in Tanzania: the cases of Amana and CRDB banks

Magesa, Angela Peter

The University of Dodoma

Magesa, A. P. (2017). Comparison study on the financial performance between Islamic bank and convectional banks in Tanzania: the cases of Amana and CRDB banks. Dodoma: The University of Dodoma http://hdl.handle.net/20.500.12661/339 Downloaded from UDOM Institutional Repository at The University of Dodoma, an open access institutional repository. COMPARISON STUDY ON THE FINANCIAL PERFORMANCE

BETWEEN ISLAMIC BANK AND CONVECTIONAL BANKS IN

TANZANIA: THE CASES OF AMANA AND CRDB BANKS

ANGELA PETER MAGESE

MASTER OF BUSINESS ADMINISTRATION

THE UNIVERSITY OF DODOMA

OCTOBER, 2017 COMPARISON STUDY ON THE FINANCIAL PERFORMANCE

BETWEEN ISLAMIC BANK AND CONVECTIONAL BANKS IN

TANZANIA: THE CASES OF AMANA AND CRDB BANKS

By

Angela Peter Magese

A Dissertation submitted in partial fulfilments of the requirements for the degree of

Master of Business Administration at the University Of Dodoma

The University of Dodoma

October, 2017 CERTIFICATION

The undersigned certifies that, he has read and hereby recommends for acceptance by the University of Dodoma a dissertation entitled “Comparison study on the financial performance between Islamic bank and Convectional banks in Tanzania:

A cases of Amana and CRDB banks” In partial fulfilment of the requirements for a degree of Masters of Business Administration at the University of Dodoma.

……………………………………………

Dr. Joel J Mmasa

(SUPERVISOR)

Date ……………………………………

i DECLARATION

AND

COPYRIGHT

I ANGELA P MAGESE declare that, this dissertation is my own original work and that it has not been presented and will not presented to any other university, for a similar or any other degree award.

Signature………………………………………

No part of this dissertation may be reproduced, stored in any retrieval system, or transmitted in any form or by any means without prior written permission of the author or the University of Dodoma.

ii ACKNOWLEDGEMENTS

First and foremost, thanks to Almighty God, the most gracious & merciful, for giving me the strength to carry out this research project.

Secondly, I would like to appreciate my supervisor Dr Joel Mmasa for his dedication, patience, availability and encouragement throughout the project. His suggestions and comments were invaluable to the outcome of this research project.

Special appreciations should go to my family Mr Peter Magese and Madam Lydia

Elkana for their support and encouragements.

Finally, to those whom have not mentioned does not mean that I do not value your contributions which are highly appreciated and I say thank you much.

iii DEDICATION

Dedicated to Peter and Lydia

iv ABSTRACT

The study has evaluated and compared the financial performance of Islamic banks and conventional banks in Tanzania during year 2012 to 2016, to establish whether there were significant differences between financial performances of the two banking category. Data for the study were mainly extracted from the financial statements of the sampled banks, which were the Amana Bank and CRDB. CAMEL model was employed in the analysis of the financial performances and the mean ratios of each category,were compared through inter-bank analysis. Finally, a T-test was carried out to establish whether there were significant differences between the financial performances of the two banking category. The study has found out there was a good CAMEL in banks in all performance ratios used. This study also, has found that there was a statistical significantly difference in Financial Performance between the Convectional and Islamic bank. The calculated mean of the CAMEL model found that the CRDB bank had a better financial performance than Amana bank. The t-test result also showed the statistical difference between the financial performances of the banks by using the CAMEL model.Furthermore, the study has revealed that, Conventional banks outperformed Islamic banks in overall financial performances during the study period, though there was no significant difference between the financial performances of the two banking categories. The study has implication to knowledge, theory and management practice as to improve our understandings on the comparison between Islamic banks and Conventional bank.

On the same line, it provides information on the financial performance in Tanzania banking industry context.

The study recommended to both banks to reduce expenses which will also reduce income to expenses ratio. Also based on the findings, both banking categories provided equal opportunities and are recommended to Investors, savers, borrowers among other decision makers.

v TABLE OF CONTENTS

CERTIFICATION ...... i DECLARATION AND COPYRIGHT ...... ii ACKNOWLEDGEMENTS ...... iii DEDICATION ...... iv ABSTRACT ...... v TABLE OF CONTENTS ...... vi LIST OF TABLES ...... ix LIST OF FIGURES ...... x LIST OF APPENDICES ...... xi LIST OF ABREVIATIONS ...... xii

CHAPTER ONE: INTRODUCTION ...... 1 1.1 Background of the Study ...... 1 1.1.1 The Islamic Bank ...... 2 1.1.2 CRDB Bank ...... 3 1.2 Statement of the Problem ...... 5 1.3 Research Objective...... 6 1.3.1 General Objectives ...... 6 1.3.2 Specific objectives ...... 6 1.4 Research Questions ...... 6 1.5 Significance of the Study ...... 6 1.6 Limitation of the Study ...... 7

CHAPTER TWO: LITERATURE REVIEW ...... 8 2.1 Introduction ...... 8 2.2 Theoretic Review ...... 8 2.2.1 Definition of key terms and concept ...... 8 2.2.1.1 The Principles of the Islamic Banking System ...... 8 2.2.1.2.1 Mudaraba (Speculation) ...... 9 2.2.1.2.2 Musharaka (Full partnership) ...... 9 2.2.1.2.3 Murabaha (mark-up on sale) ...... 9 2.2.1.2.4 Istisna (Manufacturing contracts) ...... 10

vi 2.2.1.2.5 Ijarah (lease financing) ...... 10 2.2.1.2.6 Quard Hassan (benevolent loans)...... 10 2.2.1.2 Islamic Banking Transactions ...... 10 2.2.1.3 Conventional Banks (Universal and Commercial Banks) ...... 12 2.2.1.4 Commercial bank ...... 12 2.2.2 Sharī‟ah Conformity and Profitability (SCnP) model ...... 13 2.3 Theory from previous study ...... 14 2.3.1 The Ratios ...... 15 2.3.1.1 Return on assets (ROA) ...... 15 2.3.1.2 Capital Adequacy Ratio (CAR) ...... 16 2.3.1.3 Non-performing loans ratio (NPL)...... 16 2.3.1.4 Operating Expense Ratio (OER) ...... 17 2.3.1.5 NIM (Net interest margin ratio) ...... 17 2.3.1.6 LDR (Loans to deposits ratio) ...... 18 2.3.2 Financial Performance of Banks in Tanzania ...... 18 2.4 Empirical Reviews ...... 20 2.5 Research Gap ...... 26 2.6 Conceptual Framework ...... 26

CHAPTER THREE: METHODOLOGY ...... 28 3.1 Introduction ...... 28 3.2 Research Approach ...... 28 3.3 Research Design ...... 28 3.4 Target Population and Sample ...... 28 3.5 Data Types and Collection Methods ...... 29 3.6 Data Analysis ...... 29

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION ...... 30 4.1 Introduction ...... 30 4.2 The CAMEL level of the banks ...... 30 4.2.1 Capital Adequacy Level of the Banks ...... 30 4.2.2 Asset Quality Level of the Banks...... 31 4.2.3 Management Quality Level of the Banks...... 33 vii 4.2.4 Earnings Quality Level of the Banks ...... 34 4.2.5 Liquidity Level of the Banks...... 35 4.3 The Financial Performance of the Islamic Banks and Conventional Banks ...... 36 4.4 Comparison of the Major Differences between the Banks ...... 38 4.4.1 Capital Adequacy Comparison ...... 38 4.4.2 Asset Quality Comparison ...... 39 4.4.3 Management Capability Comparison ...... 39 4.4.4 Earnings Quality Comparison ...... 40 4.4.5 Liquidity Position ...... 41

