International Journal of Accounting and Financial Reporting ISSN 2162-3082 2015, Vol. 5, No. 1 www.macrothink.org/ijafr 75 Gauging Profitability and Liquidity of Islamic Banks: Evidence from Malaysia and Pakistan Muhammad Asif Khan (Corresponding Author) Faculty of Commerce Kotli (FCK), UMSIT Kotli, Pakistan khanasif82@gmail.com Majid Ali M.Phil scholar at Faculty of Administrative Sciences, Kotli, UAJK Muhammad Atif Khan Faculty of Commerce Kotli (FCK), UMSIT Kotli, Pakistan atifqadeer86@gmail.com Accepted: February 03, 2015 DOI: 10.5296/ijafr.v5i1.6865 URL: http://dx.doi.org/10.5296/ ijafr.v5i1.6865 Abstract This study aims at evaluating and comparatively analyzing the financial performance of all full-fledged Islamic banks operating in Pakistan and five Islamic banks from Malaysia conveniently chosen, subject to profitability and liquidity. Data has been compiled from annual reports for 2006-11. Famous ratios analysis model has been applied with descriptive and inferential statistics to analyze the results. Empirical results revealed that Malaysian Islamic banks are more profitable, liquid and well ahead to Pakistani Islamic banks in profit margin, profit to expense, earnings per share, cash ratio and loan to deposit ratio. However no significant difference is observed in return on asset, return on equity, current ratio, cash & portfolio investment to deposit and loan to asset ratio, although Malaysian Islamic banks are superior in maintaining healthy investment portfolio and high cash ratio while Pakistani Islamic banks have maintained high loan to deposits. Keywords: Financial performance, Islamic banks, ratio analysis, profitability, liquidity