Islami Shariah

Based Banks and

Conventional Banks

Analysis of Classified Loans and Provisions for Loans of

Islami Shariah Based Banks and Conventional Banks

A Comparative Analysis of Classified Loans and

their Provisions of Islamic and Conventional
Banks in Bangladesh
Md. Momin Uddin
Assistant Professor
Department of Management Studies
Patuakhali Science and Technology University
Dumki, Patuakhali -8602
Email: mominuddin.521@pstu.ac.bd

Abstract
This study aims to assess classified loans and provisions for classified loans of conventional and Islami (shariah
based) banks of Bangladesh. The study applies both exploratory and multiple cross sectional (descriptive)
research design. The study is wholly based on secondary data expressed in quantitative way. Sample size of
the study is twenty-nine private commercial banks (PCBs) among which twenty-four banks are being operated
through conventional style of banking and five banks are being operated by Islami- shariah. Convenient and
purposive sampling technique was employed to choose representative samples. The study initially explored
the classified loans and provisions for classified loans of each selected banks and a separate ratio analysis was
made for twenty-four conventional banks and also for five shariah based banks respectively. For ratio analysis
five years’ data of each bank has been counted from of 2014 to 2018.The study found that Islami-shariah based
banks are better in loan maintenance than those of conventional Banks in Bangladesh. This study recommends
that classified loan management is necessary for sound development of banking sector, moreover development
of overall economic condition of a country.
Keywords: Classified Loan, Provisions for loans, Islami Shariah Based Banks, Conventional Banks.

1.0 Introduction
Loan classification is a process of assessing loan portfolios and assigning loans to categories or grades based on
the perceived risk and other relevant characteristics of the loans. It is also defined as accumulating or arranging
of loans and advances according to unclassified, sub-standard, doubtful and bad or loss. Provision against loan
is a strategy that banks adopt keeping money in order to prevent possible loan loss. It means keeping aside
predetermined money from the current year profit against possible loan losses. Bangladesh Bank emphasizes that

