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VOL 3, NO 11
INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS
Determinants of profitability of Islamic banks, A case study of Pakistan
Syed Atif Ali Lecturer Lahore Business School, the University of Lahore Azam Shafique Asst. Professor Hailey College of Commerce, The University of Punjab Amir Razi Lecturer Lahore Business School, the University of Lahore Umair Aslam Lahore Business School, the University of Lahore Abstract This research paper focus on Determinants of profitability of Islamic banks. It includes literature review on determinants. Hypothesis are tested and discussion is done on basis of data. Different tests are applied to draw conslusions at the end. Keywords: Determinants ; Profitability ; Islamic banks; Case study ; Pakistan I. Introduction The banking sector is well thought-out to be an important source of financing for most businesses. The common assumption, which underpins much of the financial performance research and discussion, is that increasing financial performance will lead to improved functions and actions of the Organizations. The subject of financial concert and research into its measurement is well advanced within finance and management fields. It can be argued that there are three principal factors to improve financial performance for financial institutions; the institution size, its asset management, and last one the operational efficiency. Since the first institution was established in 1963, Islamic banks have gained a foothold in almost every majority Muslim country and in a few non-Muslim countries. Not only do Islamic banks provide Profit-sharing (instead of pre-determined interest payments) banking conveniences, but they are also expected to undertake business and trade activities on the basis of fair and legal profits. In such banks, ensuring fair practices in dealings with customers and shareholders takes centre stage, more so than in conventional banking where much fair practice needs to be
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but also recommended that the profit-sharing ratio be equivalent to the interest rate offered by the conventional banks. loan ratios. gross domestic product and conventional interest rates were confidently related to profitability. which links efficiency and performance of Islamic banks. Khan believed that Nienhaus’s argument was valid in the case where profit-sharing products were provided by conventional banks.While there is plenty of literature on performance studies.ijcrb. these studies are confined to conventional banks. Islamic banks out performed conventional banks. While factors such as capital. Comparing the efficiency of conventional and Islamic banks. there has been little research on the profitability of Islamic banks. Haron. overhead. he postulated that the profit-sharing ratio (the percentage of profit paid by the entrepreneur) of Islamic banks was positively related to the lending rate of the conventional banks.g. Using ‘adaptive expectation model’. Nienhaus (1983) not only suggested that Islamic banks use the interest rate as basis for calculating profit-sharing ratio. The work by Samad (1999) is considered the pioneer study. Unfortunately. Samad found that Islamic banks be inclined to become inefficient when operating within the dual banking environment. He also alleged that in the long run. Khan (1983) expanded Nienhaus’s model and postulated that the average return of an Islamic bank in the long run will be higher than the interest rate. The objective of this study is to examine the impact of profitability determinants on performance of Islamic banks in a manner corresponding to such studies conducted with conventional banks. 1995). Khan recognized that the profit-sharing ratio would have a positive relationship with interest rate. Nienhaus (1983) tried to link the profitability of Islamic banks with the market structure. Up to this date. Khan’s framework was not empirically verified by any proofs. Nienhaus’s hypotheses were not supported with any empirical evidence.webs. NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS imposed by external regulation (further details on the concepts and operations of Islamic banking system are available elsewhere. Samad and Hassan (1999) pragmatic that in some aspects. Based on his simplistic equilibrium model. Hassan and Bashir (2003) studied the effects of proscribed and uncontrolled variables on Islamic banks profitability. Interestingly. and size were adversely related. reserves taxes. Haron and Ahmad (2000) verified Nienhaus’s (1983) and Khan’s (1983) hypotheses and found that conventional interest rates had a series positive relationship with deposits of Islamic banks. Like Nienhaus. COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 87 . e. interest based banking would be more successful than Islamic banking.com MARCH 2012 VOL 3. Applying financial ratios in their works.
