Determinants of Islamic Banking Profitability

Abstract This chapter examines how bank characteristics and the overall financial environment affect the performance of Islamic banks, using bank-level data to analyse the performance indicators of Islamic banks worldwide from 1994 to 2001. It uses several internal and external banking characteristics to predict profitability and efficiency. Controlling for macroeconomic environment, financial market structure and taxation, the results indicate that high capital and loan-to-asset ratios lead to higher profitability. Other things remaining equal, the regression results show that implicit and explicit taxes affect the bank performance measures negatively, while favourable macroeconomic conditions impact on performance measures positively. In general, the chapter confirms previous findings on the determinants of banks' profitability. The only unusual result is that a strong positive correlation is found between profitability and overhead expenses.

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