Abstract
PurposeIn recent years, the fast growth of Islamic banks (IBs) has generated debates among policymakers and economists about the sustainability and performance of these institutions. This paper aims to undertake a comparative analysis of the financial performance of IBs and conventional banks (CBs) in Pakistan over the period 2008–2019 to evaluate how IBs are faring compared to their conventional peers.Design/methodology/approachThis paper considers Financial Ratio Analysis (FRA) to analyse and compare the performance of the top-10 IBs and CBs operating in Pakistan. The sample includes five full-fledged IBs and five CBs which offer Islamic windows in Pakistan. The top-five performing CBs offering Islamic windows have been selected in this study.FindingsThe results show that IBs are better capitalized, less risky and have higher liquidity as compared to CBs. In contrast, the profits of IBs are found to be lower than those of CBs.Research limitations/implicationsThe study has provided an analysis of financial performance only for Pakistan. A cross-country analysis could be more representative of the performance of IBs.Practical implicationsThe study infers that the size of the Islamic banking industry in Pakistan should be enhanced by opening new branches and promoting Islamic financial literacy.Originality/valueThe study assists investors, creditors, debtors and managers in making better decisions. It also provides the latest valuable information to regulators and policymakers that can be used to make rules and policies for the finance industry in Pakistan.
Highlights
The surge in Islamic banking has generated debates among policymakers and economists about the sustainability and performance of Islamic banks (IBs)
The findings of this study provide details of challenges that undermine the performance of IBs, which are not well highlighted by available studies in Pakistan
The findings show that IBs have better capitalization and a higher share of assets to loans but are less competitive and less profitable than conventional banks (CBs)
Summary
The surge in Islamic banking has generated debates among policymakers and economists about the sustainability and performance of Islamic banks (IBs). The literature reveals that various studies have evaluated the performance of IBs for different countries in different times, such as Rosly and Bakar (2003), Mokhtar et al (2008), Siraj and Pillai (2012), Elsiefy (2013), Sillah et al (2014), Setyawati et al (2017), Daoud and Kammoun (2017), Akram and Rahman (2018), Johnes et al (2018), Rusydiana and Sanrego (2018), Alsartawi (2019), Berger et al (2019), Mustafa (2019), Ledhem and Mekidiche (2020) and Baeshen and Shaheen (2021). The full terms of this licence maybe seen at http:// creativecommons.org/licences/by/4.0/legalcode
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