Islamic and Conventional Banks an Analogy: Relationship Between Capital, Risk and Efficiency

Abstract

Abstract Does inefficiency interrelate with more risk? Is there any real distinction between traditional (interest based) and Islamic banks (non-interest based) as far as efficiency and risk taking concern? The purpose of this research is to answer these inquiries with regards to Pakistan. A few studies tried to analyze the performance of traditional and Islamic banking, but, no study specifically examines the trio between bank’s risk, capital and efficiency in Pakistan. By doing so the date has been extracted from the audited annual reports of concerned banks. Additionally, sophisticated statistical techniques applied to drew valid estimations such as; Data Envelopment Analysis (DEA), Seemingly Unrelated Regression (SUR) respectively. Moreover, the outcomes indicate that Islamic banks are highly effective in cost control as compared to traditional banks. Furthermore, the estimations of SUR establish the interrelation among efficiency and capital for Islamic banks only. Precisely, enhanced risk reduces capital and efficiency of Islamic banks, whereas the dynamic of traditional banks are different.