CHAPTER FIVE: CONCLUSION AND RECOMMENDATIONS ...... 43 5.1 Introduction ...... 43 5.2 Conclusions ...... 43 5.3 Recommendations ...... 44 5.4 Area for Further Research ...... 44 REFERENCES ...... 46 APPENDICES ...... 48

viii LIST OF TABLES

Table 4. 1: Capital Adequacy Ratio (CAR) of the banks ...... 31 Table 4. 2: Non-Performing Loan Ratio (NPL) of the Banks ...... 33 Table 4. 3: Operating Expenses Ratio (OER) of the Banks ...... 34 Table 4. 4: Return on Assets (ROA) Ration of the Banks ...... 35 Table 4. 5: Loan to Deposit Ratio of the Banks ...... 36 Table 4. 6a: Financial performance of the Banks ...... 37 Table 4.6b: T test result for the Overall Financial Performance of the Banks...... 37 Table 4. 7: T-test result of the Capital adequacy ratio (CAR) ...... 38 Table 4. 8: T-test Result of the Non-Performing Loan Ratio (NPL) of the Banks .... 39 Table 4. 9: T-test Result of the Operating Expenses Ratio (OER) ...... 40 Table 4. 10: T-test Result of the Return on Asset (ROA) of the Banks ...... 41 Table 4. 11: T-test Result of the LDR ratio ...... 42

ix LIST OF FIGURES

Figure 2. 1: Sharī‟ah Conformity and Profitability (SCnP) model ...... 14 Figure 2. 2: Schematic Diagram Showing the Relationship between Variables...... 26

x LIST OF APPENDICES

Appendix I: External Examiner Corrections ...... 48

xi LIST OF ABREVIATIONS

AIG American International Group

BOT Bank of Tanzania

CAMEL Capital adequacy, Asset quality, Management quality, Earnings,

Liquidity

CAR Capital Adequacy Ratio

CRDB Cooperative and Rural Development Bank

DBS Directorate of Banking Supervision

DSE Dar es Salaam Stock Exchange

GDP Gross Domestic Product

IMF International Monetary Fund

LDR Loans to Deposits ratio

NIM Net Interest Margin ratio

NPL Non-Performing Loans ratio

OER Operating Expenses Ratio

ROA Return on Assets

ROI Return on Investment

URT United Republic of Tanzania

WB World Bank

xii CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The banking sector, has a strong effect on the economy of any country due to the fundamental role of this sector in enhancing the overall economy, including out of mediation and financial transactions that are indispensable for the economy of any country (Monnin and Jokipii, 2010).

Therefore, a bank can be defined as a financial institution that trades with the money of the investors, and aims to work as a financial broker between the people who have a surplus of money (depositors) and whom have a requirement to cover their financial needs (borrowers) (Albertazzi and Gambacorta, 2010).

The bank is considered the most important financial institution accordingly that manages the money of investors, and the profit of banks will be the difference between the interest that has been paid by the borrowers and that has been paid to the depositors.

Moreover, a bank introduces many financial facilities and services to their customers, such as credit services, cashing cheques, issuing letters of credit and letters of guarantee, safety deposit boxes, portfolio management, foreign currency exchange services, acquisition of commercial papers, bank acceptance and underwriting of financial instruments (Bendi and D'Agnolo, 2008).

Before the establishment of banks, the financial activities were handled by money lenders and individuals. Again, there were no security of public savings and no uniformity regarding loans. So as to overcome such problems an organized banking sector was established, which was fully regulated by the government. Therefore, the

1 banking sector is not a static rather is a dynamic. It is a product of centuries and the development which has taken place worldwide.

It is also the product of the method of trial and error and experiences, which were made and the subsequent results related to the acceptance of money and valuables as deposits, keeping them as such, lending them, whether to private individuals or to states or other bodies and for controlling the multifarious and multi-dimensional activities, which in the beginning were only trivial and could be ignored.

However, with the growth of time, it became international in character and multi- dimensional in nature calling for actions on the part of the states, actions on the part of the individuals failed and state control became eminent.

1.1.1 The Islamic Bank

Islamic banking, is a system of banks governed and guided by the Islamic laws

(Sharia). For the banks to be considered to be offering Islamic services they are required to conform to the Islamic rules and norms; in other words, they are required to make religious features integral to their operations (Mzee 2016).

The Islamic banking system operates according to Islamic laws and Islamic sharia.

Islamic financial institutions consequently derive their rules and principles of the

Holy Quran and the sayings of the prophet Mohammad. Hence, Islamic laws prohibited Riba (interest), Gharar (risk) and Maysir (gambling) due to the negative effect of these three issues to the investor (Gait and Worthington, 2008)

The nature of the relationship between customers and the Islamic bank, is different from that of the Conventional banks. Indeed, for the conventional banks the relationship is that of a bank and borrower/depositor, whereas for Islamic banks the relationship is that of a bank and a partner (Mzee, 2016).

2 In other words, in Islamic banking, customers are regarded as investors and entrepreneurs. Therefore, in Islamic banking, banks usually provide financing through participation whereby investors and banks, provide capital jointly to carry out business and share profits generated or losses incurred according to pre-agreed ratio.

In Tanzania, Amana Bank is the first full-fledged Islamic bank to have acquired a commercial banking license from the Bank of Tanzania (BoT). Many other banks have established Islamic windows and these are such as the National Bank of

Commerce, Stanbic Bank, Kenya Commercial Bank, Bank of Baroda etc.

They operate within the established conventional system. Furthermore, there are many applications routed through the BoT for licenses either to operate Islamic windows or full-fledged Islamic banks (BOT,2011)

In Tanzania, logically, Islamic banking can only be adequately accommodated if country‟s policies and laws, are aligned to reflect the nature of Islamic banking. This can be done if the principles of Islamic banking and the existing principles of conventional banking are harmonized.

These facts, serve as a premise upon which the researcher builds a motive to conduct this study with an aim of finding out the challenges Islamic banking, poses to the existing legal and regulatory regime that would weigh down smooth operation of the banking sector (Smolarski and Schapek, 2006).

1.1.2 CRDB Bank

CRDB LIMITED is a private commercial bank. The Bank was established on July

1st 1996 to succeed the former Cooperative and Rural Development Bank (CRDB),

3 which was a public institution with a majority of shares held by the Government of the United Republic of Tanzania.

The succession was a result of the liberalization of the banking industry in Tanzania.

The liberalization, which followed the enactment of the Banking and Financial

Institutions Act (BFIA) of 1991 and the Government‟s policy, to divest its interest in the sector, prompted a recapitalization of the Bank to levels stipulated by the BFIA

(1991).

CRDB, has been blessed with an invaluable partnership from the Danish

International Development Agency (DANIDA). DANIDA‟s commitment and support in technical, managerial and financial areas of the Bank's operations has been instrumental for the success of CRDB LIMITED.

DANIDA therefore, was fundamentally involved in CRDB‟s restructuring as demanded by the BFIA (1991). The restructuring, which started in 1992, aimed at a more efficient organizational system, better returns to shareholders and the overall improvement in the financial performance of the Bank. The exercise involved.Organizational restructuring where the organizational structure was comprehensively decentralized and designed, to make the Bank more customer oriented, more accountable and with ability to compete in the free market economy.

Operational restructuring, where operational policies and procedures were streamlined to make the Bank more efficient and customer oriented in its operations.

Financial restructuring, where the bank was to start operating a sound financial basis and fulfilled conditions and measures of financial soundness mainly as outlined by

BFIA (1996).

4 1.2 Statement of the Problem

Financial performance of a company, being one of the major characteristics, defines competitiveness, potentials of the business, economic interests of the company‟s management and reliability of present or future contractors (Dufera, 2010).

Therefore, financial performance analysis and identification of their weaknesses and strengths by using a financial performance indicators, has its contribution to the management, shareholders, the public (customers of the bank), the regulator (the government), the financial sector, and the economy as a whole. (Sangmi & Nazir,

2007)

In a competitive financial market, a bank‟s performance provides signal to depositors and investors whether to withdraw or invest funds respectively from the bank.

Similarly, it flashes direction to bank managers, whether to improve its deposit service or loan service or both.

Regulators are also interested in the financial health of banks for regulation purposes.

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise, that is useful to a wide range of users in making economic decisions. (Srinivas, 2010)

Owners, and managers require a financial performance to make important business decisions that affect its continued operations. Financial analysis, which measure financial performance, is then performed with these statements to provide management with a more detailed understanding of the figures. Furthermore, the rationale of financial analysis is to diagnose the information contained in financial statement so as to judge the future earnings, ability to pay interest, debt maturities, profitability and sound dividend policy (Nimsith et al., 2015)

5 Although a few studies have been made as related to the financial performance analysis of banks, such as a performance comparison between the Islamic Bank and

Conventional Banks such studies in Tanzania, still remains unexplored.

