Capital Structure Determinants of Islamic and Conventional Banks of Pakistan

Purpose- The major objective behind conducting this research is to explicate that how does the conventional as well as Islamic banks opt for their capital structures and what are the noteworthy variables that effect the decisions of the company as regard to their capital structure. Design/methodology/approach- Data for study was gathered throughthe yearly reports of the KSE indexed companies. The yearly reports from the years 2004-2014 were selected for the study. For analysis, ordinary least square (OLS) is applied in order to obtain the results. Findings- The primary outcomes of study prove 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 positivelyimpacts the decisions of the conventional banks for choosing the capital structure. Earning volatility shows no impact on capital structure decisions. Practical implications- The outcomes of the study present that the directors of bank need to develop an understanding related to the bank specific factors which would help them to decide regarding the capital structure of the bank taking into consideration that the controlling powers are vested with state bank of Pakistan. Originality/value- This study would propose that some noteworthy insights regarding the variables that impact financing decisions ofPakistani conventional and Islamic banks. This study also provides a framework to the future researchers for deeper exploration regarding capital structure of the banks. Keywords- Conventional Banks; Islamic Banks, Ordinary Least Square, State bank of Pakistan