Efforts were exerted at several fronts by many socio-economic institutions of Pakistan to establish Islamic financial system in Pakistan. In 2002 authorities established such a system where Islamic and conventional institutions are working side by side after different trials to implement interest free financial system in Pakistan Data from 2001-2009 have been used to estimate cost efficiency time variant fixed effect model for entire banking industry and from 2006-2009 to estimate cost efi‘iciency model for Islamic banking industry in Pakistan through data envelopment analysis. This study compares the cost efi‘iciency ofIslamic banking with that ofconventional banking system o/Pakistan. The results indicate that as a group Islamic banks are relatively more cost efficient than conventional banks Within conventional banking industry, public sector banks are the most cost efficient banks and specialized banks are the least cost efficient banks. It is allocative inejficiency which is primarily contributing to the cost inefipiciency of Islamic banks in Pakistan. When we break down the efficiency scores we find that source of cost inefiiciency for Pakistani banks are few banks in their individual capacity. Supervisor:- Dr Abdul Qayyum