Therefore, the aim of this study was to compare financial performance of Islamic

Bank and Conventional Bank in Tanzania, to provide some comments by observing several financial ratios, analyzing trends of various elements of financial performance results of Amana Bank and CRDB bank, and to improve its banking business. Hence, this became the basis of the study.

1.3 Research Objective

1.3.1 General Objectives

The purpose of this study, was to compare the financial performance of Islamic bank and Convectional bank in Tanzania.

1.3.2 Specific objectives

The specific objectives of the study are to;

i. Analyze CAMEL level of the banks? ii. Evaluate the financial performance of the Islamic banks and conventional banks iii. Compare major differences between the banks

1.4 Research Questions

i. What is the CAMEL level of the banks? ii. What are the financial performance Islamic Banks and Convectional banks? iii. What are the major differences between the banks?

1.5 Significance of the Study

The study, has significantly to knowledge, theory and management practice. On the side of knowledge contribution, the findings of the study, improve our 6 understandings on the comparison between Islamic banks and Conventional bank.

On the same line, it provides information on the financial performance in Tanzania banking industry context.

1.6 Limitation of the Study

Time allocated for data collection, were very short compared to the importance and tedious work of data collection. To overcome this, the study focused on a case study research design.

7 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This section, focuses on and highlights the researches that have been conducted on the subject. This gives an idea of Islamic and Conventional banks and their financial performances in different regions during different periods.

2.2 Theoretic Review

2.2.1 Definition of key terms and concept

2.2.1.1 The Principles of the Islamic Banking System

The Islamic banking system operates according to Islamic laws and Islamic sharia.

Islamic financial institutions consequently derive their rules and principles from the

Holy Quran and the sayings of the prophet Mohammad. Hence, Islamic laws prohibited Riba (interest), Gharar (risk) and Maysir (gambling) due to the negative effect of these three issues on the investor (Gait and Worthington, 2008).

Gait and Worthington (2008), define Riba (interest) as large or small increases on the value of the initial loan to the borrower, who must pay this money to the lender.

Therefore, Islamic finance prohibits any excess or fee on the value of the initial loan due to the negative effect this would have on the borrower.

Furthermore, Gharar (Risk) is selling items or products whose futures are uncertain, which may cause risk to the buyer and make this trading the same as gambling.

Finally, Maysir (betting or gambling) is forbidden in Islamic finance due to the ambiguity of this type of trading, which does not guarantee returns.

Therefore, Riba (interest), Gharar (Risk) and Maysir (Gambling) are considered as the main three issues that are forbidden in Islamic finance and if these three

8 principles are prevented in the bank then it will become a proper Islamic banking system (Cattelan, 2009).

However, the Islamic banking system applies many types of financial methods which comply with the Islamic laws in order to avoid interest between the borrower and the bank, such as Mudaraba, Musharaka, Murabaha, Istisna, Ijarah and Quard Hasson

(Smolarski and Schapek, 2006).

2.2.1.2.1 Mudaraba (Speculation)

Mudaraba is a contract between the borrower and the bank in order to provide financial resources to the borrower. Profits and losses will be shared between the two parties according to a specific percentage which they agree upon from the beginning of the process; the investor will be responsible for all the financial losses and the other party will be responsible for all the operating losses (Vinnicombe,

2010).

2.2.1.2.2 Musharaka (Full partnership)

Musharaka, can be defined as a full partnership between the bank and the investor in the profit and loss depending on the percentage that they agree upon. In general, it is seen as co-operation or a joint process between the Islamic bank and the client, in order to conduct certain transactions. It is possible that an Islamic bank can perform as the money provider to finance different kinds of industries (Ibrahim, 2008).

2.2.1.2.3 Murabaha (mark-up on sale)

Murabaha is a kind of contract that is created to help people whom are not able to buy a property on their own; in this type of contract, the bank will purchase the property at a disclosed price and will increase the price for their clients (Vinnicombe,

2010).

9 2.2.1.2.4 Istisna (Manufacturing contracts)

Istisna is one of the Islamic financial transactions; in this type of contract the bank will provide the investors with the required industrial materials, in order to start their business with advance cash payments or by deferred payments and date of delivery

(Gait and Worthington, 2008).

2.2.1.2.5 Ijarah (lease financing)

Ijarah, is a payment for a rental contract between the two involved parties, where the owner of the assets (such as building or the offices), leases the assets to the lessee, who uses the assets (Ibrahim, 2008).

2.2.1.2.6 Quard Hassan (benevolent loans)

Quard Hassan, is a type of lending; in this type of lending the bank introduces the money to those whom need the money to decrease their difficult financial situation.

Furthermore, the bank can lend the money based on zero-interest to any of the societies for different aims, including money for expenditures related to education or marriage (Ibrahim, 2008).

2.2.1.2 Islamic Banking Transactions

The financial transactions of Islamic banks, have developed since the first Islamic bank was opened in order to introduce the best services to their customers according to Islamic laws.

Therefore, the Islamic banking system depends on the investment of the money belonging to the shareholders and depositors. consequently, several studies have discussed the financial resources of Islamic banks and the usage of this money.

According to Gait and Worthington (2008), the three basic methods of Islamic deposit accounts are as follows: 10 i. An Islamic current account, is considered a service to provide a facility for

depositors to make transactions, such as transference of funds and paying

cheques in and out of the account. This account could be paid on demand

without any interest paid to the depositors. It is also possible to keep these

accounts in the form of foreign currency, in order to make it easier to conduct

international trade.

ii. An Islamic savings account is the same as a commercial savings account.

However, this savings account introduces to the customer benefits and

services instead of interest due to the prohibition of interest. iii. An Islamic investment deposit account, is a special account for a customer

who wants to make an investment by using their own money, according to the

concept of profit and loss sharing. Therefore, Islamic investment accounts are

divided into two types as follows:

 Specified investment accounts:

In this type of account, the bank will be responsible for the investment of the

customer‟s money in a specific investment, or in conditional investments, in

specific projects or specific sectors.

 Unspecified investment accounts:

This account, introduces to the customer the opportunity to grant the bank the

full authority for the investment, with regard to the bank‟s ability and wishes

to invest in any relevant transaction.

11 2.2.1.3 Conventional Banks (Universal and Commercial Banks)

Definition: Universal bank, is a banking system in which banks provide a wide variety of financial services, including both commercial and investment services. Universal banking is common in some European countries, including Switzerland. In the

United States, however, banks are required to separate their commercial and investment banking services. Proponents of universal banking argue that it helps banks better diversify risk. Detractors think dividing up banks' operations is a less risky strategy

2.2.1.4 Commercial bank

A Commercial bank is a financial institution that provides services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts and certificates of deposit. The traditional commercial bank is a brick and mortar institution with tellers, safe deposit boxes, vaults and ATMs. However, some commercial banks do not have any physical branches and require consumers to complete all transactions by phone or Internet. In exchange, they generally pay higher interest rates on investments and deposits, and charge lower fees.

What we can find here is that commercial bank‟s services are done by those universal banks, but universal banks‟ activities some are not done by those with commercial banks. Universal banks are wider than commercial banks.

