Does Meezan Bank Deliver-The Search for Fair Returns in Islamic Banking Industry

Abstract

This paper aims to examine whether banks treat their depositors fairly, by comparing the earnings received by depositors and those of shareholders of a bank, using historical data. Since there is considerable empirical evidence available that depositors are treated unfairly in conventional banks, i chose the largest Islamic bank in Pakistan for this purpose in order to observe whether the rates of return provided to depositors (investment account holders) in Islamic Banks are significantly different from those of conventional banks for the years 2005-2012. My results indicate that on the surface, the depositors were getting around 50% of the total Net Income of the bank that was available for distribution, as against 10.23% of the same given to shareholders; however, interestingly, these depositors constituted about 94.6% of the total amount available to the bank for financing, therefore effectively, depositors were on average receiving only about 16.51% of the profit on every Rupee invested in Meezan Bank, with the rest going to the shareholders – who had contributed only about 5.5% of the total available amount – a clear indication of highly unfair treatment meted out to depositors. In the end, i suggest an alternative ratio for the distribution of the Bank’s earnings that would replace the current unfair return to the depositors.