Comparative Study: Conventional and Islamic Banking Performance in Pakistan

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1. International Journal of Management (IJM) Volume 12, Issue 3, March 2021, pp.448-459, Article ID: IJM_12_03_042 Available online at http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=12&IType=3 ISSN Print: 0976-6502 and ISSN Online: 0976-6510 DOI: 10.34218/IJM.12.3.2021.042 © IAEME Publication Scopus Indexed COMPARATIVE STUDY: CONVENTIONAL AND ISLAMIC BANKING PERFORMANCE IN PAKISTAN Hasil Murad Benazir Bhutto Shaheed University Lyari, Karachi, Pakistan Syed Baber Ali Barrett Hodgson University, Karachi, Pakistan Umair Baig* Benazir Bhutto Shaheed University Lyari, Karachi, Pakistan Ali Raza Benazir Bhutto Shaheed University Lyari, Karachi, Pakistan Shahan Ali Benazir Bhutto Shaheed University Lyari, Karachi, Pakistan Aseela Abdullah Benazir Bhutto Shaheed University Lyari, Karachi, Pakistan *Corresponding Author ABSTRACT The study aims to investigate conventional and Islamic banking in Pakistan over the period (2009-2019) using accounting ratios to measure performance in terms of profitability. Regression analysis is used to measure the influenced of CAMEL variables as independent variables and ROA and ROE used as dependent variables to measure the performance of Conventional and Islamic Banks. The results revealed that the Islamic banks allocated a greater share of their assets for financing activities as compared to conventional banks moreover, their resources are also better capitalized. Besides, the profitability of Islamic banks has gradually improved than conventional banks. Thus, the bank’s and shareholder’s market value in respective systems have progressively enhanced by executing different approaches. Islamic banking system deals in asset-based financing whereas, the conventional banking system deals in loans and advances. Inspiring factors for clienteles of Islamic banking are following Shari’a http://www.iaeme.com/IJM/index.asp 448 editor@iaeme.com
2. Hasil Murad , Syed Baber Ali, Umair Baig, Ali Raza, Shahan Ali and Aseela Abdullah compliance, whereas an extensive range of products and services are offered in the case of the conventional banking system. Key words: Islamic Banks, Conventional Banks, CAMEL, Return on Asset, and Return on Equity Cite this Article: Hasil Murad, Syed Baber Ali, Umair Baig, Ali Raza, Shahan Ali and Aseela Abdullah, Comparative Study: Conventional and Islamic Banking Performance in Pakistan, International Journal of Management (IJM), 12(3), 2021, pp. 448-459. http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=12&IType=3 1. INTRODUCTION Banking sector Competition has strengthened over the past eras and is continuously striving to position intensifying pressure on bank returns. Main financial bodies are strategically coming into new markets and proposing a varied spectrum of goods and services to combine their existence and increase their profitability (Abdul-Majid et al., 2010). Correspondingly, Sundararajan & Errico, (2002) stated that the Islamic banking system executes interest-free transactions, an Islamic bank is controlled by shariah and the regulations set by the host country. Moreover, the authors also stated that some Islamic banks were purposely set up to execute in compliance with shariah, and some conventional banks adapted the Islamic banking system. It is witnessed in Iran and Sudan that all conventional banks were transformed into Islamic banks as required by government legislation. Ariss, (2010) investigated that development of Islamic banking since 1975 has gained massive recognition as a worthwhile mode of financing. Islamic banks have flourished in the Far East and the Arabian Gulf. Moreover, a large number of banking organizations have diverted their several operations from conventional practices by locating Islamic windows or instituting well-developed Islamic Banks. Similarly, Parsa, (2020) highlighted that the recurring boom-bust cycles of recession observed across various regions and states over recent decades have highlighted the vulnerability of the conventional banking and financial institution against the financial crisis. On contrary, Čihák & Hesse, (2010); Hasan & Dridi, (2011); Kenourgios et al., (2016); Rashid et al., (2017) explored that Islamic banks with their higher capitalization and sufficient liquid assets have shown a better resilience against such havoc. Among others, this has led to the propagation of Islamic banking at a higher pace in different nations across the world, mainly