A Comparative Study On The Performance Of Islamic/ Conventional Banks In Managing Banking Risks (with A Special Focus On Credit, Liquidity And Interest Rate Risk)

Abstract

Primarily, the reason to carry out this project is to analyze the comparative performance of Islamic/ Conventional Banks in managing banking risks. Pakistan is a Muslim country and Islamic banking has ample opportunities to grow in this market. The general public also prefers and has desire that interest free banking system operates with parallel to conventional system. Keeping in view that first Islamic bank was come into origin in 2002 in Pakistan and in 2010 there are six Islamic banks and conventional banks are also launched Islamic modes of financing. Islamic Banking is expected to reach at 12 percent in 2012. The researchers examined that Islamic banks have low credit risk and liquidity risk and have high rate of return risk from their counter part banks. The research sample consisted of 12 banks (6 Islamic and 6 Conventional banks). The data was collected from December 31, 2006 to December 31, 2009 and is analyzed with the help of T-Stats, Mann Whitney test, univariate test and Multiple Linear Regression tests. According to these models, the researchers came to conclude that Islamic banks have considerably low credit and liquidity risks but considerably high rate of return than conventional banks. The researchers found that documentary credit and bank size are significant determinants of credit risk; loan sales and bank size are significant determinants of rate of return risk and loan sale and loan volatility are notably related to liquidity risk.