A study of comparative financial performance of Interest free banking with Interest based banking structure in Pakistan

Abstract

Interest free banking assembly was presented in 1940’s. 1400 years ago Riba free method was presented and virtually executed and imposed by our Holy Prophet (PBUH) to exterminate the immorality of usury. The primary intention of interest free banking was to offer a stage where a person could exploit his investments in a productive manner of banking business. There are full six interest free banks operating in Pakistan. The goal of our study is to evaluate the monetary presentation of the interest free banking and interest based banking productiveness of Pakistan. Total five interests free and five interest banks were taken of the same years when they were incorporated for this study from the Pakistani banking industry and their statistics has been collected for five years from 2005 to 2009. As the whole data which we have taken to judge the financial performances of the banks is secondary so to evaluate the performance we have taken ROA as an independent variable and few as dependent variable to verify that judgment the monetary performance of banking industry. The independent variables which we considered for this study are Total Expenses to Total Asset, Non-Interest Expense to Total Expense, Total Loans to Total Assets (TL/TA), Total Asset (TA), Total Equity to Total Assets (TE/TA) and Deposits to Total Assets. Along with these variables three different tests are also been applied in this study for the evaluation of the monetary presentation of the interest free and interest based banks and those three tests are Correlation Matrix, F-Statistics and Descriptive Statistics which discover the reaction of independent variables. Multiple regression Model is used to associate this monetary presentation. This revision gives a diverse copy of monetary linkage for interest free banking association in Pakistan, other than that certain variance in the active endeavors of interest free and interest based banks. Their monetary presentation pointers are still equivalent with the help of that profitability of the banks been calculated. At the end we conclude that the structure of the interest free banking is much greater to the interest based banks because they have the power to intensify their market segment by producing new activities in Pakistan.