Comparative Risk and Return Analysis of Islamic and Conventional Financial Institutions in Pakistan

Abstract

This paper aims to investigate whether the Islamic financial institutions perform better in terms of risk and return as compared to conventional financial institutions. To make an appropriate comparative study comprises banks, mutual funds, and Modaraba companies from 2006 to 2012. The risk and return series are oriented from stylized GARCH models and average return to risk ratio is used for potential comparison. This paper finds no difference in the performance of Islamic and conventional banks. However, large banks performed better than small banks on the basis of an average return to risk ratio. Islamic mutual funds are found riskier and provide fewer returns as compared to conventional mutual funds. Further, the performance of most Modaraba companies is found unsatisfactory. The study suggests that Islamic financial institutions need to resolve their liquidity problems, sort out new investment avenues and focus on developing short financing instruments. Islamic banks are also required to finance in risk sharing products other than fixed income.