Evaluating the Impact of Bank Distress on the Financial Performance of Commercial vs Islamic Banks in Pakistan

Banking is a predominant institution in the financial system in any economy. As Muslims, we have a set of Islamic principles for managing money, an alternative to commercial banks, an Islamic Bank is a growing industry and is being explored more than ever which follows Shariah laws instead of man-made rules. The financial crisis is a challenge, and some studies show Islamic banking method performs better under financial instability or even does not cause a financial disaster as its features are way different from Commercial banks. The review of this literature is done to find out which bank performs better, as the importance of Islamic Banking is being signified. We have tested our data on STATA an econometric software and have run the Z -score by taking data from every Islamic and Commercial bank in Pakistan from the time 2010-2020We have found out that all commercial banks are distressed, but they perform well under financial distress because they use better techniques like earning management, but it works for the short term instead of the long term.Whereas, Islamic banks are also financially distressed, and are negatively affected in the financial instability period because they are not using an artificial technique to inflate their profits or earnings.The study found that Islamic banks face a higher risk than regular banks and that their risk management practices are different than those of conventional banks