STRATEGIC TRANSFORMATION AND PERFORMANCE DRIVERS IN ISLAMIC BANKING: EVIDENCE FROM PAKISTAN

Abstract

This research critically examines the evolution, operational performance, and strategic transformation of Islamic banking in Pakistan from 2015 to 2023. Islamic banking has emerged as a robust and ethical alternative to conventional banking, guided by Shariah principles that prohibit interest (riba), uncertainty (gharar), and speculative activities (maysir). The study is grounded in stakeholder, legitimacy, and systems theory, and adopts a mixed-methods approach, utilizing both qualitative content analysis and quantitative techniques, including descriptive statistics, correlation analysis, and multiple regression. The research explores the influence of regulatory frameworks, adoption of financial technology, Shariah compliance, and governance quality on financial performance, measured by return on assets, return on equity, and capital adequacy ratio. The findings reveal that Shariah compliance and governance quality are the most significant determinants of financial performance, emphasizing the importance of aligning ethical values and institutional integrity with organizational practice. The results further underscore the resilience of the sector during the COVID-19 crisis, attributed to asset-based financing and risk-sharing mechanisms. Additionally, the study highlights the growing significance of big data, artificial intelligence, and blockchain in enhancing transparency, customer experience, and operational efficiency. Despite substantial progress, challenges remain regarding liquidity management instruments, workforce skills, and regulatory harmonization. The research advances the literature on Islamic finance by providing empirical evidence on the strategic integration of ethical and technological dimensions to support the inclusive development of finance in an emerging market context. The policy implications explain that sustained investment in regulatory infrastructure, human capital, and innovation is essential to fully realize the potential of Islamic banking in Pakistan.

Keywords: Islamic Banking, Shariah Compliance, Governance Quality, Fintech