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it is the responsibility of bank management to adopt
and implement proper accounting and reporting, and
that correct classification and provisioning is a part
of that responsibility. An effective loan classification
and provisioning system assures trustworthy of the
financial system that in turn reenergize trust and
confidence in the minds of the depositors. Economic
development of Bangladesh has been severely
affected by the tremendous malpractices of the
accumulation of classified loans. For preventing risks
of loans, the provision criteria have been updated a
number of times. To protect the depositor’s interest
and keep the bank’s financial health sound, a huge
amount of money as provision has been kept against
the classified loans. Provision of the banking sector is
being increased due to classified loans. Ultimately the
profit of the banks is going down. On the other hand,
government of Bangladesh is being deprived of getting
taxes due to higher rate of provisioning. This study
tries to compare the financial health of Islami shariah
based banks and conventional banks of Bangladesh on
the basis of loan classification and loan provisioning
so that we can know which style of banking is doing
better and catch the attention of the top authority of
selected banks to observe their financial aspect and
modify their policy and practices.
2.0 Literature Review
Reasons and effects of Loan Classification and
Provisioning
A number of studies were undertaken to find out the
problem with loan classification and provisioning of
banks prevailing in Bangladesh. Bank underperformance
and economic shutdown are the vital consequences
of huge amount of classified and provisioning in the
banking system (Adhikary, B., K.2006). A number
of reasons are responsible for huge classified and
provisioning those are lack of effective monitoring and
supervision from the banks, lack of effective lenders’
recourse, weakness of legal infrastructure, and lack of
effective debt recovery strategies. Poor enforcement
of laws relating to settlement of classified loans has
also exacerbated the financial malaise (Adhikary, B.,
K.2008). In the study of BHBFC, around 98 per cent
of the differences in the volume of classified loans
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can be explained by total advances, provisions, legal
charges and spread (Islam, Tazul. 2012). Activities of
PCBs and SOCBs were increased day-by-day to face
the challenging situation through maintain the deposit,
loan & other dimensions (Reza., Hasan.1997).
Investment risk is one of the crucial factors that might
affect the financial health of a bank as it is wholly
dependent on borrowers paying back loans (Baral,
J.,K.2005). The degree of investment risk depends
on assets held by an individual bank with considering
exposure to specific risks, trends in classified loans,
and the health and profitability of bank borrowers.
A bank with high level of loan classification and
provisioning are to bear costs on non-income yielding
assets that not only reduce portability but also lower
the capital adequacy of a bank, and in consequence,
the bank faces danger in augmenting capital resources
(Muniappan, G., P. 2002). According to Bonin, et.al
(2001), the probability of banking crises increases if
problems related to classified loans and provisions are
not eliminated quickly.
Rules regarding Loan Classification and Provision
according to BRPD-BB Circulars
Bangladesh bank has been expressing a loan classified
or unclassified on the basis of overdue criteria
and qualitative criteria to since 1989. According to
suggestions of central bank of Bangladesh, bank
managers/incumbent usually divide all loans into five
categories (continuous loan, demand loan, term loan
payable within five years, term loan payable in more
than five years and short-term agricultural credit /
micro credit) under overdue criteria. Suspicious loans
further reclassified as special mention account (SMA),
substandard, doubtful and bad/losses to comply with
international norms of loan classification (BRPD-BB
Circular 2012). No certain guidelines were followed
by the commercial banks before a new system of loan
classification and provisioning against loan losses was
introduced in November 1989. Loan classification
system has been updated through circulation issued
by BRPD of Bangladesh bank from time to time.
At present almost one-fourth of the total loans
of the banking sector are now being classified or
nonperforming (BRPD-BB Circular 2012). Loan
classification and provision system are being updated
BRPD, Bangladesh Bank’s circulars. Bangladesh Bank
has established requirements for general loan loss provisions, in certain percentages, for certain categories of
loans those are unclassified or in the special mention account. Classified loans such as sub-standard, doubtful or
bad/Loss are usually settled down on a loan-by-loan basis after meticulous investigation of each individual loan’s
probability of repayment (BRPD Circular-1,7,14,19-2006, 2012).

3.0 Research Questions and Objectives

l What is the concept of loan classification and loan provisioning?
l What is the ratio of classified loan to total loan of conventional and Islami Shariah based banks in Bangladesh?
l Are conventional or Islami Shariah Based Banks better in terms of ratio of classified loan to total loan?
l What are the provisions of for loan of conventional and Islami banks (shariah based) of Bangladesh?
l Are conventional or Islami Shariah Based Banks better in terms of keeping and managing the provisions for loan?
The Primary objective of this study is to assess classified loans and provisions for classified loans of conventional
and Islami (shariah based) banks of Bangladesh. The specific objectives are:
l to do a ratio analysis of classified loan to total loan of conventional and Islami Shariah based banks of
Bangladesh.
l to make an analysis of compared ratio of classified loan to total loan between Islami Shariah based and
conventional banks.
l to assess the provisions for loan of conventional and Islami banks (shariah based) of Bangladesh.
l to make a comparison of the provisions for loan between Islamic banks and Conventional banks.

