The Performance and comparison of Islamic/ Conventional Banking with the focus on credit, liquidity and interest rate risk

Abstract

This project aims to compare and analyze the performance of conventional retail/commercial banks with Islamic banks in managing banking risks. The financial and capital markets of Pakistan give an ideal platform for the Islamic banking industry to grow thus increasing its comparative market share in competition to conventional banking. The argument in favor for this point is the fact that, being an Islamic nation, the public has started preferring the interest- free banking system which is of course, Islamic. First Islamic bank started provision of services in Pakistan in the year 2002 and since then, many multinational Islamic banks have started operating in Pakistan for example Dubai Islamic Bank; various local banks have also started offering Islamic modes of financing like Askari Commercial bank. Comparatively, Islamic banks are exposed to low levels of credit and liquidity risk and offer a higher rate of return as opposed to the conventional banks. To prove this point, data from six conventional banks has been compared with six Islamic banks. This data is from 31st December 2006 to 31st December 2009. The analysis of relevant data has been done using the following methods: • T- stats • Mann Whitney test • Multiple linear regression test and • The univariate test