in Asia and the Middle East. Regardless of prevailing policies and controls, the Government of Pakistan and banking authorities are still facing difficulties in constantly changing economic developments and foreign trade. The reasons for these challenges that the government faces are due to Global Banking Crises, Global scams, and natural disasters. The Pakistani economy is going through a big hit due to the pandemic (COVID 19). According to Hassan et al., (2020) there is a strong connection between funding liquidity risk and bank risk in both Islamic and conventional banks of Pakistan. The authors emphasized the operations of Islamic and conventional systems. There are manmade principles in conventional banks. However, Islamic banks follow Shariah laws. Both systems aim to maximize profits. Conventional banks for lending money use compound interest. There is a fixed Income when lending money whereas, the profit and loss sharing concept is implemented by an Islamic bank. Loss shared by an Islamic bank is based on Musharakah or Mudharabah and others. Similarly, Islamic banking systems and Conventional banking systems perform all necessary functions required such as to assist the business world to run the economy smoothly but they differ in their operations and philosophies. The effective tools of the Islamic banking system tend numerous professionals and experts in the foreign states to request training in http://www.iaeme.com/IJM/index.asp 449 editor@iaeme.com
3. Comparative Study : Conventional and Islamic Banking Performance in Pakistan addition to exertion in the Islamic financial system. Moreover, the leading banks of the world now compel to must open and operate their banking system based on Islamic teachings. In this regard, they follow the principle of the Islamic Sharia Law. Moreover, Islamic banking is free from gambling and speculations as it runs in the real economy globally. Moreover, Conventional Banking is always at high risk as compared to Islamic Banking because it deals with debt financing and most of its transactions are executed based on market speculations. This eventually sets a perfect example of Islamic Banking dominance over Conventional Banking (Mahmood, 2020). In Pakistan, the Islamic Banking operations are separated from Conventional Banking operations and the banks can’t overlay one operation to another. Conventional Banking in Pakistan is running under the guidance of the State Bank of Pakistan whereas, the Islamic Banking system operates under the Sharia Advisory Board. The board is responsible to develop, introduce new products and services under Islamic guidance, and create the demands and enhance the usage of such products and services. Pakistan consists of five fully Sharia Compliance Islamic Banks with the support of twelve Conventional Banking and Islamic Banking window. In Pakistan, there are more than 268 Islamic branches exist that are retained and run by conventional banks as Islamic windows. The existing Islamic Banks are having divisions of more than 524. This means that Conventional Banking Islamic windows are more than half of the total number of branches of Islamic Banking that exist in Pakistan. It is quite clear now that Conventional Banking is striving to obtain the Islamic Banking model in its banking standards because of the stimulating business trend of Islamic windows with the sharia compliance model. This comparative study aims to estimate and measure the financial performance of Islamic Banking and Conventional Banking in terms of profitability in Pakistan (2009 to 2019). This statistical analysis of two distinct banking systems is to evaluate the operations of banks using several financial rates. The measurement is based on the CAMEL framework which is a rating system, where supervisory authorities are based on five factors, which are capital adequacy, asset quality, management quality, earnings, and liquidity. Furthermore, it assesses the performance of profitability between Islamic and conventional banks concerning return on assets (ROA), and return on equity (ROE). 