4.0 Materials, Methods and Hypothesis

This study is basically based on secondary data and it has been collected from annual reports of twenty-nine
PCBs (twenty-four conventional banks & five Islami shariah based banks) banks, Bangladesh Bank annual reports
and reviews etc. Beside these, different journals, articles, newspapers and working papers have been pursued
to enrich the literature of the study. The population of the study is the all (41 PBCs) private commercial banks
(both conventional and shariah based) in Bangladesh. The sample size of the study is twenty-nine (29= 24
conventional & 5 shariah based) private commercial banks of Bangladesh. Twenty-nine banks as sample of the
study was selected for their large market share in banking sectors of Bangladesh. Convenient and purposive
sampling techniques were employed in this study. The study initially explored the classified loans and provisions
for classified loans of each selected banks and a separate ratio analysis was made for twenty-four conventional
banks and also for five shariah based banks respectively. For ratio analysis five years’ data of each bank has been
counted from of 2014 to 2018. Published data has been collected through website platform. To do analysis and
summarize of data, simple statistical tools such as chart, graph, table, and bar chart have been utilized.
On the basis of literature review, research questions and objectives of the study, the following hypotheses will
be examined throughout the study:
l H1: Islami Shariah based banks are doing better in collecting, managing and maintaining of classified loan than
those of conventional banks.
l H2: Conventional banks are doing better in collecting, managing and maintaining of classified loan than those
of Islami Shariah Based Banks.
l H3: Islami Shariah based banks are doing better in protecting classified loans by keeping high provision for
Classified loans.
l H4: Conventional banks are doing better in protecting classified loans and loans by keeping high provision
for Classified loans.

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5.0 Results and Discussions
5.1: Average ratio analysis of classified loan to total loan of five Islami banks in different years
Table-01: Average ratio of classified loan of Islamic Banks
Year
Name of the Banks 2014 2015 2016 2017 2018
Al-ArafaIslami Bank 4.94% 4.66% 4.54% 4.10% 4.79%
EXIM Bank Limited 3.23% 4.69% 5.23% 5.32% 5.11%
FSIBL 2.22% 2.76% 2.58% 3.07% 3.34%
Islami Bank Limited 4.92% 4.25% 3.83% 3.59% 4.12%
ShahjalalIslami Bank Limited 7.87% 6.47% 4.70% 3.97% 6.84%
Total 23.18% 22.83% 20.88% 20.05% 24.20%
Average 4.64% 4.57% 4.18% 4.01% 4.84%
Source: Annual reports (2014-2018)

Average of ratio of classified loan of Islami Banks

0.05
Average of ratio

0.04
0.03
0.02
0.01
0
2014 2015 2016 2017 2018
Year

Chart 01: Average of ratio of classified loan of Islami Banks

From the above table and chart, it is observed that there is gradual decrease in the average of ratio of classified
loan of Al Arafah Islami banks over the last five years. It is also observed that Exim bank has increasing trend
of classified loan over the last five years. Shajalal Isami bank and Islami Bank Bangladesh limited have decreasing
trend from 2014-2017 but both have increasing trend in 2018. Fareast Islami bank limited has both increasing and
decreasing trend of classified loan over the five years. It is interesting that ratio of classified loan is never above
the 5%. We can say that the loan recovery of Islami banks of Bangladesh is satisfactory.

5.2: Average ratio analysis of classified loan of conventional banks

Table-2: Average ratio of classified loan of conventional banks
Year
Name of the banks 2014 2015 2016 2017 2018
AB Bank Ltd 3.86% 3.16% 5.19% 7.15% 33.07%
Bank Asia Limited 5.31% 4.26% 5.41% 4.38% 4.10%
Basic Bank Limited 57.15% 51.09% 54.13% 54.63% 56.85%
Brac Bank Limited 5.72% 5.99% 3.40% 3.56% 3.10%
Dhaka Bank Limited 5.49% 4.66% 4.01% 5.98% 4.99%
DBBL 4.40% 3.70% 5.20% 4.70% 4.10%
Eastern Bank Limited 4.36% 3.27% 2.69% 2.50% 2.35%
IFIC Bank Limited 4.95% 6.46% 5.29% 6.40% 6.16%