Short used both central bank discount rates and the interest rates on long-term government securities. this relationship can be positive or negative. One is internal determinants and other one is external determinants. COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 88 . Hester and Zoellner (1996) studied the relationship between the items of balance sheet and the earnings of all the banks in Kansas City and Connecticut. This research by Bourke was confirmed by Molyneux and Thornton (1992) who also found the same results. He found that all the variables have significant impact on the profitability. He was sure that this variable can be use to determine the profit. scarcity of capital.ijcrb. Vernon (1971) studied on the effect of ownership on profitability. He said that it depends upon the nature of the balance sheet. government policies. Internal determinant include financial statement variables and non financial statement variables. another researcher was Short who included scarcity of capital as a variable for determining the profitability. Smirlock (1985) found that demand deposits are the cheaper source of funds and it does have significant impact on the profit of the balance sheet. NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Literature Review: The profitability of banks can be divided into two parts. In 1979. He found that if ownership of one bank is controlled by the owner and other bank is owned by the management. location and time on profitability of commercial banks. the first bank which is owned by the owner will earn less then the second bank which is owned by the management of the bank. He found that these have positive relationship with the profitability.com MARCH 2012 VOL 3. According to Bourke these internal variables were related to the profitability positively. In this way. staff expenses and liquidity ratios in the internal variables for profitability. The dependent variables were comprised of the net profit before taxes against total capital ratio and net profit before taxes against total assets ratio.webs. The very first researcher who felt that internal variables are the part of profitability was Bourke (1989). bank management. Mullineaux (1978) said that balance sheet has impact on profitability. as the government banks are non profit oriented. size. taxes and also competition. He found out some results and he found that when there are some changes in balance sheet it has some significant impact on the earnings of the banks. Short (1979) examined that government have an impact on profitability. Haslem (1968) used 64 operating ratios to measure the effects of management. He included capital ratios. The internal determinants are controlled under the bank management. While external determinants include inflation. He found that the government ownership variable was significantly adversely related to profits.
ijcrb. both studies found that inflation had a significant relationship with profit. stable and healthy financial system.com MARCH 2012 VOL 3. He further found that interest rates. financial market structure. Fourth. Bashir (2000) examined the determinants of Islamic banks’ performance in eight Middle Eastern countries between 1993 and 1998. Peltzman (1968) was among the first researchers to empirically test the effects of regulation on performance. these variables were found to have an adverse effect on profits. In the case of market share and money supply. Second. This hypothesis was empirically tested by Bourke (1989) and Molyneux and Thornton (1992). NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS The banking industry is one of the most heavily regulated industries in the world. Sudin Haron (2004) examined that The profit-sharing ratio between banks and the users of funds seems to be very favorable to the bank. After controlling for economic and financial structure indicators such as – macroeconomic environment. the efficiency and ability of both banks increased and both banks have expanded their investment and activities. Third. Saleh and Rami (2006) for the purpose of evaluating the Islamic banks’ performance in Jordon examine and analyze the experience with Islamic banking for the first and second Islamic bank. this study concludes that Islamic banks have high growth in the credit facilities and in profitability.webs. these banks focused on short-term investment. and Islamic International Arab Bank (IIAB) in Jordon. this study examines the relationships between profitability and the banking characteristics. Jordan Islamic Bank for Finance and Investment (JIBFI). Firstly. whereas the profit-sharing ratio between the banks and the providers of funds indicates a mutual advantage. the study shows some very important and interesting results. the paper finds many interesting results taking profit maximization. This study also tells about the domestic as well as global challenges faced by this sector. Using the consumer price index (CPI) as a proxy for inflation. the profitability measures COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 89 . First. capital structure. Finally. similar results were found for Islamic banking. Revell (1980) was the first person who discussed the effect of inflation on bank profitabilitys. and liquidity tests as performance evaluation methodology. Main reason for this regulation is to provide a sound. both the banks played an important role in financing projects in Jordan. and taxation. Peltzman’s research showed that a prohibition on interstate branching and a legal restriction to new entry had a significant impact on the market value of a bank’s capital. Bank for Finance and Investment (JIBFI) founded to have maximum profitability. By using the cross-country bank-level data on income statements and balance sheets of 14 Islamic banks in eight Middle Eastern countries for each year from 1993 to 1998. inflation and size have significant positive impact on the profits of conventional banks.
