Abstract

Islamic banking is a recent phenomenon which is growing at a fast pace around the world even in Non-Muslim countries. Islamic rules of financing are based on Shariah principles of Islam. In Shariah, interest (Riba) is forbidden, thus Islamic banking is largely seen as interest-free banking. This study compares the financial performance of the interest-free and interest-based banks operating in Pakistan i.e. full-fledge Islamic banks and Conventional banks. It’s aimed at investigating whether Pakistan has well established Islamic Banking system. Financial performance of these two categories is assessed using the CAMEL model. Banks with a large number of branches in Pakistan in each category are selected for the study. Total ten banks (equal from both categories) are included in the study with financial data of five years (2006-10).Statistical methods are comprised of Levene’s test, t-test, and Mann-Whitney test. Inferences imply that yet Islamic banks in Pakistan do not have much robust financial health as compared to the conventional banking in country. There is strong need of awareness, improvements, and expansions in the Islamic Banking system of Pakistan. Government should formulate Islamic economic policies which may support the Islamic banking in Pakistan to a finest level.