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 Jamuna Bank Limited 5.68% 6.69% 4.05% 3.33% 3.77%
Mercantile Bank Limited 4.13% 4.95% 5.13% 3.79% 4.82%
Mutual Trust Bank Limited 2.67% 2.08% 4.36% 4.30% 5.39%
National Bank Limited 5.26% 7.01% 10.35% 10.64% 9.50%
NCC Bank Limited 7.49% 7.18% 5.92% 5.79% 5.80%
One Bank Limited 4.72% 3.58% 4.93% 5.31% 7.05%
Prime Bank Limited 7.61% 7.82% 5.96% 5.45% 6.16%
Premier Bank Limited 9.03% 6.64% 5.17% 4.69% 3.99%
Pubali Bank Limited 6.25% 5.32% 5.38% 8.68% 5.46%
South East Bank Limited 3.64% 4.25% 4.89% 5.99% 5.87%
Trust Bank Limited 2.45% 2.74% 3.21% 3.35% 7.90%
City Bank Limited 5.88% 7.58% 6.05% 5.43% 5.33%
UCB Limited 4.62% 5.23% 8.01% 7.38% 6.79%
NRBG Bank Limited 0.00% 0.64% 0.42% 1.31% 2.02%
NRBC Bank Limited 0.00% 0.27% 0.52% 2.46% 2.94%
Modhumoti Bank Limited 0.00% 0.00% 0.26% 0.29% 1.83%
Total 160.67% 154.57% 159.93% 167.49% 199.34%
Average 6.69% 6.44% 6.66% 6.98% 8.31%
Source: Annual reports (2014-2018)

Average of ratio of classified loan of Islami Banks

0.1
Average of ratio

0.08
0.06
0.04
0.02
0
2014 2015 2016 2017 2018
Year
Chart 2: Average of ratio of classified loan of Conventional Banks
From the above table and chart it is observed that average ratio of classified loan of all conventional banks are
6.69% of total loan of 24 banks in 2014, 6.44 % of total loan of 24 banks in 2015, 6.66% of total loan of 24 banks
in 2016, 6.98% of total loan of 24 banks in 2017 and 8.31% of total loan of 24 banks in 2018. Over the last five
years the ratio is always above the 6%. The reason is that the ratio of classified loan of Basic Bank is huge that
is always above 50% over the last five years. From the table we also see that the ratio of classified loan of other
conventional banks is quite satisfactory, while the ratio of classified loan of basic bank is highly unsatisfactory.
Therefore, it has negative impact in the loan management of conventional banking industry of Bangladesh.
5.3: Comparison of classified loan between Islami banks and conventional banks
Table-3: Comparison of classified loan between Islami Banks and Conventional Banks
Particulars Years
2014 2015 2016 2017 2018
Average ratio of classified loans of Islamic banks 4.64% 4.57% 4.18% 4.01% 4.84%
Average ratio of classified loans of Conventional banks 6.69% 6.44% 6.66% 6.98% 8.31%

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 9.00%

8.00%

7.00%

6.00%
Average ratio of classified
5.00%
loans of Islamic banks
4.00% Average ratio of classified
loans of Conventional banks
3.00%

2.00%

1.00%

0.00%
2014 2015 2016 2017 2018

Figure 01: Comparison of classified loan between Islami banks and conventional banks
From the above table and figure it is found that ratio of classified loan to total loan of conventional banks is above
6.20% over the last five years, which was quite unsatisfactory. On the other hand, we see that ratio of classified
loan to total loan of Islami shariah based Banks i is below 5% over the last five years, which was quite satisfactory.
Islami Banks are more effective and efficient in loan recovery than those of conventional banks in Bangladesh.
5.4: Analysis of provisions on loan of Islami banks
Table-4: Average of provisions for loan of Isiami Banks (Amount in Millions)
Year 2014 2015 2016 2017 2018
Al-ArafaIslami Bank 2457 3190 3940 4819 5837
EXIM Bank Limited 3505 5797 7204 8732 10741
FSIBL 2955 3809 5086 7105 9349
Islami Bank Limited 13016 13463 14913 19938 23957
ShahjalalIslami Bank Limited 3049 2631 2327 2581 3820
Social Islami Bank Limited 3042 3494 4460 6360 8211
Total 28024 32384 37930 49535 61915
Average 4671 5397 6322 8256 10319
Source: Annual reports (2014-2018)
Average of Provision for Loan