com MARCH 2012 VOL 3. Islamic banks rely heavily on activities such as murabaha. The reserve to GDP ratio (RES) reflects implicit taxes due to reserve and liquidity restrictions Together.webs. ex ante spreads are calculated through the contractual rates charged on loans and rates paid on deposits. It seems likely that banks in oil-rich countries face lower or no taxes on their profits. like Jordan and Sudan.ijcrb. including participation in direct investment. 1999). For traditional banks. Second. direct investment. In the end. Accounting values from the bank’s financial statement were being used to calculate the ex post spread (net non-interest return). thus. minus all expenses of carrying such activities . Bai Mu'jal. banks in low-income countries. the results specify that customer and short-term funding. NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS of the Islamic banks react positively to the increases in capital and loan ratios. we use the ex post spreads consisting of revenues generated from banking operations such as Murabaha. The tax variable shows the explicit (average) tax rate levied on each bank in a specific country. service charges. and service charges. 1993). Third. The bank's before-tax profit over total assets (BTP/TA) is used as a measure of the bank profitability. keeping other things constant. This measure is calculated from the bank's income statement as the sum of noninterest income over total assets minus overhead over total assets minus loan loss provision over total assets minus other operating income. the spread can be calculated from the rates of return generated from various noninterest banking activities. In distinction. though. As an efficiency sign. Meanwhile. fees. there is proof that implicit and explicit taxes affect the bank performance measures negatively. the study shows the empirical role that adequate capital ratios and loan portfolios play in explaining the performance of Islamic banks. The efficiency of financial intermediaries can be measured through ex ante and ex post spreads. large size is attractive because it is expected to enable Islamic banks provide larger menu of financial services (Bashir. Fifth. the results of the study show that stock markets are complementary to bank financing. the explicit and implicit taxes disclose the degree of financial repression practiced in the respective country. the results expose that foreign-owned banks are more profitable than their domestic counterparts. suffer from high taxes. In the case of Islamic banks. Sixth. Fourth. and overhead are also important for promoting banks’ profits. non-interest earning assets. favorable macroeconomic conditions have positive effect on performance of the bank. COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 90 . which is instinctive and consistent with previous studies. It is obvious that banks in rich countries are larger in size. Large size is expected to promote economies of scale and reduce the cost of gather and processing information (Boyd and Runkle.
When bank chooses (assuming this is allowed by its regulators) to take more capital risk. was also interacted with GDP to capture the effects of GDP on the performance of bank. ceteris paribus. except risk variable. They include fund source management (CSTFTA). funds use management (OVRHEAD and NIEATA). the loan effect may be negative during times of financial stress. its leverage multiplier and return on equity. are higher. These activities distinguish the main sources of margin and Seven bank characteristics are used as internal determinants of the performance. 1997). Using LATA adds a greater deepness in understanding the risks a bank takes when trying to obtain higher returns. and currency trading.ijcrb. Since the volume of the earnings of Islamic banks come from non-interest activities. risk (LATA) and a fake variable for ownership (FRGN). and are expected to impact profits positively. Each one of these determinants. On the other hand. is a liquidity ratio that comes from the liability side. and profitability was also found from using international database (Demirguc-Kunt and Huizinga. These supplemental measures are mostly useful for detailed understanding of the factors underlying a bank's net margin and return on assets. A positive relationship between ratio of bank loans to total assets. The ratio is also a sign of lower capital or greater leverage. is expected to impact profitability positively. In general. LOANTA.webs. Islamic banks take on risky operations in order to be able to generate comparable returns to their customers. Islamic banking operations are specified by a high degree of financial risks. In the absence of guaranteed returns on deposits. since most the Islamic banks' loans are on the form of profit and loss sharing. this consists of current deposits. NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Profitability. Bank loans are expected to be the main resource of revenue. saving deposits and investment deposits. Previous studies of the determinants of bank and profitability. in the absence of the deposit insurance.com MARCH 2012 VOL 3. We expect LATA to be positively linked with performance measures. We use the ratio of total liabilities to total assets (LATA) as a alternate for risk. This supports that profitable banks profitability in the United States found a strong and statistically significant positive relationship between the EQTA remain well capitalized or well capitalized banks enjoy access to cheaper (less risky) sources of funds with consequent improvement in profit rates (see Bourke. the ratio of non-interest assets to total assets. Since liquidity holding represent an expense to the bank. The ratio of consumer and short-term funding to total assets. CSTFTA. capital and liquidity ratios (EQTA and LOANTA). Though. NIEATA. the coefficient of this variable is expected to negative. the COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 91 . 1989).