2. LITERATURE REVIEW The performance and competency of Islamic banks, in general, have been studied comprehensively. The emphasis on these past studies was to compare the execution of the Islamic banking system with conventional banks. Chaker & Salih, (2010) highlighted that more competent and proficient banks are those that have similar market share and low nonperforming advance ratio. The authors further discussed the performance of Islamic banks with conventional banks in different economies and examined the performance of Islamic and conventional banks. They discovered that Islamic banking scheme have documented higher return on assets (ROA) as they can utilize prevailing overheads carried by conventional banks. Their outcomes confirmed their controversy that Islamic banking that flourishes on interest-like products is less likely to outshine conventional banks in terms of efficiency. Conventional Banks and Islamic Banks have an important participation in the economic development of the country. Various historical researches and development have been established in a way to check the fact that there is an effect over the procedure, process, and viability of both the banking sectors. Mrad & Mateev, (2020) investigated that both banking in the MENA region and U.A.E had done a comparison of Conventional Banking and Islamic Banking in the U.A.E using correlation, evocative, and several regression analyses considering their effectiveness and profitability. They found a major difference in cost-effectiveness amongst Conventional http://www.iaeme.com/IJM/index.asp 450 editor@iaeme.com
4. Hasil Murad , Syed Baber Ali, Umair Baig, Ali Raza, Shahan Ali and Aseela Abdullah Banking and Islamic Banking in the U.A.E. The principal suitability measures on a bank’s costeffectiveness are commanding in equal banks. Risk-taking had countless effects on the cost competence of traditional banks, but this influence is not good enough for Islamic banks. They found the productivity of the bank is not meaningfully dissimilar among Islamic and Conventional Banking. The impact of money acceptability processes on a bank’s success is quite significant only in conventional banks. However, Islamic profitability is more reactive to risk-taking. They suggested that since Islamic and conventional banks are governed by different rules and laws, then setting up and application of regulations must be different for both banks to enhance their financial performance and market position, compliance standing, and risk assessment. Bitar et al., (2019) explored that the efficiency of conventional and Islamic banks proposes distinct opinions on the efficiency of Islamic banks and conventional banks. Similarly, several studies have supported the view that Islamic banks are more competent based on four main points firstly; Islamic bank’s mark-up financing contracts are asset-backed and thus associated with the real economy that makes them less exposed to losses linked to speculative activities. Secondly, Islamic banks pay competitive returns to Investment Account Holders to preserve existing depositors and fascinate new ones. If return rates are not competitive so Investment Account Holders will withdraw funds and invest somewhere else. Correspondingly, Farooq & Zaheer, (2015) reported that pressure may discipline Islamic banks and make them more competent. Thirdly, Bitar et al., (2019) discussed that the managerial capability of Islamic banks has augmented substantially to cover weaknesses related to constraints imposed by Shari'a law. According to Johnes et al., (2014) Islamic banks have improved their investment in workforce training and in refining public knowledge of Islamic financial goods. These trials have led to an improved reputation, positive bank experience, and larger demand for their products. Finally, Bitar et al., (2019) discusses that Islamic banks are more efficient than conventional banks due to macroeconomic factors. For example, Bitar et al., (2017) suggest that oil revenues, the speedy economic development through the private banking sectors, the inaugural of the banking sector to foreign competition, and the newly adopted financial reforms has a pressure on Islamic banks. This pressure can be transformed into new financial products and more expenses on research and development, as well as on staff training to guarantee efficient resource allocation and enhance productivity. Consistently, Ali et al., (2019) researched the comparative analyses between both the banking sectors using efficiency ratios. They took five Islamic and five Conventional Banks from the Islamic republic Pakistan. Moreover, they illustrated that Islamic Banking has performed more competently. They also suggested that the Islamic sector must focus on the development of new products and new technical solutions to fulfill the client’s needs and also maintain proactive services. Their study concluded that the Islamic banking sector has a better structure than commercial banks because it's less risky than a commercial