Euro-Asian Journal of Economics and Finance http://www.absronline.org/eajef ISSN: 2310-0184 Volume: 1, Issue: 1 (October 2013), Pages: 09-23 © 2013 Academy of Business & Scientific Research *Corresponding author: Asif Hussain, College of Management & Administrative Sciences, GC University, Faisalabad, Pakistan. E-Mail: asif.winner@gmail.com 9 Capital Budgeting Practices in Islamic Banking: Evidence from Pakistan Asif Hussain 1 *, Imran Shafique 2 1. College of Management and Administrative Sciences, GC University, Faisalabad, Pakistan 2. Independent Scholar from Pakistan The main purpose of this study is to ascertain the amount of current technique in the decision making of a capital budget in the Islamic banking sector, Pakistan, which include real options, and make the result perfect. In Pakistan, a survey of the largest 5 banks and their branches in Faisalabad through e- mail and questionnaires was conducted. Sophisticated techniques tendency have been continued; however, DCF not used by 17% large banks. Among those which did, most of them prefer IRR and NPV. Most of the banks from a selected sample that used DCF were not so effective at it and also ignore real options. Only 8% banks use real options. First limitation is, survey doesn’t show why managers are continually using those capital budgeting techniques for decision making, which are less developed. Second research is conducted in Pakistan using a small and convenient sample size of Islamic banks located in Faisalabad. The basic area where management focuses more is a real option. Other improvement areas are administrative procedures using WACC, adjustment of weighted average cost of capital in different projects/divisions, employment of market values or target for weights and excluding interest expenses from the cash flow of the project .The minimum number of managers feels that there is a need that DCF start using. It is clear from the evaluation that theory practice gap still remains in real options, and in the decisions technique of DCF capital budgeting. Moreover, it is precious to capture stock of views that has been improved in many years. What this study suggests is a fine-grained analysis of decisions making on investment, a composition and completion of different papers on DCF where novel illustrations are made, advice was given to managers to improve the opportunities of investment by making good decisions. Keywords: Decision making, Capital budgeting, Investments, Discounted cash flow, Islamic bank, Pakistan INTRODUCTION Mature capital investment and financial management decisions are very important (Firer et al. 2008, p. 4), for the survival of the growing Islamic banking and these have a direct effect on profitability. If in both long term and short term investment, we make smart capital budgeting, our selected project will get benefits, in consequence, business will grow and shareholder wealth will be