The Internal and External Determinants of Financial Performance: Evidence from Islamic and Conventional Banking Sector in Pakistan

Purpose: This study set out to investigate the effects of both external and internal factors on financial performance (FIP) in Pakistan's banking industry, with an emphasis on comparing the conventional and Islamic banking sectors. Data and Methodology: The sample of this study includes five leading Pakistani conventional banks and five Islamic banks. The study applied the OLS, fixed effect, or random effect model along with some pre-requisite diagnostic tests like descriptive statistics, correlation, and the Hausman test. Findings: The study's findings show that, whilst asset management, bank size, and liquidity have a positive and substantial association with the ROE of Islamic banks, liquidity and asset management have a positive link with the ROE of conventional banks. Furthermore, a positive and significant link was found between running Mushārakah and ROE, while a negative and significant relationship was found between diminishing Mushārakah and ROE. Significance: This study examines internal and external factors affecting the performance of top conventional and Islamic banks in Pakistan from 2016-2022, providing crucial insights into the effectiveness of Islamic banking for economic stability and progress. Implications: Policymakers, investors, and students of Islamic banking and finance, as well as the conventional and Islamic financial sectors, may all benefit from this research.