bank, but there is no substantial change in terms of profitability among both. Likewise, Arshed & Kalim, (2020) in their study assessed the market of Islamic banking deposits. Bank as an intermediary ensures effective allocation of surplus capital, but steady accessibility of deposit because resources help banks to accomplish long-term capital structure portfolio. Moreover, unlike conventional banks, Islamic banks have to meet Shari'ah requirements. The scholars further concluded that the international Islamic banking deposit market is sound and stable converging. Hence, banks must confirm their association with price while formulating a strategy to appeal deposits. Similarly, they also demonstrated the impact of fixed capital formation, net financing, and Islamic banking product on growth. The study found a long-run positive correlation between economic growth and Islamic financial investment and capital accumulation. The growth of the economy is positively stimulated with http://www.iaeme.com/IJM/index.asp 451 editor@iaeme.com
5. Comparative Study : Conventional and Islamic Banking Performance in Pakistan Islamic banking products like Ijarah, whereas diminishing Musharkah and Murabaha is an inverse relationship with economic growth. Ijarah was the product that was perfectly positively related in both the long run and the short run. Saeed et al., (2020) explored that risk taking attitudes in capitalization are classified as Islamic and conventional. The emergence of Islamic banking system in compliance with Shariah principles is an important development in the financial world. Despite developing pains and a loss of confidence in global financial systems, Islamic institutions has sustained rapid growth. Contrary, Kamarudin & Kassim, (2020) revealed that customers are more gratified with the conventional banks in terms of their consistency, responsiveness, reassurance, and empathy, except for tangibility, where they are more contented with the Islamic bank. Besides, customers who have been engaged with the bank for above one year consider each dimension of employee professionalism as important in ensuring their satisfaction with the bank. Thus, this study found TE/TA (Total Equity over Total Assets), EBTE (Earning-before-tax to Equity), EBTTA (EBT to total Assets), and ratio loans to assets, during evaluation applying several measures. Findings of this study demonstrates that Conventional Banking rapidly increases its market share. 2.1 Conceptual Framework The conceptual framework of this study is derived from the past studies which have been discussed in the above section. A conceptual framework describes important relationships among designed variables of the study. Moreover, it enables us to understand the derived network of existing ideas for the current study. Figure 1 2.2 Hypothesis This study proposes the following hypothesis mentioned below: Ha1: CAR is significantly associated with the profitability of Islamic Banking. Ha2: LQR is significantly associated with the profitability of Islamic Banking. Ha3: AQR is significantly associated with the profitability of Islamic Banking. Ha4: MQR is significantly associated with the profitability of Islamic Banking. Ha5: EQR is significantly associated with the profitability of Islamic Banking. Ha6: CAR is significantly associated with the profitability of Conventional Banking. Ha7: LQR is significantly associated with the profitability of Conventional Banking. http://www.iaeme.com/IJM/index.asp 452 editor@iaeme.com
6. Hasil Murad , Syed Baber Ali, Umair Baig, Ali Raza, Shahan Ali and Aseela Abdullah Ha8: AQR is significantly associated with the profitability of Conventional Banking. Ha9: MQR is significantly associated with the profitability of Conventional Banking. Ha10: EQR is significantly associated with the profitability of Conventional Banking. 3. METHODOLOGY This study explored through empirical investigation, the data is accumulated from the annual financial reports. This study applied financial ratios to explore a comparative investigation between Conventional and Islamic Banking, therefore, data were gathered from the period of 2009 to the end of 2019 of Pakistani banks. This study considers eight (8) major banks in Pakistan and categorizing them into 2 clusters, one cluster of Islamic Banking system with 4 banks and another cluster of Conventional Banking system with 4 banks. This study examines with the help of regression analysis and correlation, For this purpose, SPSS software was used in this current study to evaluate financial ratios to ascertain profitability in Islamic and Conventional Banks. Therefore, these were the following variables used in the study. These variables have been classified into two (2) dependent and five (5) independent variables 3.1 Dependent Variable ROE, Returns on equity ROA, Returns on Assets. 