Abstract
This study assesses the impact of regulatory capital on the efficiency of Islamic and commercial banks with Islamic windows listed on the Pakistan stock exchange for the period from 2010 to 2019. More specifically, the influence of the Basel accord capital adequacy requirement has been assessed on the earnings of the bank by using the proxy of net interest margin along with control variables, including bank policy rate, credit growth, the fee charged by the banks, and non-performing loans. Data has been retrieved from the State Bank of Pakistan reports. Panel regression has been deployed, and based on the Hausman test, the fixed effect model was selected, and its results have been retained. Results reveal that the overall implementation of the Basel accord capital regulatory requirement in the shape of the capital adequacy ratio is an elixir that increases efficiency in the form of interest margin in Pakistani Islamic banks. Moreover, it reveals that well-capitalized Islamic banks are efficient. This study offers practical insights for regulators in tailoring capital adequacy regulations to the unique framework of Islamic banking. It also lays the groundwork for future research into additional efficiency drivers, such as governance mechanisms, digital transformation, and market dynamics.