This study attempts to investigate the impact of macroeconomic and bank specific variables on credit risk for the banking sector of Pakistan. This impact has been examined for 4 Islamic and 13 conventional banks over the period 2007-2017. The Study has estimated the dynamic panel model by using Generalized Method of Moments (GMM) technique to identify the factors which influence the behavior of credit risk. The findings of the study suggest that in conventional banking system, GDP growth, inflation, unemployment, real exchange rate, interest rate, capital adequacy ratio, return on assets, loan loss provision, inefficiency ratio and bank size significantly affect the behavior of credit risk. Similarly, in Islamic Banking, all the mentioned variables significantly cause the credit risk’s behavior, except the interest rate and financing loss provision. Therefore, to attain a more stable banking system in the country, the government should devise prudent macroeconomic policies. Additionally, keeping in view the prevailing economic situation, the high-ups in the financial institutions should also consider the endogenous structure of the institutions to lower the likelihood of credit risk. Supervisor:- Dr. Hafsa Hina