Capital Structure Determinants of Islamic and Conventional Banks of Pakistan

Abstract

The major objective of this research is to explicate as to how conventional and Islamic banks opt for their capital structures and what are the variables that affect their decisions regarding their capital structure. Data was gathered through the yearly reports of the KSE indexed companies from the years 2004-2014. For analysis, ordinary least square (OLS) is applied in order to obtain the results. The outcomes of study demonstrate that the conventional banks are more leveraged as compared to the Islamic banks. In addition, the conventional banks are bigger in size than Islamic banks and possess higher level of profitability. The fixed operating resources possessed by the Islamic banks are more in comparison to the conventional banks. The outcomes show that the profitability and tangibility are inversely associated with book leverage however the bank size has significant nexus with the book leverage of Islamic banks. On the other hand, profitability, growth and tangibility are negatively related to book leverage in whereas the bank size positively impacts the decisions of the conventional banks for choosing the capital structure. Earning volatility shows no impact on capital structure decisions. These outcomes warrant that the banks need to develop an understanding related to the bank specific factors which would help them to decide regarding the capital structure of these banks. This study provides a framework for future researchers for deeper exploration.