Financial disintermediation and Profitability of Global Islamic Banks

Abstract

Recently Islamic banks are experiencing rapid growth in Islamic countries as well as non-Islamic countries. The profitability of the Islamic banks is based on the different instruments as a share of total financing. Mainly there are two categories of financing instruments are available, first is the trade based and the second is finance based. Modes of trade are instruments having low risk and fixed returns, whereas the modes of finance are instruments having high risk and possibly high returns. This study started with the proposition that both modes have different effects on the profitability as both have different roots in Islamic finance. For the analysis the data is collected which comprises of 19 full-fledged Islamic banks from 7 countries, the study used SEM framework controlling for macroeconomic effects and country effect. The results indicated that modes of finance have positive and modes of trade have a negative effect on the growth of assets and equity of Islamic banks. These results reiterate the faith-based model of Islamic finance and propose Islamic banks to promote the partnership based mode of finance, which is more socially beneficial to the banks and to the economy.