3.2 Independent Variables Capital Adequacy Ratio (CAR) = Total Equity / Total Assets Asset Quality Ratio (AQR) = Provision Loan Losses / Total Loan Management-Quality-Ratio (MQR) = Loan / Total Deposit Earning-Quality-Ratio (EQR) = Operating Cost / Total Revenue Liquidity-Quality-Ratio (LCR) = Liquid Assets / Total Deposit Moreover, CAMEL (Capital Adequacy, Asset Quality, Management Quality, Earning Quality, and Liquidity Quality) approach is well-thought-out for this study with the help of a regression equation to estimate the financial performance of Conventional Banking and Islamic Banking. Furthermore, this research will correspondingly equate the results of two categories of Pakistani banks. When undertaking the factors of returns and performance of banks for measurement purposes the ratios of profitability are significant. Typically, the previous finding such as Algaoud & Lewis, (2007) undertook ratios of profitability. Following Table-01 shows the brief description of the variables used in this study. Table 1 Brief description of used variables No. Variables Dependent Variables 1 Return on Assets (ROA) Definition 2 ROE ratio is utilized to calculate the profitability of the Conventional and Islamic Bank. It’s calculated by dividing the net profits of the firm over the whole equity. The fundamental approach to use ROE is to measure the return in percentage over the shareholder’s equity. The interpretation of the ROE explain Return on Equity (ROE) ROA is a viability ratio which is derived by dividing the net revenue of the firm over the whole assets. It’s a fundamental approach that is used to explain net pay return in the proportion of the organization's effectiveness of assets. http://www.iaeme.com/IJM/index.asp 453 editor@iaeme.com
7. Comparative Study : Conventional and Islamic Banking Performance in Pakistan that how much the firm can get benefits from using the equity of the shareholders Independent Variables 1 Capital Adequacy 2 Assets Quality 3 Management Quality 4 Earning Quality 5 Liquidity Quality The capital adequacy ratio (CAR) can be calculated to analyses the solvency of the bank. It is a relation between risk of capital and its sources, that ratio has mostly recognized by capital to riskweighted assets ratio, capital adequacy ratio (CAR) can be calculated by the help of companies’ Assets and Equity, Equity in totality by the total assets over by Total Assets. TETA (total equity to total assets). Advances are the main source of income of commercial banks, it is treated as assets in the balance sheet. The assets quality ratio is calculated to analyses how much Bank has control over credit, it is necessary to control and manage the credit risk. The relation of total loans over a whole deposit is calculated by analyses the liquidity of the banks, it depends on Top management decision, how to utilize the deposit if the ratio of the total loan over a total deposit is higher, this means there isn't enough liquidity to cover any unforeseen circumstances and fund requirements Every organization is operated to earn maximum profit, this is the main target of any organization in the world, to determine the profit the cost over revenue proportion must be calculated. EQR is defined as how efficiently the bank is being operated and efficiently utilizing the available resources. This ratio is calculated through (CR) (total operating cost divided by total revenue) of the bank. The liquidity ratio can be calculated by the proportion of the liquid assets over the total deposit LIQD. It is mandatory for banks to have enough liquidity, because the bankers and other financial institutions cannot postpone the payment of any customer, and cannot impose an obligation to pay the payment of interest before its due or maturity. 3.3 Model Specification ROE=α1+β1(CAR)t1+β2(AQR)t2+β3(MQR)t3+β4(EQR)t4+β5(LQR)t5 +ε (1) ROA=α1+β1(CAR)t1+β2(AQR)t2+β3(MQR)t3+β4(EQR)t4+β5(LQR)t5 +ε (2) Where: ROA: Return on Assets ROE: Return on Equity EQR: Earning Quality Ratio CAR: Capital Adequacy Ratio AQR: Asset Quality Ratio MQR: Management Quality Ratio LTA: Logarithmic of Total Assets LQR: Liquidity Quality Ratio Ε: Error term. α1: alpha (constant) for each model respectively. β1, β2, β3, β4, β5, β6, β7: Beta coefficients of the regression equation. http://www.iaeme.com/IJM/index.asp 454 editor@iaeme.com
