Islamic and non-Islamic governments have recently expanded significantly towards Islamic Sukuk Bonds as a means of providing financial resources to cover the official government needs. There are strong indicators of expansionary tendencies in the Islamic Issuance Market (IIM), were the IIM has increased significantly, but this requires an integrated legislative framework that compliance with legitimacy (Shariah) rules and regulations specially that there was a large demand for Islamic Sukuk after the global financial crisis, with volumes of issuance of Islamic Sukuk reaching more than US $ 200 billion worldwide.
In Pakistan initial attempts were made in 1980s to Islamize the banking sector resulted into lot of changes in banking companies’ ordinance 1962. Since then, changes in financial system for allowing the issuance of interest free instruments, permission of Modaraba companies and Modaraba certificates’ floatation, establishment of commission for Transformation of Financial system (CTFS) and setting up of Islamic Banking Department by State Bank of Pakistan are major steps taken by government. The purpose of this study is to comprehend the nature of Islamic banks, measure and compare the performance of five Islamic banks with five conventional banks working in Pakistan over a period of five years from 2006-10. Performance comparison was conducted by trend analysis and using twelve financial ratios under category of profitability, risk, liquidity and efficiency. The study concluded that Islamic banks are less risky, more solvent and efficient than conventional banks but there is not much difference seen in terms of profitability. In respect of trend analysis balance sheet & income statement of Islamic banks revealed good positive trends as compared to conventional banks. The results of the study would be beneficial to current management of Islamic banks to improve their performance as well as potential stakeholders.