Performance comparison of Islamic and Conventional banks in Pakistan

Abstract

The study examined and compared the performance of Islamic and conventional banks operating inside Pakistan during 2005 to 2009 by analyzing CAMEL test standard factors such as capital adequacy, asset quality, management quality, earning ability and liquidity position. The financial data for the study was mined from the banks’ financial statements existing on state bank of Pakistan website. A sample of 5 Islamic banks and 5 Conventional banks were selected to measure and compare their performance. Each year the average ratios were considered,because some of the young Islamic banks in the sample do not have 5 years of financial data.CAMEL test which is a standard test to check the health of financial institutions was used to determine the performance of Islamic and conventional banks. The study found that Islamic banks performed better in possessing adequate capital and better liquidity position while conventional banks pioneered in management quality and earning ability. Asset quality for both modes of banking was almost the same; conventional banks recorded slightly smaller loan loss ratio showing improved loan recovery policy whereas, UNCOL ratio analysis showed a nominal better performance for Islamic banks.

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