Bank-Specific and Macroeconomic Determinants of Islamic Banks Profitability: The Case of GCC Countries
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Date
2020-05
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The British University in Dubai (BUiD)
Abstract
Generally, profitability for a business firm is the primary factor to survive. It helps the organization
to grow, compete and remain attractive to investors as well as analysts. The purpose of the present
study is to research in the bank-specific as well as macroeconomic determinants of Islamic banks in
a region that’s consider to play an important role in Islamic finance development, namely the GCC
region. The study used 28 Islamic banks operating in the GCC stock exchanges as a sample for the
time of period from 2011 up to 2016, namely Boursa Kuwait, Abu Dhabi Securities Exchange, Doha
Securities Market, Bahrain Stock Exchange, Saudi Stock Exchange, Muscat Securities Market, and
Dubai Financial Market. Pooled OLS regression is used to estimate the empirical model. The bank’s
profitability is measured by the return on asset (ROA), whereas the independent variables that tested
are capital adequacy ratio, operational efficiency, assets quality, financial leverage, bank size,
liquidity risk, GDP growth, and inflation rate.
The regression results indicate that bank-specific determinants including capital adequacy ratio,
financial leverage, and operational efficiency are statistically significant and have negative
relationship with the Islamic bank’s profitability. However, the bank size is the only tested variable
that’s have a positively and significantly relationship with the banks’ profitability. Whereas, the
study proves that there is nonlinear relationship between bank’s size and profitability. On the other
hand, assets quality and liquidity risk are found to be insignificant determinants for Islamic banks’
profitability. Regarding the macroeconomic variables, GDP growth is the only variable shown that
it is relating positively to Islamic banks profitability, whilst the inflation rate has no association with
the Islamic banks profitability for the sample studied.
These findings provide valuable policy implications which may assist Islamic banks operating in the
GCC region to improve their performance and increase their profitability.
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Keywords
Islamic banks, GCC countries, panel data, pooled OLS regression, banks’ profitability, bank-specific determinants, macroeconomic factors