The Conventional and Islamic Banking: A Socioeconomic Perspective

Abstract

A banking sector has always been conceptualized as a reflector of economic progress of any country. In a developing country like Pakistan, economic progress of any sector is also linked with multiple facets of social progress. In Pakistan, two parallel modes of banking systems (conventional and Islamic) offers two different paths to investors and lenders to achieve their financial goals. The profitability of these two different banking systems could determine the extent to which investors and lenders could benefit from achieving their social and economic up gradation. Primarily, this study aims at evaluating the financial performance of conventional and Islamic banks operating in Pakistan. This research endeavor mainly focuses on assessing the viability and profitability of both banking systems (conventional and Islamic) in terms of how efficiently these banks are fulfilling the customers’ and investors’ needs to facilitate them in uplifting their economic and social status. In this regard, a sample of this research study constitute ten banks representing five banks from conventional banking system whereas, as remaining five relates to Islamic banking sector. In order to achieve study objectives, the financial statements of selected banks covering the period of 2010-2015 were analyzed. The financial performance of selected banks was measured through efficiency, liquidity and leverage ratios. This study concluded that the degree of liquidity is higher and riskiness is lower for Islamic banks as compared to conventional banks whereas, conventional banks reported higher profitability then Islamic banks. The significance of this study is embedded in providing useful insight in terms of identifying that how both banking systems are responding to investors and lenders’ expectations and contributing towards economic development of a country.