Therefore, we observe a conventional bank comprises both universal and commercial banks. But many writes takes the name of conventional banks as same as commercial banks

12 2.2.2 Sharī’ah Conformity and Profitability (SCnP) model

In the study, the theory applies with the Sharī‟ah Conformity and Profitability

(SCnP) model, to measure the financial performance of the banks,which was used by the Kuppusamy, Saleh, and Samudhram (2010). Kuppusamy, Saleh, and Samudhram

(2010), whom have stated that, nonIslamic banking performance measures are sufficient indicator of profitability, business strength and stability, while the Islamic bank adhered to Sharī‟ah principles. In this model, there are four different types to identify the Sharī‟ah Conformity and Profitability model. They are:

i. High profitability banks which have a good Sharī‟ah compliance ii. High profitability banks which have a weak Sharī‟ah compliance iii. Low profitability banks which have a good Sharī‟ah compliance iv. Low profitability banks which have a weak Sharī‟ah compliance

13 Figure 2. 1: Sharī’ah Conformity and Profitability (SCnP) model

High Profitability

LOWER LEFT LOWER LEFT

QUADRANTS BANKS: QUADRANTS BANKS:

Weak Sharī‟ah conformity Good Sharī‟ah conformity

& low profitability & High profitability

Weak Sharī’ah conformity Good Sharī’ah conformity

LOWER LEFT LOWER LEFT

QUADRANTS BANKS: QUADRANTS BANKS:

Weak Sharī‟ah conformity Good Sharī‟ah conformity & & High profitability low profitability

Profitability

2.3 Theory from previous study

Turen (1996) used the financial theory as the framework to examine the performance and risk analysis of the Islamic banks in Bahrain; risk and return have linear relationship. Low risk is associated with low return and high risk consequently brings high return. Rosly and Bakar (2003) used two concepts to examine the performance of Islamic and mainstream banks in Malaysia. First is the concept of X-efficiency, which deals with the management of banks inputs, namely deposits, labour and capital while scale and scope examines how the size and type of bank assets are able to reduce costs and thereby increasing profits. Second is equivalent counter value concept, any profit created from a trade and commerce must contain an equivalent counter value. Kuppusamy, Saleh, and Samudhram (2010) used Sharī‟ah Conformity 14 and Profitability (SCnP) model as the framework to measure the performance of

Islamic banks. Four different types of Islamic banks are separated and identified in the Sharī‟ah Conformity and Profitability model. Those are:

i. High profitability banks that have good Sharī‟ah compliance.

ii. High profitability banks that have weak Sharī‟ah compliance.

iii. Low profitability banks that have good Sharī‟ah compliance.

iv. Low profitability banks that have weak Sharī‟ah compliance

2.3.1 The Ratios

The ratios used, were chosen based on the availability of data for the computation in the financial statements of the sample banks. Another reason was that, they are widely used 30 ratios according to many studies, that were reviewed and this can provide a basis for comparison. The ratios for each CAMEL component can be described as follows;

2.3.1.1 Return on assets (ROA)

A high ratio indicates that the business was earning more money and investing less on assets. It is an indicator of the asset intensity of a company. Manufacturing firms usually have a lower return on assets as they require a huge investments in assets compared to the service industries. A low ratio shows that the company is more asset-intensive.

A high percentage indicates that the company was less asset-intensive. It also means that lesser investments are needed in assets to make profits. In the industry, as a general rule, return on assets ratio below 5% indicates that, the company is an asset heavy and above 20%indicates that the company is asset-light (Dogra, 2013).

15 ROA helps to determine a lot of factors as well as aids in taking certain decision related to business and investment, including the assessment of asset management, determination of investment decisions, profit indication and determination of shareholder‟s profit.

2.3.1.2 Capital Adequacy Ratio (CAR)

CAR is measure of a bank's capital. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.

Capital adequacy ratio, is the ratio which determines the bank's capacity to meet the time liabilities and other risks such as credit risk, operational risk etc. In the more simple formulation, a bank's capital is the "cushion" for potential losses, and protects the bank's depositors and other lenders. Banking regulators in most countries define and monitor CAR, to protect depositors, thereby maintaining confidence in the banking system (Wikipedia, 2013).The regulatory CAR for Tier 1 capital is 10% and for tier 1 and tier 2 capital combined is 12% according to BOT standards.

2.3.1.3 Non-performing loans ratio (NPL)

NPL, is the sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default. Once a loan is nonperforming, the odds that it will be repaid in full, are considered to be substantially lower. If the debtor starts making payments again on a nonperforming loan, it becomes a re-performing loan, even if the debtor has not caught up on all the missed payments.

16 2.3.1.4 Operating Expense Ratio (OER)

The financial ratio known as the operating expense ratio, or OER, is considered as a measurement of management efficiency.By using information found on the income statement, this metric looks at the ratio of operating expenses to net sales. While management can take certain actions to control expenses, the price of a product or service is typically a function of market demand.

The operating expense ratio allows investors and analysts to understand how efficiently a business was able to produce goods or supply services. When viewed over time, the operating expense ratio can also reveal if the management was able to expand operations without dramatically increasing expenses.

If revenues were to expand year-over-year and the OER goes down; this would indicate that management was able to scale production efficiently; revenues expanded more quickly than expenses increased. This is a very positive outcome from a profitability standpoint.

2.3.1.5 NIM (Net interest margin ratio)

Net interest margin is the ratio of net interest income to invested assets. Banks are keenly interested in their net interest margins because they lend at one rate and pay depositors at another. However, comparisons between net interest margins of different banks are not always useful because the nature of each bank's lending and deposit activities varies.

Net interest margin is a measure of an investing strategy's success, especially when investors are attempting to "arbitrage" the market by borrowing at a rate that they believe was below what their potential returns will be (Investing Answers, 2013).

The net interest margin (NIM) measures how large the spread between interest

17 revenues and interest costs, that management has been able to achieve by close control over earning assets and the pursuit of the cheapest sources of funding (Rose et al., 2006).

2.3.1.6 LDR (Loans to deposits ratio)

LDR (Loans to deposits ratio) is a ratio between the bank‟s total loans and total deposits. If the ratio is lower than one, the bank did not borrow money first from another bank in order to then loan it further to its customers, but did only use its own deposits. If, on the other hand, the ratio is greater than one, the bank did not use only its deposits, but it first borrowed additional money from another bank and loaned it to its customers at higher rates. Banks may not be earning as much as they could be, if the ratio is too low; on the other hand, if the ratio is too high, it means that, banks might not have enough liquidity to cover any unforeseen fund requirements or in case of crisis. It is a commonly used statistic for assessing the bank's liquidity. Based on reading different theories on profitability and CAMEL, expectations of how the independent variables will affect the dependent variable are predicted.

2.3.2 Financial Performance of Banks in Tanzania

Financial soundness is a situation where depositors‟ funds are safe in a stable banking system. The Financial soundness of a financial institution may be strong or unsatisfactory varying from one bank to another (BOT, 2002).

Some useful measures of financial performance, which is the alternative term as financial soundness, are coined into what is referred to as CAMEL. The acronym

"CAMEL" refers to the five components of a bank's condition that are assessed:

Capital adequacy, Asset quality, Management, Earnings, and Liquidity. The sixth component,is the bank's Sensitivity to market risk, was added in 1997; hence, the

18 acronym was changed to CAMELS. Ratings are assigned for each component in addition to the overall rating of a bank's financial condition (Jose, 1999). The ratings are assigned on a scale from 1 to 5.

Capital Adequacy:

This ultimately determines how well financial institutions can cope with shocks to their balance sheets. The bank monitors the adequacy of its capital using ratios established by The Bank for International Settlements. Capital adequacy in commercial banks, is measured in relation to the relative risk weights assigned to the different category of assets held both on and off the balance sheet items, as per the

Financial Institution‟s Act of 2004. (Bank of Uganda, 2002).

Asset Quality:

The solvency of financial institutions typically, is at risk when their assets become impaired, so it is important to monitor indicators of the quality of their assets in terms of overexposure to specific risks trends in non- performing loans, and the health and profitability of bank borrowers especially the corporate sector.

Credit risk is inherent in lending, which is the major banking business. It arises when a borrower defaults on the loan repayment agreement. A financial institution whose borrowers default on their repayments may face cash flow problems, which eventually affect its liquidity position. Ultimately, this negatively impacts on the profitability and capital through extra specific provisions for bad debts (Bank of

Tanzania, 2002).

19 Earnings:

The continued viability of a bank, depends on its ability to earn an adequate return on its assets and capital. Good earnings performance enables a bank to fund its expansion, remain competitive in the market and replenish and /or increase its capital

(Bank of Uganda, 2002).

A number of authors have argued banks which must survive need: Higher Return on

Assets (ROA)., better return on net worth/Equity (ROE), sound capital base i.e. the

Capital Adequacy Ratio (CAR), adoption of corporate governance ensuring transparency to stakeholders that is the equity holders, regulators and the public.

