Jamshid ur REHMAN, Abdul RASHID / Journal of Asian Finance, Economics and Business Vol 9 No 2 (2022) 0001–0014 1 Print ISSN: 2288-4637 / Online ISSN 2288-4645 doi:10.13106/jafeb.2022.vol9.no2.0001 Impacts of Bank-Specific and Macroeconomic Risks on Growth and Stability of Islamic and Conventional Banks: An Empirical Analysis from Pakistan Jamshid ur REHMAN 1 , Abdul RASHID 2 Received: October 15, 2021 Revised: December 25, 2021 Accepted: January 05, 2022 Abstract The implications of bank-specific risks and macroeconomic risks on the growth, profitability, and stability of Islamic and conventional banks are examined and compared in this article. The study also investigates whether corporate governance mitigates the effects of both bank-specific and macroeconomic risks on Islamic and conventional banks’ development, profitability, and stability. For the period 2007–2019, we examined a panel data set of 22 banks in Pakistan, including both Islamic and conventional banks. We discovered considerable evidence that both bank-specific risks and macroeconomic risks have negative effects on the growth, profitability, and stability of Pakistani banks using a dynamic panel data estimator, the two-step Generalized Method of Moments (GMM) approach. Furthermore, the findings show that bank-specific and macroeconomic risks have different consequences in both types of banking. The impacts of liquidity risk, operational risk, capital risk, inflation risk, and exchange rate risk are higher for Islamic banks than for conventional banks. Conventional banks, on the other hand, are more vulnerable to credit risk and interest rate risk. Finally, the findings show that good corporate governance reduces the negative consequences of both categories of risks on bank development, profitability, and stability. This is true for Islamic and conventional banks alike. Keywords: Bank-specific Risks, Macroeconomic Risks, Growth, Profitability, Stability, Corporate Governance JEL Classification Code: C23, G21, G32, G34 & Obeidat, 2013). They are exposed to several risks like credit, market, liquidity, reputational, operational, and compliance/regulatory risk, which may adversely affect bank performance. The effects of various types of risks on banks’ growth, profitability, and stability are critical for evaluating the overall performance and success of banks. The study of the performance and stability of the banking sector is of good interest to researchers and policymakers in both developed and underdeveloped countries. Specifically, after the financial crises 2007/2008, the evaluation of these variables has gained dynamic attention among researchers and becomes a growing concern for bank supervisors and regulators (Ali & Puah, 2018). For instance, Rashid and Jabeen (2016) identified bank-specific, macroeconomic, and financial factors affecting bank performance in Pakistan. They documented that reserves, overheads, and operating efficiency are significant indicators of conventional banks’ (CBs) performance, whereas, deposits, market concentrations, and operating efficiency are the important factors in explaining the Islamic banks’ (IBs) performance. 1 First Author and Corresponding Author. Ph.D. Scholar, School of Islamic Banking & Finance, International Islamic University, Pakistan. [Postal Address: H-10, Islamabad, 44000, Pakistan] Email: jamshid.phdibf26@iiu.edu.pk 2 Professor, International Institute of Islamic Economics, International Islamic University, Pakistan. Email: abdulrashid@iiu.edu.pk © Copyright: The Author(s) This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (https://creativecommons.org/licenses/by-nc/4.0/) which permits unrestricted non-commercial use, distribution, and reproduction in any medium, provided the original work is properly cited. 1. Introduction Banks play a significant role in the smooth operation of a country’s economy. Financially stable banking is considered a prerequisite for sustainable economic development. The banking sector performs the important function of economic acceleration and financial intermediation by transforming deposits into productive investments. Typically, banks operate in a highly uncertain environment (Al-Tamimi