Financial Stability of Islamic Banks; A Case Study of Pakistan

Abstract

It is reported by Thomson Reuter in its publication, that Islamic banks contribute $ 1.3 trillion in total assets of International Banking Sector during 2012, with the growing rate of 15% per annum. According to State Bank of Pakistan (SBP), there are five (05) fully fledged Islamic banks operating in Pakistan. And their share to deposits in banking business is nearly 13% and is expected to grow to 20% in 2020. Being the deposit taker and engine of economy, banks are required to be financially sound. Since emergence of Islamic Banking in 1975, share of Islamic banks is growing in the industry and corporate or ordinary investors are very keen to know their credibility, so their stability is very much questioned. To answer this, an empirical measure i.e. Z-Score was calculated and was compared with large as well small conventional banks operating in                Pakistan. Financial statements for last eight years (2007-2014) of fifteen banks were obtained and ratios were calculated for each bank. In analysis, five large conventional banks, five Islamic              banks and five small conventional banks were selected from Pakistan. And based on the average values of ratios and empirical analysis using statistical tools it was resulted that Islamic banks were more economically secure than both huge and small conventional banks. But their return on assets was comparatively smaller than large conventional banks but was larger than small conventional banks.