8. Hasil Murad , Syed Baber Ali, Umair Baig, Ali Raza, Shahan Ali and Aseela Abdullah 4. RESULTS 4.1 The Correlation Concerning Islamic Banks The correlation has been applied to Islamic banks and the results have been presented, results found that there is a weak Negative relationship among (ROE) & (ROA) as dependent variables with the number of independent variables such as (CAR) capital adequacy ratio and (AQR) assets quality ratio. Similarly, a very weak negative relationship among (ROE) & (ROA) as the dependent variable with (MQR) management quality ratio. While there is a perfect negative relationship between the dependent variables (ROE) and (ROA) with the independent variable (EQR) earning quality ratio which means by increasing in earning quality ratio may decrease the profitability. In the last there is a weak positive relationship between dependent variables of profitability (ROE) and (ROA) with independent variable (LQR) liquid quality ratio, which means by increasing in liquid equality ratio may increase in profitability. Following table-xxx is given below for presenting details of the above discussion. Table 2 Correlation concerning Islamic Bank Correlation ROE ROA MQR CAR EQR AQR LQR ROE 1.000 0.914 (0.128) (0.311) (0.859) (0.299) 0.3343 ROA MQR CAR EQR AQR 1.000 (0.049) (0.364) (0.926) (0.281) 0.3649 1.000 0.027 (0.003) (0.370) 0.531 1.000 0.338 (0.241) 0.141 1.000 0.245 (0.344) 1.000 (0.290) LQR 1.000 4.2 The Correlation Concerning Conventional Banks Likewise, the correlation has been applied to Conventional banks. Results highlighted that there is a strong negative relationship between (ROE) & (ROA) as dependent variables with the (EQR) earning quality ratio as an independent variable, it means by increasing in earning quality ratio will decrease the profitability of the conventional banks. However, there is a very weak positive relationship between dependent variables of profitability such as (ROE) and (ROA) with independent variables (MQR), (CAR), and LQR. It means by increasing the independent variables would be a reason for slightly increase profitability. In last, there is a weak negative relationship between dependent variables of the study and the number of independent variables (LQR) and (AQR), which means there is an inverse relationship between both of them, by increasing the independent variable may decrease the ratio of profitability. Following table-xxx is given below for presenting details of the above discussion Table 3 The correlation concerning Conventional Banks Correlation ROE ROA MQR CAR EQR AQR LQR ROE 1.0000 0.6842 0.0701 0.0609 (0.7416) (0.0654) (0.0842) ROA 1.0000 0.1809 0.0712 (0.6167) (0.2051) 0.1107 MQR CAR 1.0000 (0.3724) (0.0290) (0.4729) 0.2111 http://www.iaeme.com/IJM/index.asp 455 1.0000 (0.0572) (0.0279) 0.2919 EQR 1.0000 0.2079 0.2197 AQR 1.0000 (0.2921) LQR 1.0000 editor@iaeme.com
9. Comparative Study : Conventional and Islamic Banking Performance in Pakistan 4.3 Regression Analysis Regression analysis is considered a reliable statistical approach to explore the impact of the desired variable of the study. In this study, we are focusing to explore the impact of CAMEL on banks' profitability which has been measured by ROA and ROE as dependent variables of the current study. Regression analysis conducted into two sets to investigate extensive findings of the study; a model of regression of Islamic-banks, and second, regression model of conventional-banks, in other words, the analyses of regression are conducted over the Islamic banks as well as conventional banks separately and findings of both groups are compared to reach an exclusive conclusion. 4.4 Regression Model Analysis of Conventional and Islamic Banks Separately Islamic Banking: The value of MQR Coefficient with ROA is -0.0144 and the probability value is 0.0115 of IB, concluding that MQR shows significant inverse relation with ROA while the Value of MQR Coefficient with ROE is 0.1605 and the probability value is 0.3759 of IB, concluding that MQR shows insignificant positive relation with ROE. As per the figures and their results we conclude that the alternate hypothesis is accepted with the ROA variable but reject-with another profitability variable that is ROE. The coefficient value of CAR with ROA is -0.0428 and P-value is 0.0269 of IslamicBanking, resulting in that CAR interprets significant indirect relation with ROA while the coefficient value of CAR with ROE is 0.1266 and P-value is 0.7880 of Islamic-Banking, resulting