Liquidity:

Solvent financial institutions initially may be driven towards a closure by poor management of short-term liquidity. Indicators should cover funding sources and capture large maturity mismatches. An unmatched position potentially enhances profitability but also increases the risk of losses (The Tanzania Banker, June 2001).

The “M” represents Management, given that this paper is hinged on financial performance, the management component in not considered in the measure. Capital

Adequacy, Earnings and Liquidity are the key dimensions of measuring financial performance in Commercial Banks (Rogers Matama, 2008).

2.4 Empirical Reviews

Bank performance can be measured by using both qualitative and quantitative techniques. Numerous studies have been done on the different determinants of bank performance measured in term of; profitability, growth, efficiency, liquidity, credit risk performance, and solvency. Several variables and statistical techniques additionally have been used for analysis and results are drawn from them aiming at 20 performance evaluation. Profitability, however, is the ultimate goal of any bank, so there has been a widespread interest by several scholars and researches to use it as a foremost bank performance indicator.

Prior studies on bank performance and profitability have tackled the impact of attributes such as firm-specific and macroeconomic variables as significant determinants of bank profitability.

Based on an extensive comparative studies between the performance of Islamic and

Conventional banks, there is a general agreement in the literature that, Islamic banks are superior to Conventional banks in terms of their performance as concluded by

Samad and Hassan (2004) and Safiullah (2010). On the other hand, there are several other studies indicating no significant differences in the performance of the divergent banking systems, while others claim that CBs are still superior to IBs in terms of their performance.

Similar results were reported by Safiullah (2010) in Bangladesh. showing that operational efficiency was a significant determinant of profitability, and that conventional banks were doing better than Islamic banks based on productivity and operational efficiency.

Hassan et al (2010) attempted to examine the performance of Islamic banks (IBs) and

Conventional banks (CBs) during the recent global crisis by observing at the impact of the crisis on profitability, credit and asset growth, and external ratings. They concluded that IBs have been affected differently than CBs. Factors related to IBs„ business model helped limit the adverse impact on profitability in 2008, while weaknesses in risk management practices in some IBs led to a larger decline in

21 profitability in 2009 compared to CBs. IBs' credit and asset growth performed better than did that of CBs in 2008–09, contributing to financial and economic stability.

Kassim and Abdulle (2012) conversely conducted a similar comparative analysis on the impact of the 2008 crisis in Malaysia and documented two main findings, "there was no a major difference in profitability and credit risk among the two types of the banking institutions due to the financial crisis; and IBs banks, were holding more of the liquid assets than their conventional counterparts, thus were less exposed to the liquidity risks due to the financial crisis". Hence, this might be a driving factor behind Islamic banks' rapid success in the global financial crisis as compared with conventional banks.

Manarvi & Muhammad (2011) and Momeneen & Jaffar (2011) compared the performance of the Islamic and the conventional banks in Pakistan by using the

CAMEL test. They both concluded that the Islamic banks were better in processing any adequate capital and present a better liquidity position of IBs, as compared to

CBs in Pakistan, however CBs pioneered in management quality and earning ability, while the asset quality for both streams of banking was almost the same.

These findings are also consistent with the results of Ika and Abdullah (2011) which concluded that, IBs in Indonesia were more liquid than CBs and have a better liquidity management practices.

Akhtar, Ali & Sadaqat (2011) did a comparative analysis of Islamic and

Conventional banks by focusing on the importance of the firm size, networking capital, return on equity, capital adequacy and return on asset with liquidity risk management. Results indicated that the bank size and networking capital to net assets have a positive but insignificant relationship with liquidity risk. Whereas the

22 capital adequacy in CBs and return on asset in IBs, has a positive and significant relationship with liquidity risk.

In a study by Javaid, Anwar and Zaman (2011) to discover the main determinants of the profitability of banks in Pakistan by using internal factors only (the impact of assets, loans, equity, and deposits on profitability).

The empirical results showed that, these variables have a strong influence on the profitability. However, they concluded that, higher total assets may not necessarily lead to higher profits due to diseconomies of scales and that higher loans contribute towards higher profitability however their impact was not significant.

Ali, Akhtar and Ahmed (2012), respectively also studied the determinants of profitability of banks in Pakistan however by using both internal and macroeconomic variables. The study, documented a significant effect of capital adequacy ratio, credit risk, asset management, GDP and consumer price index with profitability when measured with return on assets (ROA) and significant relation of operating efficiency, asset management and GDP with profitability, when measured with return on equity (ROE).

Rahman, Farzand, Kurshed and Zafar (2012) further, evaluated the effect of banks- specific and macroeconomic variables on the profitability of IBs and CBs in Bahrain; by using liquidity, capital adequacy and expenses management as internal factors and ownership, firm size and external economic conditions as external determinants.

The study concluded that variables used in the model had a strong effect on the profitability and higher total assets may not be positively related to higher profit because, as assets of the bank increased there may be inefficiency in the bank management. However, profitability and the size (total asset) of the financial

23 institution was found to have a positive relationship, in addition to efficient expense management and the macroeconomic factor, inflation rate.

Shaista and Umadevi (2013), attempted to analyze the differences in bank characteristics of Islamic and Conventional banks in Malaysia, in terms of profitability, capital adequacy, liquidity, operational efficiency and asset quality, corporate governance issues and economic conditions. Findings of the study revealed that the return, on average assets, bank size and board size values of Conventional banks was higher compared to Islamic banks. The other variables- operational efficiency, asset quality, liquidity, capital adequacy and board independence-, were higher for Islamic banks.A significant differences between the two bank types were found for all the variables, except for profitability and board independence. All variables except for liquidity, board characteristics and type of bank, were found to be highly significant in affecting profitability. However, contrasting results were found for the independent t-tests and regression analysis. These findings are consistent to those of Almazari (2014) on Saudi and Jordanian banks as the study also reported that capital adequacy, asset quality and liquidity had a significant impact on profitability.

Faizulayev (2011) also carried a comparative study between IBs and CBs in several countries by using the CAMEL framework.

By utilizing regression analysis to evaluate the impact of profitability determinants and ANOVA tests, to measure the significance he concluded that CB are different than IBs in terms of capital adequacy, asset quality, earnings quality, liquidity quality and management quality and IBs are less liquid than CBs because they were dealing mostly with long term investment.

24 Furthermore, he indicated that the moderating effect of bank type had a significant impact on the bank performance.

Anouar Hassoune(2002), studied the volatility of Islamic banks in terms of return on equity ROE and return on assets ROA by comparing with Conventional peers in 26

GCC countries. He used ROE as efficiency measure and ROA as profitability measure. Moreover, he found that, Islamic banks were more profitable than

Conventional banks with the same structure of a balance sheet. And he explained his empirical results in a way that, Islamic banks got benefits from imperfection of market. Furthermore, he found that, Islamic banks had weakness in terms of liquidity, concentration risks and operational efficiency.

Rima Turk Ariss (2006), analyzed a competitive condition prevailing in Islamic and

Conventional global banking markets by observing into difference of profitability measure between Islamic banks and Conventional banks. Findings suggest that,

Islamic banks were allocating a large amount of their assets to finance activities such as, Musharaka, Mudaraba, Ijara and etc. in comparison with Conventional peers and

Islamic banks are better capitalized.

In other words, Islamic banks are greatly exposed to credit risks, Generally, he examined the difference of Islamic and conventional banking markets and they came up with that, Islamic global banking market showed evidence of being more concentrated and less competitive banking segment in contrast to Conventional ones.

M.S. Moin(2007), measured the performance of first Islamic bank in Pakistan with comparison of 5 conventional banks. The performance measure of this study was in the field of profitability, liquidity, risk and efficiency by using financial ratios. He found that conventional banks were more profitable and significantly different from

25 first Islamic bank in terms of ROE. His findings showed that Islamic banks were getting closer with Conventional ones in terms of profitability. He found also a positive relationship of net profits with profitability indicator, ROE. However, he did not find any difference between Islamic bank and conventional banks in term of liquidity, loan to deposit ratio. Conventional banks are more risky and less solvent than Islamic bank due to a high profitability.