1998.ijcrb. Ghafur. though. He found that. is used to provide information on variation in bank costs through the banking system. in Pakistan.com MARCH 2012 VOL 3. the binary variable representing foreign ownership. Haron and Ahmad. the coefficient of LATA may be the negative. might affect the performance of Islamic banks in Indonesia. The result showed that. In the end. NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS higher risk-taking would expose the bank to the risk of insolvency. It reflects employment as well as the total amount of the wages and salaries. 2000. Ari KuncaraWidagdo and Siti Rochmah Ika (2008). (2007) also examined comparative financial performance of Islamic banks and conventional banks in the UAE. examined that financial performance of Islamic banks in Indonesia might not associate with fatwa issued by MUI. In Bahrain circumstances Samad (2004) examined comparative financial performance of Islamic banks and the conventional banks during 1991-2001. Kader. almost in all of the ratios. OVRHD. The result showed that there was no significant difference between Islamic banks and conventional banks in respect of profitability and liquidity. et al. Hassan (1999) examined performance of Islamic Bank Bangladesh Limited and compared it with the other private banks in Bangladesh. The increasing competition in the national and international banking markets. due to the lack of statistical technique. in terms of deposit growth and investment growth. performance of Islamic Bank Bangladesh Limited was better than performance of the private banks during the period from 1993-1994. and challenge all of the banks to make timely preparations for the COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 92 . FRGN is expected to affect profitability positively. It was supported by the finding of previous studies (Gerard and Cunningham. such as interest rate. this study is not good enough (Samad and Hassan. The ratio of overhead to total assets. Islamic bank was superior to conventional bank during the period of 2000-2004. 2003) that told motivation of depositors of Islamic banks is the return of the money (welfare maximization premise). Therefore. 1997. indicating that foreign banks benefit from tax breaks and other preferential treatments. It was experienced that macro economy indicator. the change over towards monetary unions and the new technological innovations sign major changes in the banking environment.webs. 2000). Metawa and Almossawi. The finding showed that there was no major difference between Islamic banks and conventional banks with respect to profitability and liquidity. There is a Similar study in other Middle East country. OVRHEAD is expected to impact performance negatively because efficient banks are expected to operate at lower costs. Mahmood (2005) compared the financial performance of the Islamic bank with that of conventional bank. In Bangladesh.
