Abstract
This paper assesses Islamic banks (IBs) profitability determinants by investigating bank-specific, macroeconomic, and financial inclusion variables in MENA. Data is collected from Zawya, Bankscope, The Banker, Global Findex and World Bank databases covering 73 IBs from 2008-2017. ROA and ROE are deployed as IBs’ profitability term with new predictor variables assessing financial inclusion: overall financial structure, financial service penetration, and self-service banking prevalence. Common bank-specific variables are employed that include; credit risk, liquidity, size, capital adequacy, the effect of income fees and charges, and operating costs with other macroeconomic variables; GDP, inflation, and the average world governance indicator (WGI). A dynamic panel data is applied using a GMM model. Both ROA and ROE have almost the same significant relationship with credit risk, size, capital adequacy, and effect of income fees and charges but no significance was established with Basel capital adequacy. The same significant relationship between ROA and ROE is validated with only WGI as a macroeconomic variable and self-service banking prevalence as a financial inclusion indicator. Guiding IBs executives to improve bank profitability by utilizing macroeconomic and financial inclusion factors. Results may imply the importance of new products and alternative channel development in enhancing IBs’ profitability. Few studies are found measuring the effect of bank-specific, macroeconomic, and financial inclusion variables. Thus, this paper contributes to the existing literature by introducing other dynamics affecting IBs’ profitability
Highlights
There is an unquestionable important role of a country‟s banking sector in the overall economic activities development where the banking sector is crucial for global economic stability and development
There is a large dispersion in the minimum and maximum observation of Islamic banks (IBs) relationship between profitability (ROA) that could be seen from the high standard deviation of ROA that is 1.5%, which is similar to ROE indicative figures that show a mean of 10.8% with a high relative standard deviation of 11.5% indicating that IBs experience high-risk volatility
Using a sample of 73 IBs located in the MENA region, during 2008-2017, the study demonstrates some important associations between a set of bank-level, macroeconomic and financial inclusion explanatory variables on IBs profitability
Summary
There is an unquestionable important role of a country‟s banking sector in the overall economic activities development where the banking sector is crucial for global economic stability and development. Failure in such a growth-supporting sector for the economy can lead to an associated effect for the entire global economy where the global financial crisis is a vivid demonstration of how banks can transmit devastative economic shocks into the economic system of a country and across the globe. Adversity impact on the economy, on the other hand, is always the result of the failure in the performance of such a vital sector Such a vital sector of the economy has two main versions of operations: conventional banking (CBs) versus Islamic banks (IBs). An IMF survey comparing the performance of IBs with CBs claims that IBs showed stronger resilience during the global financial crisis where IBs managed to survive the crisis without much substantial impact (IMF, 2010; Othman, Mat Sari, Alhabshi, & Mirakhor, 2017)
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