Abstract:
Performance of banking sector is critical for the functioning of the financial
system of a country as it ultimately casts impacts on economic stability and
growth. Islamic banking has become substantial component of financial structure
of many Muslim and non‐Muslim countries. Islamic banking in Pakistan has won
remarkable market share in just a few years. While failure of conventional banks
in western world has caused economic crisis in those economies, Islamic banks
have proved to be robust due to their profit and loss sharing mechanism. This
study is an attempt to analyze performance of Islamic banks in comparison of
their conventional counterparts.
This study does not apply a single performance evaluation method. It rather
addresses several dimensions of performance using multiple methods like Ratio
Analysis, DEA, Malmquist Index and Regression. Performance of Islamic and
conventional banks is compared using parametric and non‐parametric statistical
tests of significance. This study conceptualizes performance as combination of
efficiency and effectiveness. Total Factor Productivity change is further
decomposed into subcomponents. Tobit regression is applied to estimate
determinants of change in efficiency, effectiveness and performance. This study
analyzes 2004 to 2009 financial data of all the Islamic and conventional banks
working in Pakistan. However, to find out determinants of profitability this study
analyzes the quarterly data of Meezan Bank, which is the pioneer full‐fledged
Islamic bank of Pakistan.
Islamic banks outperformed conventional banks in terms of financial ratios of
capital adequacy, asset quality, liquidity, asset turn over and risk. However,
performance of conventional banks has been higher in terms of DEA scores of
efficiency and effectiveness. Although both the types experienced decline in TFP
Malmquist index, yet no significant difference in performance pointed out. Bank
specific factors cause variation in efficiency whereas market specific and
macroeconomic indicators affect effectiveness significantly. Liabilities, capital,
overhead expenses and earning assets have positive impact on profitability.
Deposits, service income and financing are inversely related with profitability of
Islamic banks.