Macroeconomic Conditions as Determinants of Profitability and Risk: A Comparison of Islamic and Conventional Banks in Pakistan

Khalid Hussain; Rafiullah Sheikh; Abdul Qayyum; Sana Naseer Abbasi

doi:10.32350/ibfr.111.01

Khalid Hussain Bahria University Islamabad
Rafiullah Sheikh Riphah International University
Abdul Qayyum University of Sargodha
Sana Naseer Abbasi

DOI: https://doi.org/10.32350/ibfr.111.01

Keywords: Keywords: Macroeconomic conditions, Risk, Efficiency, Profitability, Islamic banks

Abstract

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The current study aims to investigate the association between macroeconomic factors and Islamic and conventional banks’ profitability, technical efficiency, and credit risk in the context of Pakistan. The sample size comprised four (4) Islamic banks and four (4) conventional banks in Pakistan. Data was collected for a period of ten (10) years (2009-2018). To calculate technical efficiency, Data Envelopment Analysis (DEA) method was employed. Profitability was measured through Return on Assets (ROA) and credit risk through Debt to Asset Ratio (DAR). The results of regression estimation showed that generally, all economic variables had the same impact on both Islamic and conventional banks’ profitability, efficiency, and credit risk. However, interest rate showed an opposite impact on both bank types. It was found that interest rate improves the profitability of conventional banks, while it has an adverse impact on Islamic banks’ profitability. Moreover, interest rate improves the efficiency and increases the risk incurred by conventional banks, whereas its impact on the efficiency and risk of Islamic banks is not significant. The current study reveals certain differences in how these institutions respond to macroeconomic conditions. It helps to highlight the resilience or vulnerability of each banking system to economic fluctuations, providing practical implications for policymakers and practitioners both in Pakistan and in other Islamic finance markets.

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