2.5 Research Gap

Evidence regarding the performance of Islamic banks relatively to conventional banks is limited and inconclusive. This research therefore fills the gap in the literature by investigating questions to which previous studies had failed to provide an adequate answers.

A detailed literature review conducted by researchers, indicated that, there was a death of studies conducted in Tanzania by the comparing performance of Islamic vis-a-vis Conventional banks. Studies conducted in Dodoma will bring out an inconsistence results. To resolve the above issues and to smooth the inconsistencies, this study has been undertaken

2.6 Conceptual Framework

According to Umar Sekaran (2003), a conceptual framework is logically developed described and explain the network of the relationship among variables of interest to the research study. It is therefore, the conceptual model which shows how one theory or makes a logical sense of relationship among the several factors which have been identified as an important to the problem.

26 Figure 2. 2: Schematic Diagram Showing the Relationship between Variables

INDEPENDENT DEPENDENT VARIABLE

VARIABLE

Bank specific Bank variables performance

 Capital Indicators Adequacy

 Asset Quality ROA  Management ROE Quality  Earnings NIM

 Liquidity

Moderating variables

Islamic Vs. Conventional

Bank Source: From the Literature Review, 2017

27 CHAPTER THREE

METHODOLOGY

3.1 Introduction

Research methodology, is a science of studying how research is done scientifically.

In this study,the research methodology consisted of the study area, research design, study population, sampling and sampling techniques, data collection, data analysis and presentations.

3.2 Research Approach

The decision to choose a specific methodology is based on its suitability to answer the research questions (Bryman, 2000. A Quantitative research, is based on the measurements and the analysis of a causal relationship between variables (Berg,

2001). Based on the above facts, therefore, this study has involved a quantitative research approach.

3.3 Research Design

A Research design, is the conceptual structure within which research is conducted; it constitutes the blueprint for the collection, measurement and analysis of data. As such the design includes an outline of what the researcher will do from writing the research questions and its operational implications to the final analysis of data

(Kothari,2010).. The design of this study, was time series design by using secondary data.

3.4 Target Population and Sample

The study population is the existing 2 commercial banks (Islamic banking and

Conventional banks) in Tanzania, to make a sample for the research criteria sampling method was selected. Due to working on the CAMELS rating system, it is necessary

28 to work upon bank‟s annual financial reports. The criteria for the banks to be included as a sample were the availability of their audited consolidated annual financial reports. For the purpose of this study 2 banks; CRDB and Amana Bank were selected.

3.5 Data Types and Collection Methods

Data which were used were the historical data disclosed by annual reports of the sample banks. Methods of collection include, browsing the internet and reading published sources of annual reports.

3.6 Data Analysis

According to Rwegeshora (2006), data analysis involves the ordering of data into constituent parts to obtain answers to the research questions.

The analysis of this study will base on CAMEL framework as described in the theoretical literature to include the capital adequacy, asset quality, management quality, earnings, and liquidity management. The ratios, will be by correlation and multiple regressions to obtain the determinants of profitability. One-way ANOVA, will be used to test for any differences between the financial performance of Islamic and the Conventional banks by using the CAMEL model variables.. Lastly, T-test will be used to conclude whether there was a significant difference between financial performance between Islamic Bank and Conventional Bank. Descriptive statistics entailed percentages, were also analyzed.

29 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.1 Introduction

This chapter is about the presentation, analysis and interpretations of data collected from audited financial statements, annual reports, articles, previous studies on related topic, published articles by different authors and journals.

The CAMEL model ratios are used to discuss the financial performance of banks; to evaluate the financial performance of the Islamic banks and Conventional banks and to compare the major differences between them .

4.2 The CAMEL level of the banks

This study sought to analyze the camel level of banks. The camel level of the banks was measured by observing the ratio indicators which are the Capital adequacy,

Asset quality, Management quality, Earning quality and Liquidity level of the banks

4.2.1 Capital Adequacy Level of the Banks

Findings have revealed that the Capital Adequacy of the Islamic bank and

Conventional banks for the past five years, and showed that the Capital Adequacy

Ratio (CAR) has been used to analyze the capital adequacy of banks and results show that, over the past five years the mean CAR of the CRDB and Amana was

16.44 and 12.54 respectively.

These results implied that these banks were maintaining depositors‟ confidence and preventing the bank from going bankrupt. Capital adequacy, reflects the overall financial condition of banks and also, the ability of management to meet the needs for an additional capital.

30 The capital adequacy ratio, was developed to ensure that banks could absorb a reasonable level of losses occurred due to operating losses and determine the capacity of the bank in meeting the losses (Ahmad, 2007).

CRDB had a better performance than Amana as the higher the ratio, the more will be the protection of investors, hence, the performance of the bank. Banks under study are well capitalized and they are complying with the directive of BOT, on the capital adequacy ratio which requires a minimum of 12% total capital to risk weighted capital.

This means banks should be able absorb to the potential shocks which might occur. For this reason the Tanzanian banking system continued to perform well even though the globe was hit by a financial crisis. Table 4.1 below

Table 4. 1: Capital Adequacy Ratio (CAR) of the banks

Years Banks CRDB Amana 2012 15.8 11.6 2013 15.1 11.9 2014 14.3 12.1 2015 19.4 13.9 2016 17.6 13.2 Mean 16.44 12.54

Source: Surveyed annual reports of the Banks, 2017

4.2.2 Asset Quality Level of the Banks

This study also has aimed to examine the asset quality of the banks. The Non- performing Loan Ratio (NPL), was used to examine the asset quality. Results presented have shown that, the average NPL for the previous five years for the

CRDB is 8.08 and 10.22 for the Amana bank.

31 These results have revealed that CRDB had a better NPL than Amana Bank therefore,

CRDB had a better strength to maintain service than Amana Bank. Management of banks are usually concerned with the quality of their assets as they constitute most part of the bank‟s cost and play an important role, in the profitability of a bank.

The performance of commercial banks largely depends on the quality of the assets held by them, and the quality of assets relies on the financial stability of their borrowers in terms of character, capacity, collateral and covenant (4Cs). These findings, are consistent with those obtained by report of the Bank of Tanzania (2002), which stated that, the financial institution whose borrowers default on their repayments may face cash flow problems, which eventually affect its liquidity position.

Ultimately, this negatively impacts on the profitability and capital through extra specific provisions for bad debts. Likewise, the study agree with the study by Hassan

(2007) who reported that, solvency of financial institutions typically is at risk when their assets become impaired, so it is important to monitor indicators of the quality of their assets, in terms of over exposure to specific risks trends in non- performing loans, and the health and profitability of bank borrowers especially the corporate sector. Amana Bank performed poorly in asset quality due its maturity as it has only

7 years since it was initiated while CRDB has 21 years since it was initiated.

32 Table 4. 2: Non-Performing Loan Ratio (NPL) of the Banks Years Banks CRDB Amana 2012 6.8 8.6 2013 6.2 9.5 2014 5 10 2015 8.4 14 2016 14 9 Mean 8.08 10.22

Source: Surveyed annual reports of the Banks, 2017

4.2.3 Management Quality Level of the Banks

Management capability is another essential component of the CAMEL model which guarantees the growth and the survival of a bank. Therefore, this study also has examined the management capability of these two banks by using Operating

Expenses Ratio (OER). Results have pointed out that, the OER average of the CRDB and Amana Banks for the past five years was 65.88 and 109.3 respectively.

These results indicate that, CRDB had a better management capability to set norms, ability to plan and respond to changing environments, leadership and administrative capability than Amana Bank. It stated that, the lower ratio, the better for the bank since it shows that the management had a good ability to handle bank operations (Goddard et al., 2004).

The study also agrees with a report by Ahmad (2007) who commented that, the maturity of the bank is the main reason for the banks having a higher OER ratio as there is a lot of fixed cost during the establishment of the bank. Table 4.3 below

33 Table 4. 3: Operating Expenses Ratio (OER) of the Banks Years Banks CRDB AMANA 2012 61.3 164 2013 62.5 132.3 2014 65.8 106.2 2015 63.1 76 2016 76.7 68 Mean 65.88 109.3

Source: Surveyed annual reports of the Banks, 2017

4.2.4 Earnings Quality Level of the Banks

This study has also examined the earnings ratio of the banks and the Return on Asset

(ROA) ratio which was employed. Findings presented have shown that, the averages

ROA of the CRDB and Amana bank for the past five years were 3.5 and 1.84 respectively.

