The Nexus of Capital, Risk, and Liquidity: A Comparative Study of Conventional and Islamic Banking in Pakistan

Abstract

The purpose of this study is to meticulously investigate the determinants of capital, risk, and liquidity and the joint association between them particularly in the context of conventional and Islamic banks in Pakistan. The banking and financial theory and the simultaneous equation model have been employed in this research to understand the relationships. Even though Islamic banks are growing rapidly, still research confirms the riskier character of Islamic banks. The findings of this study reveal that conventional banks outperform in asset quality. The primary concern for Islamic banks is the issue of sharing profits among depositors. Islamic banks are less capitalized in comparison with conventional ones. The resolution of such problems lies in the development of new products and initiating fresh equity. The literature lacks studies that discuss these relationships, especially in the context of the South Asian region. Hence, the present study makes a profound contribution to the extant literature and elevates further understanding.