in that CAR present insignificant direct relation with ROE. Results found that the alternate hypothesis is rejected with ROE but accept with ROA. The value of the Coefficient of EQR with ROA is -0.0189 and the value of probability is 0.0000 of IB, interestingly, EQR shows significant inverse relation with ROA while the value of EQR Coefficient with ROE is -0.5301 and the probability value is 0.0000 of IB, resulting in that EQR shows significant indirect relation with ROE. The coefficient value of AQR with ROA is -0.0605 and P-value is 0.0337 of Islamic banking, concluding that AQR presents significant inverse relation with ROA while the coefficient value of AQR with ROE is 0.7202 and P-value is 0.1584 of Islamic banking, resulting in that AQR shows insignificant positive relation with ROE. As per facts and figures and their results regarding AQR with profitability measures we conclude that the alternate hypothesis is accepted with the ROA variable but reject-with another profitability variable that is ROE. LQR Coefficient value with ROA is 0.0365 and the probability value is 0.0231 of IB, concluding that LQR shows significant positive relation with ROA while the coefficient value of LQR with ROE is 0.1159 and the probability value is 0.4084 of IB, interpreting that LQR shows insignificant direct relation with ROE. To conclude the alternate hypothesis is rejected with ROE but accepted with ROA. Conventional Banking: MQR Coefficient value with ROA is 0.0145 and P-value is 0.3482 of Conventional-banking, resulting in that MQR shows insignificant direct relation with ROA while the MQR Coefficient value with ROE is 0.1605 and the probability value is 0.3759 of CB, concluding that MQR shows insignificant positive relation with ROE. The coefficient value of CAR with ROA is 0.0055 and the probability value is 0.8912 of CB, concluding that CAR represents not significant direct relation with ROA while the coefficient value of CAR with ROE is 0.1266 and the probability value is 0.7880 of CB, concluding that CAR shows insignificant positive relation with ROE. The Coefficient value of EQR with ROA is -0.0339 and the probability value is 0.0000 of CB, concluding that EQR shows significant inverse relation with ROA while the coefficient http://www.iaeme.com/IJM/index.asp 456 editor@iaeme.com
10. Hasil Murad , Syed Baber Ali, Umair Baig, Ali Raza, Shahan Ali and Aseela Abdullah value of EQR with ROE is -0.5301 and the probability value is 0.0000 of CB, concluding that EQR shows significant inverse relation with ROE. The coefficient value of AQR with ROA is 0.0229 and P-value is 0.5947 of CB, indicating that AQR shows insignificant positive relation with ROA while the coefficient value of AQR with ROE is 0.7202 and P-value is 0.1584 of CB, indicating that AQR also shows insignificant positive relation with ROE. LQR Coefficient value with ROA is 0.0192 and the probability value is 0.1125 of Conventional banking, which shows that LQR presents significant direct relation with ROA while the LQR Coefficient value with ROE is 0.1159 and the probability value is 0.4084 of CB, shows that LQR presents insignificant positive relation with ROE. Table 4 Regression analysis related to Conventional Banks and Islamic Banks Regression Constant coefficients MQR P-values CAR P-values EQR P-values AQR P-values LQR P-values R-Squared R-Squared (adjusted) F value Conventional Banks ROE ROA 0.2003 -0.0024 0.1605 0.0145 0.03759 0.03482* 0.1266 0.0055 0.7880 0.8912 -0.5301 -0.0339 0.0000*** 0.0000*** 0.7202 0.0229 0.01584** 0.05947* 0.1159 0.0192 0.04084* 0.1125 0.5831 0.4606 0.5218 0.3813 9.5106 5.8068 Islamic Banks ROE ROA 0.2003 -0.0030 0.1605 -0.0144 0.03759* 0.0115* 0.1266 -0.0428 0.07880 0.0269* -0.5301 -0.0189 0.0000*** 0.0000* 0.7202 -0.0605 0.1584 0.0337* 0.1159 0.0365 0.04084* 0.0231* 0.5218 0.8930 0.5218 0.8772 9.5106 56.7327 5. CONCLUSION In this study, we compared both conventional and Islamic banks performance, primarily keeping conventional banks aside, the Islamic banking system established there norms and standards with the exclusion of bank rate and the hypothetical market trend. The aim of the research is pretty significant in the view that both the banking system have their realities. They both system are facing ups and downs in the current banking environment of Pakistan. However, the most essential aspect of the study is not merely concluded that which banking system is better performing in Pakistan after comparing financial ratios and regression analysis. Moreover, this study allows investors to think and