Performance comparison of Islamic and conventional banks: empirical evidence from Pakistan

Abstract

Purpose

This study aims to investigate the performance differences of Islamic and conventional banks in Pakistan by using financial ratios.

Design/methodology/approach

This study analyzed 5 Islamic and 19 conventional banks for the periods of 2007-2014. Two types of analyses were performed – sample t-test and logistic regression. Analysis was also performed on sub-sample considering crisis effects.

Findings

It was found that Islamic banks are relatively better in profitability, efficiency, risk and liquidity management, while conventional banks are superior in asset quality. Higher efficiency of Islamic banks contradicts with previous studies conducted in Pakistan. Probable reasons for this include phenomenal expansion of Islamic banking industry and its broad appeal to customers in Pakistan. Risk management practices of Islamic banks are superior to conventional banks, as Shariah rules restrict pure speculation in monetary terms. Better asset quality of conventional banks is attributed to their recognition and product diversity. During the crisis, Islamic banks were found less profitable than their counterparts.

Research limitations/implications

This study suggests that high operational efficiency of Islamic banks should be converted into technical efficiency by improving human resource, introducing innovative market-oriented products and prudent resource allocations. As operational efficiency does not promise returns in long term, to sustain ongoing phenomenal growth of Islamic banking, management needs to gain customer trust.

Originality/value

This is an original research that compares performance differences across Islamic and conventional banks by using financial ratios.

Citation

Khan, I., Khan, M. and Tahir, M. (2017), "Performance comparison of Islamic and conventional banks: empirical evidence from Pakistan", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 10 No. 3, pp. 419-433. https://doi.org/10.1108/IMEFM-05-2016-0077