Financial stability of Islamic banking in Pakistan: An empirical study

Abstract

The relative financial strength of Islamic banks was assessed empirically based on evidence covering individual Islamic and conventional banks in Pakistani banking system with a substantial presence of Islamic banking. Industry specific, bank specific, country specific and macro-economic variables were pooled for pair-wise and regression analysis. We found that (i) small Islamic banks tend to be financially stronger than small conventional banks; (ii) large conventional banks tend to be financially stronger than large Islamic banks; (iii) small Islamic banks tend to be financially stronger than large Islamic banks, which may reflect challenges of credit risk management in large Islamic banks; and (iv) the market share of Islamic banks had a significant impact on the financial strength of other banks. Key words: Islamic banking, conventional banking, financial stability.