A Comparative Study of Islamic and Conventional Banking System

ABSTRACT

The main objective of this study is to compare the liquidity of Islamic and conventional banking system in Pakistan. For this purpose, the researcher has selected cross-sectional data of Seven Islamic and Seven Conventional banks on convenient sampling technique for 5 years from 2010 to 2014. Liquidity is selected as a dependent variable and explanatory variables are Net loan to total Assets and Liquid Assets to Total Assets. To get results from the above data we have feed it in SPSS & STATA. The empirical results explain that the liquidity of Islamic banks is drastically greater than the conventional banks.

Chapter no 1

Introduction

1.1 Background of the study

Islamic banking is an alternative system of conventional banking in many countries all over the world. Islamic banking system has been growing all over the world including Pakistan. In 1997 the first Islamic bank was established in Pakistan with the name of “Al-Meezan Investment Bank” to eliminate the interest. Now days the number of Islamic banks is significantly increased in Pakistan. Islamic banking is affecting a number of products and services of conventional banking system; because Pakistan is an Islamic country therefore people prefer Interest- free banking. A conventional bank is a banking system which offers their products & services to people or organizations at a fixed mark-up, where Islamic banking offers such products & services without any markup.  

According to the customer demand towards Interest free banking, a majority of the conventional banks in Pakistan including International banks have been also introduced Islamic banking department or complete branches to offer Islamic banking products & services. The reason of this research is to assess the liquidity between Islamic and Conventional Banks of Pakistan and to find out the major issues regarding their comparability.

Liquidity refers to the easily convertibility of an asset or a security into cash or near to cash. It is also known as marketability. Liquidity is an essential factor which evaluates the products & services of Islamic and Conventional banks. According to Stouffer (2011) Liquidity has a significant impact on investment decision making process. Liquidity is mandatory for every banking sector to run their operations smoothly.

Islamic banks and Islamic finance is established by the shariah as well as on Fatwa (the sayings of qualified Muslim scholar). Due to these fatwa’s Islamic banking become easy to adopt by Muslims.  

1.2 Problem Statement

Islamic banking system is based on interest free system. There must be a difference between the liquidity positions of both banking system. The major problem is to describe the differences between Islamic and conventional banks of Pakistan on the basis of liquidity Management.

1. Significance of Research:

This study will uncover the position of liquidity of Islamic banking system and Conventional Banking system of Pakistan. This would provide the way of comparison of  liquidity of both banking systems. This study will summarize the previous literatures of liquidity of both banking systems.