Average of Provision for Loan of Islami Banks

15000
in million

10000

5000

0
2014 2015 2016 2017 2018
Year
Chart 4: Average of Provision for Loan of Islami Banks

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From the above table and chart, gradual increase in keeping provision against loan over the last five years has
been observed. This is a positive sign because higher amount of provisions reduces the credit risk of Islami banks.
But the problem is banks can’t invest that amount in any other sector rather banks has to freeze that amount.
Therefore, the profitability of the Islami banks reduces.
5.5: Average of provisions on loan of conventional banks
Table-05: Average of Provision on Loan of conventional banks
Year 2014 2015 2016 2017 2018
AB Bank Ltd 4854 4715 6605 8733 10640
Bank Asia Limited 5137 5997 7423 7841 8984
Basic Bank Limited 4307 4342 46459 51617 23553
Brac Bank Limited 7181 8418 6956 7990 7571
Dhaka Bank Limited 3569 4245 6241 7779 8888
DBBL 4202 4218 6496 7072 7571
Eastern Bank Limited 1811 2264 2288 4659 4351
IFIC Bank Limited 3586 3982 4138 5310 5409
Jamuna Bank Limited 2895 2824 3484 4166 4374
Mercantile Bank Limited 6109 6468 7034 8551 10362
Mutual Trust Bank Limited 1851 2247 3159 4414 4605
NCC Bank Limited 3430 4033 4316 4996 6031
Prime Bank Limited 6327 7780 7290 8916 8293
Premier Bank Limited 1198 1451 2386 2981 3758
Pubali Bank Limited 5423 5555 7180 12395 12812
South East Bank Limited 4008 3863 6158 10070 13283
Trust Bank Limited 1082 1545 3433 4593 6578
City Bank Limited 4932 6239 6303 6047 7974
UCB Limited 3681 4403 5902 7418 8649
NRBG Bank Limited 85 141 364 541 71557
NRBC Bank Limited 158 243 429 833 1133
Modhumoti Bank Limited 41 48 62 92 202
Total 75867 85021 144106 177014 236578
Average 3449 3865 6550 8046 10754
Source: Annual reports (2014-2018)
Average of Provision for Loan

Average of Provision for Loan of Conventional Banks

12000
10000
in million

8000
6000
4000
2000
0
2014 2015 2016 2017 2018
Year
Chart 5: Average of Provisions for Loan of Conventional Banks

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From the above table and chart it is observed that there is gradual increase in the provisions for loan over the
last five years. This is a positive sign because higher amount of provision reduces the credit risk of conventional
banks. But the problem is banks can’t invest that amount in any other sector rather banks has to freeze that
amount. Therefore, the profitability of the conventional banks reduces.
5.6: An analysis of compared provision against loan between Islami Shariah Based banks and conventional banks
Table-06: Compared provision against loan between Islami Shariah Based banks and
conventional banks
Year 2014 2015 2016 2017 2018
Average of Provision for Loan of Islami Banks 4671 5397 6322 8256 10319
Average of Provision for Loan of Conventional Banks 3449 3865 6550 8046 10754

12000

10000
Average of Provision for
8000 loans of Islamic banks
Average of Provision for
6000
loans of Conventional banks

4000

2000

0
2014 2015 2016 2017 2018

Figure 02: Compared provision against loan between Islami Shariah Based banks and conventional banks
From the above table and figure it is observed that there is a little bit difference in the trend of provision against
loan over the last five years for both Islami shariah based banks and conventional banks of Bangladesh. Loan
provision of Islami sharia based banks were higher than those of conventional banks in 2015, 2015, and 2017 but
in 2016 and 2018, the scenario is quite opposite. Overall provision against loans are increasing over the last five
years and it is true for both banking systems. Overall Islami Shariah based banks kept musch provision against loan
than those of conventional banks. From one perspective it a positive sign and form another perspective it is a
negative sign for any banking industry. By maintaining higher amount of provision the banks can recover their loss
form loan, and reduces the credit risk. But the problem is the banks can’t use that amount of money for earning
profit. Therefore, the profitability of the banks reduces.
From the above results and discussion, following hypotheses are supported and rejected
respectively.
H1: Islami Shariah based banks are doing better in collecting, managing and maintaining of Supported
classified loan than those of conventional banks.
H2: Conventional banks are doing better in collecting, managing and maintaining of classified loan Rejected
than those of Islami Shariah Based Banks.
H3: Islami Shariah based banks are doing better in protecting classified loans by keeping high Supported
provision for Classified loans.
H4: Conventional banks are doing better in protecting classified loans and loans by keeping high Rejected
provision for Classified loans.

