Abstract
This study addresses the dynamic aspects of financial leverage in
banking sector in Pakistan. Using theoretical and empirical insights, it aims to
highlight the differences in leverage between Conventional Banks (CBs) and Islamic
Banks (IBs). The study works with dynamic model (System GMM) to explore the
existence of target leverage and variation in the speed of adjustment across CBs and
IBs. In accordance with dynamic framework, the study observes the dynamics of
the association between the exogenous variables and financial leverage. Study is
deviation from textbook theory of bank capital and has embraced with sophisticated
model to illustrate that the banks optimize and adjust their capital structure with
environmental shocks and financial variations. Looking into very dynamic nature
of environment, the study reports that in CBs the economic shocks and financial
variations adjustment time tends to maintain adjustments in 1.88 years while IBs
tend to maintain it in 0.82 year. Moreover, variations are found about the impacts
of economic growth, inflation and sectoral nature in both Islamic and conventional
banking. It will help policy makers in financial markets as well as mangers of both
IBs and CBs by providing insights about dynamics of leverage. Systemic financial
reforms after the global financial crisis and financial digital landscape are advised
for banking industry that stress the development of hedging doctrines for deposits
and deposit income. Therefore, there is a strong need to revisit hedging doctrine
and risk management models for the banking sector in Pakistan that is relatively
sluggish.
Naila Hameed, Muhammad Naveed, Shahzad Ahmad Khan. (2019) How Financial Leverage Differs Between Conventional and Islamic Banks: A Dynamic Model Perspective of Banking Sector in Pakistan, Journal of Islamic Business and Management, Vol ume 9, Issue 2.
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