Findings indicate that, a CRDB bank had more profitability and also sustainability and growth in earnings in future than Amana bank. These findings are consistent with a study done by Couto and Brasil (2002) whom reported that, the higher the ratio, the better financial performance of the bank. Similarly, Christopoulos, et al. (2011) also found that, the ROA ratio shows the efficiency of the bank, that how the bank uses its own capital in an efficient manner.

34 Table 4. 4: Return on Assets (ROA) Ration of the Banks Years Banks CRDB Amana 2012 3.8 1.7 2013 3.7 1.6 2014 3.6 1.5 2015 4.2 2.1 2016 2.2 2.3 Mean 3.5 1.84 Source: Surveyed annual reports of the Banks, 2017

4.2.5 Liquidity Level of the Banks

To manage well liquidity of financial institutions such as banks is a prime objective of its management. This study has used the total loans to total deposit ratio to measure the liquidity level of the banks. Results showed that, the liquidity ratio of the CRDB and Amana banks were 75.08 and 68.2 respectively.

This indicated that, CRDB bank had more ability to convert its financial assets into cash most rapidly or in a quick succession or we can say the availability of funds to pay off all its financial obligations when they become due more than Amana bank.

This is due to the high capital invested at CRDB which is more than Amana Bank.

CRDB also has joined in the Dar es salaam stock exchange where it sells its shares and Has more branches, which provide service more than Amana Bank. These findings are consistent with those by Bar and Zeb (2011), whom found out that the risk of liquidity is a danger to the image of the bank. A Bank has to take a proper care to hedge the liquidity risk; at the same time ensuring good percentage of funds, are invested in high return generating securities, so that it is in a position to generate profit with the provision of liquidity to the depositors.

35 Table 4. 5: Loan to Deposit Ratio of the Banks Years Banks CRDB Amana 2012 71 48 2013 67.1 73 2014 76 64 2015 78.7 80 2016 82.6 76 Mean 75.08 68.2

Source: Surveyed annual reports of the Banks, 2017

4.3 The Financial Performance of the Islamic Banks and Conventional Banks

The second objective of this study, was to evaluate the financial performance of the

Islamic bank (Amana Bank) and the Convectional banks (CRDB) in Tanzania.

Financial performance of banks is measured by assessing the overall financial performance indicator in the CAMEL framework.

The Results have revealed that, the financial performance of a bank by using

CAMEL model, and the researcher calculated the MEAN by using CAMEL model.

It was found out that, the CRDB bank had a better financial performance. (Mean

4.212) than the financial performance of the Amana bank (mean= -8.388). This negative sign had revealed that, the Amana Bank for the previous years, was not stable in financial performance therefore, was not producing profit when compared to the CRDB. This was highly caused due to the maturity of the Amana. Table 4.6a and 4.6b respectively below.

36 Table 4. 6a: Financial performance of the Banks Ratio CRDB Amana Capital adequacy 16.44 7.54 Asset Quality -8.08 -10.22 Management Quality -65.88 -109.3 Earning Quality 3.5 1.84 Liquidity Position 75.08 68.2 Mean 4.212 -8.388

Table 4.6b: T test result for the Overall Financial Performance of the Banks

Amana CRDB Mean -8.388 4.212 Variance 4102.656 2559.07152 Observations 5 5 Hypothesized Mean Difference 0 Df 8 t Stat -0.34519 P(T<=t) two-tail 0.73885 t Critical two-tail 2.306004

Source: Surveyed annual reports of the Banks, 2017

Table 4.6a above shows that the composite ratio has revealed that, the overall financial performance of Conventional Banks exceeded that of the Islamic Banks.

While table 4.6b, the sample absolute t-value was 0.345 while the p-value was 0.73.

Since the sample absolute t-value was less than 2.306 (the t-critical value) and the p- value was greater than 0.05 (the critical p-value), then it is statistical concluded that, there was a significant difference between the overall financial performance of

Islamic banks and Conventional banks in Tanzania based on CAMEL model.

37 4.4 Comparison of the Major Differences between the Banks

The third objective of this study, was to compare the major differences between the

Islamic and the Convectional banks in Tanzania. The t-test analysis, was used to test the major differences found in the CAMEL model of the banks

4.4.1 Capital Adequacy Comparison

This Results from, the sample absolutely t-value was 2.93289 while the p-value was

0.01. Since the sample absolute t-value was greater than 1.94318 (the t-critical value) and the p-value was less 0.05 (the critical p-value), it is statistical proved that ,there was a significant difference between the capital adequacy of Islamic banks and

Conventional banks.

These findings are not inconsistent with the study of Manarvi& Muhammad (2011) and Momeneen&Jaffar (2011) whom both concluded that, the Islamic banks were better in processing an adequate capital as when compared to the convectional banks in Pakistan.

Table 4. 7: T-test result of the Capital adequacy ratio (CAR) Amana CRDB Mean 0.1254 0.1644 Variance 1.363 4.223 Observations 5 5 Hypothesized Mean Difference 0 Df 6 t Stat -2.9329 P(T<=t) one-tail 0.01309 t Critical one-tail 1.94318

Source: Surveyed annual reports of the Banks, 2017

38 4.4.2 Asset Quality Comparison

The t-test results presented have shown that, the sample absolute t-value was 1.154 while the p-value was 0.14. Since the sample absolute t-value was less than 1.859

(the t-critical value) and the p-value was greater than 0.05 (the critical p-value), then, it is statistical concluded that, there was no a significant difference between the asset quality of Islamic banks and the Conventional banks. This indicated that, both banks had almost the same ability to manage assets and loans from borrowers. These findings are consistent with the report of BOT (2002) which found that, the solvency of financial institutions typically was at risk when their assets became impaired, so it was important to monitor indicators of the quality of their assets, in terms of over exposure to specific risks trends in non- performing loans, and the health and profitability of the bank borrowers especially the corporate sector.

Table 4. 8: T-test Result of the Non-Performing Loan Ratio (NPL) of the Banks Amana CRDB Mean 0.1022 0.0808 Variance 0.0004742 0.0012452 Observations 5 5 Hypothesized Mean Difference 0 df 8 t Stat 1.154011972 P(T<=t) one-tail 0.140901574 t Critical one-tail 1.859548033

Source: Surveyed annual reports of the Banks, 2017

4.4.3 Management Capability Comparison

From Sample absolute t-value is 1.842 while the p-value was 0.14. Since the sample absolute t-value was less than 2.77 (the t-critical value) and the p-value was greater than 0.05 (the critical p-value), therefore, there was no a significant difference

39 between the management efficiency of Islamic banks and the Conventional banks.

This indicated that, both banks had an effective management which took crucial decisions depending on its risk perceptions.

These results are supported by the study done by Manarvi& Muhammad (2011) whom compared the performance of the Islamic and the Conventional banks in

Pakistan by using the CAMEL test and concluded that, in management the quality for both streams of banking was almost the same

Table 4. 9: T-test Result of the Operating Expenses Ratio (OER) Amana CRDB Mean 10.931 0.6588 Variance 1.758532 0.0039302 Observations 5 5 Hypothesized Mean Difference 0 df 4 t Stat 1.842985027 P(T<=t) two-tail 0.139116059 t Critical two-tail 2.776445105 Source: Surveyed annual reports of the Banks (2017)

4.4.4 Earnings Quality Comparison

Rresults in the, the sample absolute t-value was 4.442 while the p-value was 0.004.

Since the sample absolute t-value was greater than 2.446 (the t-critical value) and the p-value was less than 0.05 (the critical p-value), it is statistically concluded that, there was a significant difference between the earning quality of Islamic banks and the Conventional banks. This implied that the Convectional banks were in position of earning more profit than the Islamic banks.

Good earnings performance enables a bank to fund its expansion, remain competitive in the market and replenish and /or increase its capital (Bank of Uganda, 2002). A 40 study of Faizulayev (2011) has similar results with this study, as he concluded that,

Convectional banks and Islamic bank have significantly difference ratio in terms of earnings quality.