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6.0: Findings, Conclusion and Recommendations
The ratio of classified loan to total loan of conventional banking industry is above 6% over the last five years,
which is quite unsatisfactory. On the other hand, we see that ratio of classified loan to total loan of Islamic
Banking industry is below 5% over the last five years, which is quite satisfactory. The prime reason for high ratio
of classified loan of conventional banking industry is for huge amount of classified loan of Basic Bank ltd. The
ratio of classified loan of Basic Bank Ltd has always been above 50% over the last five years. Therefore, the
overall the conventional Banking is in bad position of loan maintenance compared to Islami sharia based banks
of Bangladesh. So the conclusion is clear that, the Islami shariah based banks are better in loan maintenance than
those of conventional banks in Bangladesh. Another indicator of loan maintenance is provision against loan.
The study shows that, the amount of provision required for loan has been increasing over the last five years for
both Islami sharia based and conventional banks. Overall it is researcher’s opinion that banks are not performing
well in loan maintenance. As the loan maintenance of the two banking industry of Bangladesh is not quite
satisfactory, therefore banks should take necessary steps to improve the condition for the betterment of the
economy. So, for a strong& thriving economy the financial health of the banks must be very sound. Banks must
focus on polishing up their customer selection, loan screening methods and loan monitoring effort with a view
to ignite speedy growth of the economy on an urgent basis. In face of the relaxed method of loan classification
injected by Bangladesh Bank in June, 2019, Banks actually need to be more cautious as the policy indirectly
widens scopes for the habitual defaulters to get away with their non-complying behavior. So, the Banks, specially
the conventional ones must exercise tougher screening of borrowers, deploy effective credit risk analysis and
prudent disbursement of right amount of loan with right kind of credit facility and strict post-disbursement
monitoring of the loan and regular follow-up with the borrowers in case of fresh customers. In the meanwhile,
Banks must keep the ongoing persuasion & pressure on the existing defaulters and thoroughly check up every
legal option available when the soft approach fails.
This study has not taken into account the state owned banks which are largely subsidized by the government in
various aspects despite of poor corporate governance and lax loan monitoring and supervision at every layer of
credit operations. Most of the times, government comes up with unusual ways at own discretion to cushion up
the provision shortfalls and weak capital base of these state owned banks. However, it is a matter of future study
to find out how the state-owned banks are being backed by the government in face of the capital & provision
shortfall created largely by various insidious corruptions and not so credit-friendly ways.

References
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Annual Report. (2014-2018). ONE Bank Ltd. https://www.onebank. loans)
com.bd/home/financial/annual-reports/
Unclassified Less than 6 1
Annual Report. (2014-2018). Premier Bank Ltd. https:// months
premierbankltd.com/pbl/financial-reports/
Substandard 6 months< 9 20
Annual Report. (2014-2018). Prime Bank Ltd. https://www. months
primebank.com.bd/index.php/home/financial_reports Doubtful 9 months < 1 year 50
Annual Report. (2014-2018). Southeast Bank Ltd. https://www. Bad 1 year or more 100
southeastbank.com.bd/?page=annual_reports
Annual Report. (2014-2018). Standard Bank Ltd. https://www. Source: BRPD circular no. 19/December 2012

60 THE COST AND MANAGEMENT

ISSN 1817-5090, VOLUME-49, NUMBER-05, SEPTEMBER-OCTOBER 2021