EVALUATING BANK PERFORMANCE UNDER THE PAKISTAN GREEN TAXONOMY: A COMPARATIVE ANALYSIS OF ISLAMIC AND CONVENTIONAL FRAMEWORKS

Abstract

The State Bank of Pakistan’s implementation of the Pakistan Green Taxonomy (PGT) marks a major empirical shift toward climate-resilient finance. This study examines how PGT compliance affects bank performance in Pakistan’s dual-banking system using a rigorous, purely quantitative methodology. We balance a panel data set of 20 commercial Pakistani banks over a nine-year period (2018–2026), generating 180 firm-year observations. Using Fixed-Effects (FE) and Two-Step System Generalized Method of Moments (GMM) econometric estimation, we find a dual trend: PGT compliance creates a statistically significant short-term drag on profitability metrics (ROA, ROE) due to immediate operational compliance expenditures, but leads to a substantial long-term enhancement of asset quality by lowering Non-Performing Loan (NPL) ratios. Crucially, the interaction models reveal that Shariah-compliant frameworks enjoy a distinct resilience advantage over conventional banks, mitigating the initial profitability drop while yielding sharper reductions in credit default rates. The paper concludes with objective, data-driven macroprudential recommendations, including the recalibration of risk-weighted assets (RWA) by the central bank to support sustainable financial growth.