Anouar Hassoune has also studied on profitability of Islamic banks and he concluded that. They did use in their study a multi criteria methodology to categorize Greek banks according to the return and operation factors. Usually. is in fact less volatile than that of conventional banks. 1992 ). efficiency is treated as a relative measure that reflects the deviations from maximum achievable output for a given level of input (1992 English M). then Islamic banks are characterized by another interesting feature: their profitability. By using nine financial ratios in measuring the performances with respect to (a) profitability. 2002 ) investigated the usefulness of Greek banks that were based on their assets size. If. the concept of efficiency can be regarded as the relationship between outputs of a system and the matching inputs used in their production.ijcrb. and Doumpos. ( Tser. over the cycle. Another study by ( Aly H. This particular technique plays the role of a cushion. it concludes that there exists a significant COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 93 . because it has to pay the interest charges. and Rangan 1990 ) extend this analysis to contain analysis of assign efficiency.Yieth Chen. The Islamic bank’s ROE is less unstable than that of the conventional one. and ( Field. ( Rangan N. 1990 ). ( Dark. then they are surely always more profitable. Such a smoothing effect comes from the ability of the Islamic bank to absorb shock on assets’ returns throughout profit and loss sharing. and Grabowski. 2002 ) have conducted some studies into the efficiency of the bank.com MARCH 2012 VOL 3. NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS purpose to enter into new competitive financial environment. In short. on the opposing. which are the less flexible. 2001 ).and Howcroft. and (c) credit risk. there have been several studies analyzed the efficiency of financial institutions. Within the financial efficiency literature.. ( Spathis. thanks to the cushioning role that played by profit and loss sharing. the possibility of the Islamic bank being more profitable than conventional banks is low.1998 ). and ( Leigh D.webs. if we assume that Islamic banks completely control the rate at which they share profits. (b) liquidity risk. Along with these. and to confirm the differences of the bank’s profitability and efficiency between small and the large banks. Though. and Tasi Yeh. Abdus Samad (2004) in his paper determines the comparative performance of Bahrain’s interest-free Islamic banks and the interest-based conventional commercial banks through the post Gulf War period 1991-2001. which the conventional bank can’t rely.. ( Chu-Meiliu. it is assumed that this rate is fixed. If returns on assets are high and non-interest charges are low (which is the case when the cycle is in its upward phase). or an insurance against cyclicality in returns. 1988 ) use data envelopment analysis to analyze the technical efficiency in US banking into clean technical and scale efficiency. and by applying Student’s t-test to these financial ratios.
While Molyneux and Thornton (1992) and Demirgüç-Kunt and Huizinga (1999) indicate a positive association between interest rate and bank profitability. (Arzu Tektas. 4) inflation. the effect hinges on the sum of loans and securities held. there is the use of GDP per capita to outfit for the level of economic development DATA METHODOLOGY: To determine the profitability of Islamic banking in Pakistan. five external economic factors are taken. Second. the study finds no major distinction in profitability and liquidity performances between Islamic banks and conventional banks. Consequently. The impact of interest rate on bank’s profits operates through two main channels of the revenues side. and their study showed how shifts in market perceptions can form trouble during crisis. there is cyclical output which basically reflects the variation of GDP from an HP-Filtered GDP. 5) unemployment. in case of rising interest rates. movements in general activity level are expected to produce direct impacts on profitability of banks. Naceur (2003) identifies a negative affiliation.ijcrb. The time period of the data was taken from 2003 to 2009. Dubai COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 94 . Second. But. In technically words. 3) interest rate. GDP captures upswings and downswings manifesting in the business cycles.com MARCH 2012 VOL 3. 2005 ) discuss the asset and liability management in financial crisis. speed of revenue adjustment will be a function of speed of interest rate adjustment. Demirguc-Kunt and Huizinga (1999) show that rapid economic growth increase fertility for a large number of countries. and Gunay. a climb in interest rate scales up the amount of income a bank earns on new assets it acquires. NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS difference in credit performance between two sets of banks. First. The names of the banks are.webs. while the return on equity is calculated through the formula of net income divided by total average equity. 1) GDP (real growth rate) 2) industrial production rate. They argued that an efficient asset-liability management requires maximizing bank's profit as well as controlling and lowering various risks. First. There are six listed Islamic banks in Pakistan. Return on assets is calculated by the formula of net income divided by average total assets. The empirical literature generally resorts towards two versions of GDP. Indeed. Though. The profitability is determined through return on asset (ROA) and return on equity (ROE). rates on loans are advanced than marketable securities so that strong incentives succeed for banks to have more loans rather than buying securities.
