Comparative Analysis of Dividend Policy between Islamic and Conventional Banking of Pakistan

Abstract

Dividend policy remains a central issue in corporate finance because it reflects firms' financial strength, governance quality, and strategic capital allocation. Although Islamic banking has experienced substantial growth over the past two decades, limited evidence exists on whether the determinants of dividend policy differ systematically between Islamic and conventional banks operating within the same regulatory environment. This study investigates the financial determinants of dividend policy and compares dividend payout practices between Islamic and conventional banks in Pakistan's dual banking system. Using an unbalanced panel dataset of listed banks covering the period 2015 to 2025, the study employs panel data regression techniques to examine the effects of profitability, liquidity, leverage, and firm size on dividend payout decisions while controlling for bank-specific heterogeneity.The empirical findings indicate that profitability and firm size have positive and statistically significant effects on dividend payouts, suggesting that financially stronger and larger banks are more likely to distribute earnings to shareholders. Conversely, leverage exhibits a significant negative association with dividend policy, reflecting the preference of highly leveraged banks to retain earnings to meet financing obligations and regulatory capital requirements. Liquidity shows a positive but relatively modest influence on dividend distributions. The comparative analysis further reveals that Islamic banks follow more conservative dividend policies than conventional banks, consistent with Shariah governance principles, profit-and-loss sharing mechanisms, and prudent risk management practices. This study extends the literature by providing recent empirical evidence from an emerging economy with a dual banking system and offers a comparative assessment of dividend policy across Islamic and conventional banks. The findings provide practical implications for investors, bank managers, regulators, and policymakers in designing dividend strategies that support financial stability, shareholder value, and sustainable banking sector development.Derivatives, Structured Finance, Turnaround Costs, Financial Risk Management, Synthetic Leases, FX Hedging, Operational Liquidity, ISDA Framework.

Keywords- Dividend Policy; Islamic Banks; Conventional Banks Panel Regression, Profitability, Financial Performance.