Islamic Banking: An Appraisal of Insolvency Hazard

Abstract The literature reveals that most of the comparative studies have been conducted in the field of conventional versus Islamic banks while as much focus has not been paid to analyze comparative performance of Islamic banks across the countries and literature is scant in this area. This study appraises and analyses comparatively the riskiness and solvency of selected Malaysian and Pakistani Islamic banks during 2006 to 2011. Data have been obtained from secondary sources of annual audited financial reports of various banks under stud that has been analyzed through mean, standard deviation, coefficient of variation and t-test. The empirical findings demonstrate that solvency has gradually condensed and Malaysian Islamic banks are more vulnerable to financial risk as financial leverage has moved upward. The Malaysian Islamic banks (MIB) have fairly attracted deposits compared to Pakistani Islamic banks (PIB), resultantly they are more exposed to default risk. It is concluded that Malaysian Islamic banks are more risky and less solvent compared to Pakistani Islamic banks which are less risky and more solvent. The study is a valuable addition to literature and it signals policy makers devise policies to remain productive. Key words Financial performance, risk and solvency, Islamic banks and ratio analysi