Comparative Performance Study of Conventional and Islamic Banking in Pakistan

The purpose of this empirical study is to analyze and compare the performance of Islamic and conventional banking in Pakistan and to find out which of the banking stream is performing better than other. For this study, sample of 22 conventional banks and 5 Islamic banks were selected. For in-depth understanding and sound comparison, key performance indicators were divided into external and internal bank factors. The external factor analysis includes studying the customer behavior and perception about both Islamic and conventional banking. Internal factor analysis includes measure of differences in performance of Islamic and conventional banks in terms of profitability, liquidity, credit risk and solvency. Nine financial ratios were used to gauge profitability, liquidity and credit risk; and a model known as “Bank-o-meter” is used to gauge solvency. Findings suggest in terms of profitability and liquidity conventional banking leads, while in credit risk management and solvency maintenance Islamic banking dominates. Motivating factors for customers of Islamic banking are the location and Shari’a compliance, while in case of conventional banking it is wide range of products and services.