Determinants of Islamic Banks’ Profitability: Some Evidence from Pakistan

Abstract

This study examines the determinants of the profitability of Islamic banks operating in Pakistan. Both the organization-specific and macroeconomic determinants of Islamic banks’ profitability are investigated. For this purpose, the financial data of 10 Islamic banks and macroeconomic data of Pakistan were obtained and analysed through ordinary least square regression models. The collected data covered the time period from 2008 to 2014. The bank profitability was measured through return on total assets (ROA), return on stockholders’ equity (ROE), and net interest margin (NIM). The findings indicate that the capital adequacy has a positive impact on profitability of Islamic banks. Further, a significant positive relationship is found between the macroeconomic indicators (GDP growth rate, foreign exchange rate, and inflation rate) and Islamic banks’ profitability. This study attempts to contribute towards a better understanding of the indicators of Islamic banks’ profitability, by analysing the latest financial and macroeconomic data from the setting of a developing economy (i.e. Pakistan). The findings have some useful implications for practitioners (i.e. bank management), policy makers (i.e. Government or central bank), and future researchers.