033016152 0. Analysis & conclusion Effects on ROA Testing of Hypothesis: (a) There is no difference between all five factors.004267284 MS 0.00223502 0. H0: µ1= µ2 =µ3= µ4= µ5 H1: At least two means are not equal Level of significance: α = 0.05 (suppose) Calculation: SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA Regression Residual Total df 5 15 20 SS 0.ijcrb. GDP growth rate and inflation) of all six Islamic banks in Pakistan with respect to Return on Asset. Dawood Islamic bank.523756941 0. industry production growth rate.723710537 0. and Emirates global Islamic bank.365009254 0.05 COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 95 . unemployment.webs.2993044 Significance F 0. industry production growth rate. Meezan Islamic bank. GDP growth rate and inflation) of all six Islamic banks in Pakistan with respect to Return on Asset. (b) There is difference between all five factors. unemployment.033016152 & 0.com MARCH 2012 VOL 3. (interest rate. Islamic bank.00013548 F 3.033016152 ≤ 0.011639772 21 Critical region: P ≤ 0.002032264 0. (interest rate.000447 0. NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Bank Islami and Albarka Islamic bank.05 We have p-value 0.
77412253 1.23395698 CONCLUSION P-value is the probability of obtaining a test statistic at least as extreme as the one that was actually observed that usually we get from the ANOVA and Regression analysis. it is found that only interest rate is COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 96 .687490552 -0.43042898 -1. unemployment.26961196 -2. so we can say that interest rate is highly significant than any other factor. GDP. These p values depend upon external factors and we will compare these p values with given level of significance for knowing the affect of profitability of Islamic banks.210785557 1. unemployment.02810021 0.36249752 0.806807565 -0. we conclude that out of five economic factors which are. NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Result: P value is smaller than level of significance that’s why we reject null hypothesis.10828329 2. all the factors (interest rate.Coefficient of determination.45088809 0.729874166 0.231797428 -0.05. we have assumed that our null hypothesis was the no difference between all five factors of Islamic banks. In many research articles.webs.04505721 0.values.877794796 0.664600571 2.092528962 Standard Error 0. From above calculation of regression. GDP growth rate and inflation) have not great difference to each other.36249752 0.150703389 0. there is only one factor which does have a significant impact on the profitability of the Islamic banks.66460057 2.0% 0.75651654 -0. The standard error is an estimate of the standard deviation of the coefficient that tells us the variation of the five factors to each other.00972602 UNEMPLOYEMENT INTREREST RATE INDUSTRIAL PRODUCTION 1.19478394 Upper 95.98543408 -0.00972602 Lower 95.02152062 0. That’s why here R2 gives us information about effect of the all external factors on profitability of Islamic Banks.23395698 -0.02810021 which is less than significant value that is 0.98543408 -0. inflation.0450572 0. and interest rate has significant impact on the profitability of the banks.74888239 -0. Usually we P value is calculated through SPSS or excel program of require data.07290988 Lower 95% -0. REGRESSSION ANALYSIS Coefficients Intercept GDP INFLATION -0.92871595 P-value 0.366273883 -0.215321793 0.com MARCH 2012 VOL 3.68749055 -0. Here as using excel we calculated different p. All the other factors don’t have much significant affect on the profitability. interest rate and industrial production.748882388 -0. R2 is used in the context of statistical models whose main purpose is the prediction of future outcomes on the basis of other related information.23179743 -0. The 95% confidence interval gives us information that we are 95% confident about the Regression modal.32320144 -0.0% -0.194783944 Upper 95% 0. industry production growth rate.079776864 0.11445877 -0. So we conclude that through analysis of variance.10540639 -1.22356729 0. The p value of the interest rate is 0.047974385 t Stat -0.ijcrb.28639888 0.756516541 -0.10828329 2.061757068 0.
