Is Profitability of Islamic Banks Shaped by Bank-specific Variables, Global Financial Crisis and Macroeconomic Variables?

Abstract

This study aims to investigate the determinants of Islamic banks’ (IBs) profitability. A large sample of IBs from 12 developing counties has been selected for a period (2004-2017) that includes the recent global crisis period (GFC), as well as bank-specific and macroeconomic variables. The paper applies advanced quantitative techniques by using a dynamic generalized method of moments (GMM) compared to the fixed effect models that are widely used within the literature. Findings indicate that asset quality, capital adequacy and non-financial activity play major roles in determining profitability of IBs. Furthermore, findings show that IBs are not affected by GFC, as they are less exposed to international banks and do not grant subprime loans. Moreover, IBs were able to maintain better capital ratios during the GFC which shielded them from the severe effects of the crisis. On the other hand, results showed that profitability would be reduced by the increase in asset quality, liquidity, and deposit ratio. These findings emphasised that profitability of IBs would be safeguarded if those banks maintained a suitable level of capital adequacy to withstand any financial distress and introduced diverse sources of income. Hence, the findings of this research provide useful insights for IBs’ stakeholders including bank management, investors, clients, and policy markets.

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