Student Name

Saira HannanFollow


Master of Science in Islamic Banking & Finance


Department of Finance

Faculty/ School

School of Business Studies (SBS)

Date of Submission

Spring 2022


Dr. Ashraf Khan, Assistant Professor, Department of Finance, Institute of Business Administration, Karachi

Committee Member 1

Dr. Ashraf Khan, Supervisor, Institute of Business Administration, Karachi

Committee Member 2

Dr. Irum Saba, Associate Professor, Program Director MS-IBF


This paper has shed light on the risk structure in Pakistan’s banking sector in presence of a hybrid banking system where both Islamic and conventional banks are operating side by side. Islamic banks and conventional banks are based on differentiated models of source of financing where returns offered by conventional banks are largely affected by the interest rates prevailing in the money market. Whereas, since Islamic banking modes and financing models are interest-free, the returns offered by them are not expected to be influenced by the interest rates changes. Finding out the causal relationship between the rates of return offered by the two banking systems, it might be possible to present an outlook on the general risk structure of the banking sector of Pakistan. Pair-wise Granger Causality Test has been used to find the causal direction between the interest rates by conventional banks and profit rates by Islamic banks. The results showed no causality between the two-time series. In addition, Johansen System Cointegration Test has been deployed to find the long run relationship between the two rates and has been found that there exists no correlation. Based on the results of this study, it may be concluded that the Islamic banks are not following or dependent on the conventional banks’ convention of deciding rate of returns i.e., Islamic banks profit rates are not internally linked with the interest rates hence they are not exposed to the interest rate risk as conventional banks are. This is one of the first studies on Pakistan’s banking industry to empirically investigate the relationship between the rate of returns coming from the two distinguished banking institutions.

Document Type

Restricted Access

Submission Type

Research Project

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