Table 4. 10: T-test Result of the Return on Asset (ROA) of the Banks Amana CRDB Mean 0.0184 0.035 Variance 0.0000118 0.00000058 Observations 5 5 Hypothesized Mean Difference 0 Df 6 t Stat -4.442888139 P(T<=t) two-tail 0.004362297 t Critical two-tail 2.446911846

Source: Surveyed annual reports of the Banks, 2017

4.4.5 Liquidity Position

With regards to the t-test, results pointed out that the sample absolute t-value is

1.083 while the p-value was 0.32. Since the sample absolute t-value was less than

2.446 (the t-critical value) and the p-value was greater than 0.05 (the critical p- value), it is statistically concluded that, there was no significant difference between the Liquidity position of the Islamic banks and Conventional banks. This indicated that, both banks management had the almost same ability of converting its financial assets into cash most rapidly.

These results are in line with Moin (2007), who measured the performance of the first

Islamic bank in Pakistan with a comparison of 5 conventional banks and did not find any difference between the Islamic bank and the Conventional banks in term of liquidity.

41 Table 4. 11: T-test Result of the LDR ratio Amana CRDB Mean 0.682 0.7506 Variance 0.01622 0.0038108 Observations 5 5 Hypothesized Mean Difference 0 Df 6 t Stat -1.083827012 P(T<=t) two-tail 0.320060859 t Critical two-tail 2.446911846 Source: Surveyed annual reports of the Banks, 2017

42 CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

This chapter, offers a brief summary of the findings through reiteration of what has been discussed in the previous chapters of the study, provides a conclusion and recommendations. The chapter also recommends area for further studies.

5.2 Conclusions

In a conclusion of the CAMEL level of the banks, the study has found out there was a good CAMEL in banks in all performance ratios used. There was a good Capital adequacy for both banks which was above 12% and also there was a better asset quality that means those bank had the strength to maintaining their business and services.

It has also found that there was a better management quality ad earning quality in the

Convectional banks; however, there was a poor management quality and earning quality in Islamic bank. Lastly, study has concluded that, there was a better liquidity position for both Cconvectional and the Islamic bank.

Futhermore, this study also concluded that there was a statistical significantly difference in Financial Performance between the Convectional and Islamic bank. The calculated mean of the CAMEL model found that the CRDB bank had a better financial performance than Amana bank. The t-test result also showed the statistical difference between the financial performances of the banks by using CAMEL model.

Last of all, the study has found out, there was a major difference between banks by using the CAMEL model. There was also major difference in earning quality and

43 capital adequacy of the banks. However, it was found out that there was no statistical difference in liquidity position of the bank, management capability as well as asset quality of the banks.

The study has implication to knowledge, theory and management practice. On the side of knowledge contribution, the findings of the study, improve our understandings on the comparison between Islamic banks and Conventional bank.

On the same line, it provides information on the financial performance in Tanzania banking industry context.

5.3 Recommendations

In light of the findings, the study summarises and conclusions, the following recommendations are significant for the both the Convectional and Islamic banking for the financial performance:

i. Conventional Banks out performed Islamic Banks financially during the

study period. Both banking categories provided equal opportunities and are

recommended to Investors, savers, borrowers among other decision makers.

ii. Both banks are recommended to maintain expenses as to reduce income to

expenses ratio

5.4 Area for Further Research

Needless to say another study should be carried out to establish the relationship between the organization culture and organizational performance. A further study in the same area is recommended, in future, with an increased sample size and expand the period of the study as more data on Islamic Banking becomes available.

44 i. Comparative study on the Efficiency of Islamic Banks and Conventional

Banks in Tanzania, is also considered an area of interest and is recommended

for a further research ii. A study on a comparative financial performances of Private and Public

owned Banks in Tanzania is also recommended as a research area.

45 REFERENCES

Adam, J., Kamuzora, F. (2008), Research Methods for Business and Social Studies. Mzumbe Book Project Morrogoro-Tanzania.

Aggarwal, R.K.. Yousef, T. (2000, Feb), Islamic Banks and Investment Financing. Journal of Money, Credit and Banking, 32 (1). pp. 93-120. Retrieved from http://www.jstor.org/stable/2601094

Ahmad, Rehman & Safwan. (2011, March), Islamic Banking and Prohibition of Riba/Interest. African Journal of Business Management. 5(5). 1763-1767.

Ariff, M, (1982), Monetary Policy in an Interest-free Islamic Economy - Nature and Scope. In Ariff, M. (Ed.), Monetary and Fiscal Economics of Islam. International Centre for Research in Islamic Economics, Jeddah 1982.

Aristotle (350, B.C.E), Politics: Book One Part X. ( B. Jowett, Trans). Retrieved from http://classics.mit.edu/Aristotle/politics.1.one.html. Council countries and challenges ahead. Washington D.C: International Monetary Fund Publication.

Creswell, J. W. (1994), Research Designs: Qualitative and quantitative approaches. Thousand Oaks, CA: Sage.ed. Singapore: Wiley Finance

Gerard, P., & Cunningham, J.B. (1997), Islamic Banking: A study in Singapore. International Journal of Bank Marketing, 15(6), p. 204-16

Hassan, A. (2007), Regulation and Performance of Islamic Banking in Bangladesh. Thunderbird International Business Review,49 (2). pp. 251-277.

Horowitz, D.L. (1994, Spring), The Qur'an and the Common Law: Islamic Law Reform:http//www.ius.edu.ba/mcan/GPROJECTS/Graduation%20thesis %20-%20Jasmin%20Jusufovic.pdf

Iqbal, A. (2012), Liquidity Risk Management: A Comparative Study between Conventional and Theory of Legal Change. The American Journal

Iqbal, Z. and Mirakhor, A. (2011), An Introduction to Islamic Finance: Theory and Practice, 2nd Islamic and Conventional Banks: Empirical Evidence from Malaysia. Retrieved from Science Direct Database

Islamic Banks of Pakistan. Global Journal of Management and Business Research, 12, 1 (5). Retrieved from Global Journals Inc. ISSN: 2249-4588

Jaffar, M., & Manarvi, I., (2011), Performance comparison of Islamic and Conventional banks in

Javaid, S. Anwar, J., Zaman,K. Gafoor, A. (2011), Determinants of Bank Profitability in Journal of Risk Finance. 13 (2),148-159. DOI 10.1108/15265941211203198 46 Kahf, M., & Khan, T. (2007), Principles of Islamic Finance. Jeddah: Islamic Research and Training Institute- Islamic Development Bank.

Khalid, S., & Amjad, S. (2012), Risk management practices in Islamic banks of Pakistan. The American Journal of Sociology 111 (5). pp 1606-1608. Retrieved from http://www.jstor.org/stable/10.1086/504662

Khamis, M. & Senhadji, A. (2010), Impact of the global financial crisis on the Gulf Cooperation Kingdom.

Kothari, C.R. (2010). Research Methodology (2nd Edn). New Delhi: New Age International, Publisher.

Maurer, B. (2005), Mutual Life, Limited: Islamic Banking, Alternative Currencies, Lateral Reason. In Harrington, B. (Ed.). (2006, March) Brown University.

Muneeza, A., Wisham I. & Hassan, R. (2010), The Paradox Struggle Between the Islamic and Conventional Banking Systems. Journal of Asia Pacific Studies (2010) 1(2). 188-224. Retrieved from www.japss. org/upload/5.% 20Muneezaetal.pdf

Rogers, E.M. (2003), Diffusion of Innovations (5th Edn). The Free Press, New York.

Spong, K.. (2000), Banking Regulation: Its Purposes, Implementation, and Effects (5th Edn), Division of Supervision and Risk Management: Federal Reserve Bank of Kansas City.

47 APPENDICES

Appendix I: External Examiner Corrections

S/N ISSUE ACTION

1. Edit the rest of the dissertation for Editing done to all quarries

punctuations

2. Abstract Improved and contains all important

section and remove paragraphs

3. Measurement Presented as required

4. The conceptual framework Updated and improved as required

5. Discussion of implication of Implication of the study has been added to

the results on chapter five the chapter five

48