THE DETERMINANTS OF ISLAMIC AND CONVENTIONAL BANKING PROFITABILITY IN ASIAN COUNTRIES

Abstract

This paper investigates the determinants of profitability of Islamic and conventional banks in selected Asian countries. The sample covers 162 conventional banks and 65 Islamic banks operating in the dual banking system. We estimate an econometric model using Generalized Method of Moments (GMM) from 2009 to 2013. The empirical analysis focuses on the role of bank-specific, macroeconomic, market-specific and institutional-governance factors on the profitability of Islamic and conventional banks. The results show that the factors influencing the profitability of Islamic and conventional banks are different. The profitability of Islamic banks is significantly affected by size, management efficiency, inflation, market concentration, rule of law and monetary freedom. For conventional banks, the key determinants include capital, size, credit risk, management efficiency, monetary freedom and economic growth. The findings highlight important policy implications for bankers and policymakers to increase profitability in the dual banking system.