IMPACT OF CAPITAL STRUCTURE ON ISLAMIC AND NON-ISLAMIC INSTITUTIONS OF PAKISTAN

Abstract

The prime purpose of this study is to analyze the capital structure impact on the performance of Islamic and non-Islamic financial institutes of Pakistan during the time of 2006-2013. To examine this impact, the researchers investigate empirically what are the outcomes of capital ratio on profitability indicator (EFCROE) of Shariah compliant financial firms as well as interest-based financial firms separately. The estimation technique generalized method of moments has been used for the proposed model. Both models verify the negative association of capital ratio with the efficiency of financial institutions. The lower equity with higher leverage becomes the cause of mitigating the agency cost of the firm and good performance as well. Hence, both models confirm the presence of agency cost theory in the financial sector of Pakistan. However, this effect in the Islamic financial sector is insignificant because of the small magnitude of the Islamic financial sector. The results suggest that managers should increase their debt financial instruments and lessen their equity financing to enhance their performance and the State Bank of Pakistan should take valid and sound steps to promote Islamic financial services in Pakistan