INNOVATION VS. RISK: DETERMINANTS OF ISLAMIC BANKING PERFORMANCE IN THE PAKISTANI FINANCIAL LANDSCAPE

Abstract

This paper examines the predictors of financial performance in the Islamic banking sector of Pakistan, namely, the assessment of the impact of multifaceted measures of innovation such as financial, specific, and horizon innovation, as well as combined risk management measures. The study will use a purposive sampling method whereby annual financial statements of five leading Islamic commercial banks in Pakistan will be purposively sampled to extract the longitudinal secondary data. According to the empirical results, innovative financial strategies are strongly positively correlated with institution performance, and horizon and specific innovations can be taken as initiatives of competitive advantage. Nevertheless, in the course of the analysis, the problem of non-standardization of data is also observed, which is why the predictive capabilities of the model can be increased by broadening the time frame and including more macroeconomic indicators. These findings are significant to stakeholders and regulators who need to streamline the Shariah-compliant financial environment using structured innovation and effective risk mitigation systems.