Impact of Endogenous and Exogenous Factors on Financial Compatibility of Interest Bearing and Non-Interest-Bearing Financial Institution of Pakistan

Abstract

The main purpose of this study is to analyze the differences between Islamic and commercial banks' performance. The growth in the size and increase in the number of Islamic banks shows that the Islamic banking system is considered as an alternative to the conventional banking system. Due to this, comparisons in terms of performance measurements and evaluation of the financial health of both types of banks are essential. This research paper investigates the bank efficiency as basic performance measurement in the Conventional and Islamic banks in Pakistan in the period between 2006-2024 using annually-published report data of banks operating in Pakistan with 10 Conventional banks and 4 Islamic banks as the samples for the study. Eighteen years of secondary data were collected from the annual report for each bank. Return on Asset ratio is chosen as the dependent variable, while capital adequacy, asset quality, management quality, earnings and liquidity (CAMEL), and four external variables economic growth, inflation, consumer price index, interest rate, and exchange rate are the independent variables. Descriptive analyses were done to understand the data. The independent t-test and Mann-Whitney test show the differences between Islamic and conventional banks based on the financial variables. The stepwise and hierarchical multiple regressions were used to determine the factor that affects the profitability performance of banks. Results show that there is a significant difference between Islamic and conventional banks’ performance.