The aim of this thesis is to find the relationship between interest rate and banking operations. The study considered the comparative analysis between Conventional banks and Islamic banks. The study has used annual panel data of 40 banks (i.e. 22 conventional and 18 Islamic banks) for the period of 2008 to 2018. To mitigate the problem of endogeneity, Generalized method of moments (GMM) has been used for estimation. The empirical results suggest that interest rate has positive impact on deposits of both conventional and Islamic banks. Results of the study fulfill the theoretical expectations however, the latter effect (interest rate versus Islamic bank deposits) is contrary to general expectation which indicates that although Islamic banks operate under the interest free principle (i.e., do not directly deal with interest) but still they are exposed to interest rate risk. Similarly, the impact of interest rate on bank financing for both conventional as well as Islamic banks is also negative. The relatively minor difference in response of Islamic and conventional banks to interest rate changes may make it difficult for the central bank to achieve the desired monetary policy objectives which stresses the need to revisit the monetary policy transmission mechanism and interest rate channel for Islamic banks. Similarly, to manage the credit supply in the economy, the findings of the study suggest that SBP needs to consider the nature of Islamic banking while devising the monetary policy instrument. Further, the study has drawn the intention of future researchers to know about the theoretical background of Islamic versus conventional banking models. Supervisor:- Dr. Farhat Mahmood Co-Supervisor:- Dr. Hafsa Hina