The Internal and External Determinants of Financial Performance: Evidence from Islamic and Conventional Banking Sector in Pakistan

Abstract

Purpose: This study set out to investigate the effects of both
external and internal factors on financial performance (FIP) in
Pakistan's banking industry, with an emphasis on comparing the
conventional and Islamic banking sectors.
Data and Methodology: The sample of this study includes five
leading Pakistani conventional banks and five Islamic banks. The
study applied the OLS, fixed effect, or random effect model along
with some pre-requisite diagnostic tests like descriptive statistics,
correlation, and the Hausman test.
Findings: The study's findings show that, whilst asset
management, bank size, and liquidity have a positive and
substantial association with the ROE of Islamic banks, liquidity
and asset management have a positive link with the ROE of
conventional banks. Furthermore, a positive and significant link
was found between running Mushārakah and ROE, while a
negative and significant relationship was found between
diminishing Mushārakah and ROE.
Significance: This study examines internal and external factors
affecting the performance of top conventional and Islamic banks in
Pakistan from 2016-2022, providing crucial insights into the
effectiveness of Islamic banking for economic stability and
progress.
Implications: Policymakers, investors, and students of Islamic
banking and finance, as well as the conventional and Islamic
financial sectors, may all benefit from this research.