Determinants of Islamic Banking Profitability

M. Kabir Hassan and Abdel-Hameed M. Bashir

in Islamic Perspectives on Wealth Creation

Published by Edinburgh University Press

Published in print May 2005 | ISBN: 9780748621002
Published online March 2012 | e-ISBN: 9780748653096 | DOI:
Determinants of Islamic Banking Profitability

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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.

Keywords: bank characteristics; financial environment; Islamic banks; performance indicators; profitability; efficiency; bank performance

Chapter.  9826 words. 

Subjects: Society and Culture

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