Abstract

To overcome the lack of Basel II, the Basel committee introduced new regulations, Basel III, where the capital adequacy is 8%, but with this, maintaining leverage ratio and liquidity coverage ratio is also necessary. The study consists of Pakistan’s five conventional and Islamic banks. However, this unique business model and capital structure of the Basel Committee ignore the large sector of Islamic banks, and the same structure is implied in both entities. The same banking regulation on different types of banks has different impacts on the profitability, cost efficiency, and performance of banks in Pakistan. The study collectively analyzed the effect of CAR and LR on profitability and cost efficiency on the financial performance of both banks. The data utilizes 10 top banks and the data from 2017 to 2023 when Basel III was implemented. For estimation, particularly focusing on the Husman effect, we find that Islamic and conventional banks handle risk and reward in asset-based lending differently, and how this affects the operational and financial stability of each banking type. The results emphasize the necessity of modified approaches that fit their contexts and customer preferences. It is advised that Islamic banks create innovative financial products to diversify their revenue streams beyond conventional income models to increase profitability while complying with the Islamic Shariah board.