Researchers Hajra Noor, Naila Sadiq, and Syeda Fizza Abbas from Kinnaird College for Women’s Department of Accounting & Finance provide a comparative study diving into the complexities of conventional and Islamic banking in Pakistan. The study investigates the unique dynamics between the drivers of capital, risk, and liquidity.
Conventional banks are profit-making companies that manage public savings and facilitate strategic investments. Islamic banks, on the other hand, follow interest-free principles governed by Shariah compliance. This study looks into the factors that influence capital, risk, and liquidity in both banking systems.
The sample includes five full-fledged Islamic banks and 17 conventional banks in Pakistan, and it spans a 12-year period from 2008 to 2019. The study employs dynamic panel data methodologies, with the regression model taking into account several bank-related variables such as SIZE, LOAN, LLP, ROA, NIM, NPM, NII, GDP, and INF.
According to the findings, conventional banks excel in asset quality, whereas Islamic banks experience difficulties in profit distribution to depositors. In addition, Islamic banks have lesser capitalization than their conventional counterparts, indicating a need for innovative products and more equity. The study discovers a positive and significant association between risk and capital for both banking systems, demonstrating that greater capital may result in greater risk.
This study adds to the current body of knowledge, particularly in the context of South Asian countries like Pakistan. It bridges the gap by delving into the complex link between capital, risk, and liquidity for both Islamic and conventional banks in Pakistan.
