Efficiency, liquidity risk and asset quality: a comparative analysis of Islamic and conventional banks in Pakistan

PurposeThis study aims to investigate differences between Islamic and conventional banks in Pakistan with respect to their operational efficiency, liquidity risk and asset quality. Importantly, in addition to full-fledged Islamic and conventional banks, this study also investigates a more recently emerged breed of hybrid banks, i.e. Islamic divisions of conventional banks.Design/methodology/approachData for the period 2011-2020 was collected from financial reports of all full-fledged Islamic banks (5), Islamic banking divisions of conventional banks (8) and conventional banks (20) in Pakistan. Logistic regressions were designed to test the proposed hypotheses.FindingsThe findings suggest that full-fledged Islamic banks are operationally less efficient and experience higher liquidity risk than conventional banks. However, the asset quality of Islamic banks is better than that of conventional banks. Next, in the robustness analysis, the authors extended the sample size by adding the Islamic divisions (window) of the conventional banks; they found almost the same result except for efficiency which turned out to be non-significantly related to bank type.Practical implicationsThe findings are beneficial for investors, depositors, consumers and bank management in understanding the financial features of such as efficiency, liquidity and liquidity risk that separate Islamic banks from conventional banks.Originality/valueThe findings of this study present a clear picture to bankers and practitioners about some financial features of banking systems and depict that Islamic banks are in need to improve their liquidity risk management practices to compete with conventional banks.