analyze specifically that which system is best for them. The two different banking systems have differences in their ways and approaches to get market share and enhanced the value and worth of shareholders. Primarily, this study highlighted the historical background of both approaches and their effective aspects in details. It is also concluded after covering the aspects and multiple dimension that conventional banks are also observing the worth of the Islamic banking system, therefore, they are converting conventional branches into Islamic banks and even launching many new branches that are based on Islamic banks. This kind of decision is significant evidence that there is a success of the Islamic banking model over the Conventional Banking system in Pakistan. The acceptance of the Islamic Banking system is much wider, therefore, it is extending vastly in Pakistan, the behaviour of banks consumer are abruptly positively changing and improving the level of trust http://www.iaeme.com/IJM/index.asp 457 editor@iaeme.com
11. Comparative Study : Conventional and Islamic Banking Performance in Pakistan and confidence in Islamic banks over the conventional bank. Therefore, these consumers behaviour is must be appealing to the banking authorities to must ensure to open there Islamic banks window as well. For this purpose, a CAMEL approach is used for examining the relationship between the two banking sectors. Keep in consideration the importance of the research topic. Another purpose of this research is to highlight the features of both banks regarding the criteria about how they get and accumulate the wealth and resources in the manner that inventors and other authorities may extract the benefits out from them. Thus, this is essential research in the field of knowing banking capacities and measurements. We used a stationary test to check the data integrity of time series values and correlation analysis, we have divided correlation results among two tables. At the first step we have calculated the Islamic bank correlation test and At the stage of the second, we run the correlation on conventional Bank, We found the negative and positive relation between profitability and independent variables, but the independent variable (EQR) is a strong negative relationship with profitability, by considering regression analysis (EQR) has a more significant and consistent variable among all of them. We have done a comparative analysis of Islamic and conventional banking and we found the results that the profitability does influence due to CAMEL analysis. Therefore, banks must consider and maintain all these ratios to establish sustainability in the short run in general and specifically for the long term perspectives. Moreover, this is the recommendation for future researchers to do the same research with a large sample of banks to endorse the results of this current study and similarly, a comparative study should be conducted to compare the performance of Islamic banks with the Islamic banks of another country and highlight the ignored areas. Moreover, suggest the policy to the bankers to fulfil the deficiency areas and help to enhance the financial performance of the banks. REFERENCES [1] Abdul-Majid, M., Saal, D. S., & Battisti, G. (2010). Efficiency in Islamic and conventional banking: an international comparison. Journal of Productivity Analysis, 34(1), 25-43. [2] Algaoud, L. M., & Lewis, M. K. (2007). Islamic critique of conventional financing. Handbook of Islamic Banking, 38. Ariss, [3] Ali, S. F., & Naeem, M. (2019). Does service quality increase the level of banks performance. ? Journal of Management Development. [4] Arshed, N., & Kalim, R. (2020). Modelling demand and supply of Islamic banking deposits. International Journal of Finance & Economics. [5] Bitar, M., Pukthuanthong, K., & Walker, T. (2019). Efficiency in Islamic vs. conventional banking: The role of capital and liquidity. Global Finance Journal, 100487. [6] Chaker, M. N., & Salih, A. (2010). The impact of the global economic crisis on the Islamic banks and financial institutions across the UAE. Journal for International Business and Entrepreneurship Development, 5(2), 113-125. [7] Čihák, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2-3), 95-113. [8] Erol, C., Baklaci, H. F., Aydoğan, B., & Tunç, G. (2014). Performance comparison of Islamic (participation) banks and commercial banks in Turkish banking sector. Euro Med Journal of Business. http://www.iaeme.com/IJM/index.asp 458 editor@iaeme.com
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