Degree

Master of Business Administration

Faculty / School

School of Business Studies (SBS)

Advisor

Mr. Najmul Hassan, Adjunct Faculty, Department of Finance

Project Coordinator (External)

Muhammad Siddiq (Premier Relationship Manager - Meezan Bank Limited)

Client

Meezan Bank Limited

Committee Member 1

Dr. Mohsin Sadaqat, Project Reviewer, Department of Finance

Project Type

MBA Research Project

Keywords

Islamic Banking, Conventional Banking, Financial Performance, Financial Stability, Benchmark Interest Rate Sensitivity, Monetary Policy Transmission, Pakistan Banking Sector

Abstract / Summary

This capstone project performed a comparative quantitative analysis of Islamic and conventional banks in Pakistan with three major dimensions of financial performance, financial stability and sensitivity to the movement of benchmark interest rates. The study is set in the banking sector of Pakistan, where Islamic banks and conventional banks are facing the same macroeconomic conditions, the same regulatory framework, and the same prudential oversight mechanism administered by State Bank of Pakistan (SBP). In recent years, Islamic banking has grown rapidly in Pakistan, and has strengthened its market share by offering Sharia-compliant, asset-based and risk-sharing banking products. While the monetary policy transmission process by Islamic banks is structurally and contractually distinct from conventional banks, it is still part of the wider monetary policy transmission process and could be affected – either directly or indirectly – by the benchmark rates, including the SBP policy rate and KIBOR. This poses an important empirical question that is the focus of this study: In practice, do Islamic banks have materially different financial performance, financial stability, and benchmark-rate sensitivity than conventional banks? The study calculates, compares and correlates the metrics of Return on Assets (ROA), Return on Equity (ROE), Net Spread/Net Markup Margin, Capital Adequacy Ratio (CAR), Non-Performing Loan (NPL) Ratio, Cost-to-Income Ratio, Equity Multiplier, CASA Ratio (where disclosed) with Pakistan's benchmark interest-rate cycle for 6 years (from FY2020 to FY2025) for 4 leading Islamic banks (Meezan Bank, Bank Islami, Faysal Bank, and MCB Islamic Bank) and 4 leading conventional banks (HBL, UBL, Allied Bank and MCB Bank). The results indicate that the profitability of both segments of the banking industry closely followed the SBP policy rate cycle, improving during the tightening cycles that occurred between FY2022 and FY2023, and declining during the easing cycles that took place between FY2024 and FY2025. Despite their profit-sharing structure, the policy-rate cycle (PRC) had a highly significant statistical connection with both the average profitability and the average net spread of Islamic banks (average correlation coefficients of 0.92–0.97 for ROA, ROE, and Net Spread, respectively) in this sample, compared with conventional banks (average correlation coefficients of 0.69–0.87 for ROA, ROE and Net Spread, respectively). Conventional banks enjoyed a higher average capital position during the period, whereas Islamic banks (led by Meezan Bank) had the best asset quality on the aggregate level and a more pronounced disclosed CASA driven low-cost deposit franchise. The data problems noted in an earlier draft were superseded by a rebuild of the HBL's and Allied Bank's balance sheets, based on each bank's own ratios and disclosures of capital adequacy (Section 2.7) that made a meaningful difference in the conclusions of the study. Islamic and conventional banks have similarities rather than differences in this study sample, as the differences in leverage, cost-to-income efficiency and asset quality risk are found to be more a function of individual bank size and management decisions than the banking model itself, and benchmark-rate exposure is a common rather than an Islami-segment specific characteristic of the sector. The report proposes policy-relevant recommendations for regulators, bank management and investors, and identifies data-disclosure gaps (including on CASA breakdowns and on a standardized Z-Score methodology) for future research.

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