The Impact Of Liquidity & Credit Risks On Financial Performance Of Islamic Banks: A Case Study Of Pakistan’S Islamic Banking Sector

The purpose of this research is to examine how credit risks and liquidity risk affect the financial performance of Pakistani Islamic banks between 2019 to 2023. In this investigation, a panel dataset from different Islamic banks was utilized. The study of hypotheses has been tested by building two models of ROA and ROE utilizing random effects test. Liquidity and credit risks are the independent factors. The nonperforming loans (NPL) and loans loss provision (LLP) ratios are used to evaluate credit risk, while the cash to deposits ratio and the total loan (financing) to total deposits ratio (TFTD) are used to measure liquidity risk. Finally, this study is important because it addresses the most important kinds of risks that Pakistani Islamic banks is face during their operational cycles. The financial performance of Islamic banks in Pakistan is evaluated by the ratios of return on equity and return on assets. This study investigates the impact of liquidity and credit risks on the financial performance of Islamic banks in Pakistan. Unlike conventional banks, Islamic financial institutions operate under unique principles that prohibit interest-based transactions and rely on asset-backed and profit-sharing modes such as Murabaha, Mudarabah, Musharakah, and Ijara. These distinctive features create both opportunities and vulnerabilities in risk exposure and financial stability. Keywords: Liquidity Risk, Credit Risk, Return on Assets, Return on Equity, Cash to Total Deposit, Total Financing to Total Deposit, Nonperforming Loan, Loan, Loss Provision, Financial Performance of Islamic banks, Under Risk Management, Pakistan