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Comparison Study on the Financial Performance Between Islamic Bank and Convectional Banks in Tanzania: the Cases of Amana and CRDB Banks

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Comparison Study on the Financial Performance Between Islamic Bank and Convectional Banks in Tanzania: the Cases of Amana and CRDB Banks 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
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