Comparison of Islamic Banks with Conventional Banks: Evidence from an Emerging Market

Abstract

This paper evaluates and compares the performance of Sharia-compliant banks with their conventional counterparts operating in Pakistan. Data of five full-fledged Islamic Banks(IBs) and fifteen Conventional Banks (CBs), all from Pakistan, have been used for the study. Study period comprises of six years from year 2008 to year 2013. Bank's orientation, efficiency, quality of assets and stability are the measures used to compare the performance of Shariah-compliant and conventional banks. The Islamic Banks in Pakistan are younger in age and smaller in size compared to the Conventional Banks. Based on the financial ratios of two types of banks, we find that the business model of Islamic Banks is inferior to the model of Conventional Banks. Islamic Banks are less cost efficient than Conventional Banks. However, Islamic Banks have superior asset quality with better bank stability position.