01972357 0. (interest rate. (interest rate.06968763 21 Critical region: P ≤ 0.ijcrb.01972357 & 0. So.004856366 F 3. this statement is EFFECTS ON RETURN ON EQUITY (ROE) Testing of Hypothesis: (a) There is no difference between all five factors. unemployment.05 We have p-value 0.05 COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 97 .560096416 0.072845486 0. GDP growth rate and inflation) of all six Islamic banks in Pakistan with respect to Return on Equity. industry production growth rate. unemployment.092748723 0.018549745 0. GDP growth rate and inflation) of all six Islamic banks in Pakistan with respect to Return on Equity.01972357≤ 0.81967619 Significance F 0.webs. NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS proven to be true in this case of ROA.com MARCH 2012 VOL 3. an external economic factor that affects the profitability of the banks.413461888 0. industry production growth rate.05 (suppose) Calculation: SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA df Regression Residual Total 5 15 20 SS 0.165594208 MS 0.748395895 0. H0: µ1= µ2 =µ3= µ4= µ5 H1: At least two means are not equal Level of significance: α = 0. (b) There is difference between all five factors.
In this variance test the p value is 0.832597573 -2.625388453 -3.01366808 3.241193247 13.29171016 0. unemployment and industrial production are the factors that have highly insignificant value with values of 0. Industrial production is also insignificant.949129449.com MARCH 2012 VOL 3.631084517. All the factors have p value more than significant value.917097376 -9.490200615 -2.62538845 -3.01972357≤ 0.47762623 4.01972357 which is less than the level of significance that is 0.241521064 Upper 95.83259757 -2. or some times banks also hesitate to invest in some risky projects.909464747 0. GDP.241193247 13.05.983213396 -8.01366808 3.030463913 0.369776249 0.05 so it means that we will reject the null hypothesis which was that there is no difference between all six economic factors on Islamic bank.448323053 Standard Error 0.77777048 0.371010074 2.0% -0.5974512 -0.35525403 P-value 0.0514 that is almost equal to the significant value which 0.727345255 respectively.77777048 0.283493644 -0. the main reason could be that unawareness regarding Islamic banking in investors.261978795 t Stat 0. So. These factors don’t have any concern with the profitability of Islamic banks. 0.287223934 5. It shows that there is no single external economic factor that has significant impact on return on equity (ROE). So interest rate has a little bit significant affect on ROE not highly significant.100938831 -0.118975038 9.051450816 0.90226524 1.13816717 CONCLUSION The above table for regression analysis indicates some interesting results.118975038 9.webs.91709738 -9. COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 98 . REGRESSION ANALYSIS FOR ROE 7 Intercept GDP INFLATION UNEMPLOYEMENT INTREREST RATE INDUSTRIAL PRODUCTION Coefficients 0.211334355 -0.576191016 -1. There is only one same factor again like in ROA case about which we can say that the factor is almost significant. we conclude that all the six economic external factors have no much difference with each other.255381036 0.9832134 -8.631084517 0.216006712 0.11630091 0.030463913 0.597451201 -0. NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Result: As we know that p value tells us whether the table is significant or not.24152106 Upper 95% 1.0% 1.949129449 0. and 0.13816717 Lower 95.835470809 0. And the factor is interest rate which has p value of 0.727345255 Lower 95% -0.06487601 -1.ijcrb.
Determinants of Bank Profitability in Macao Determinants of Profitability in Turkish Banking Sector: 2002-2007 Güven Sayilgan COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 99 . NO 11 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS .D. Practices and Insights For Nigeria BY Uhomoibhi Toni Aburime* and Felix Alio** The Interest Prohibition and Financial Performance of Islamic Banks: Indonesian Evidence BY Ari Kuncara Widagdo (Corresponding Author) AND Siti Rochmah Ika A Comparison of Financial Performance in the Banking Sector: Some Evidence from Omani Commercial Banks BY Medhat Tarawneh Pioneering efforts in Islamic banking by FAKIHAH AZAHARI Bank-Specific. 3. 1 April 2001 BY Diederik van Schaik Determinants of Islamic Banking Profitability M. References ISLAMIC BANKS’ PROFITABILITY IN AN INTEREST RATE CYCLE (Anouar Hassoune) DETERMINANTS OF PROFITABILITY AND RATE OF RETURN MARGINS IN ISLAMIC BANKS BY ABDEL-HAMEED M. BASHIR Islamic Banking: Theories. Kabir Hassan.ijcrb. No. Ph.webs.com MARCH 2012 VOL 3. Industry-Specific and Macroeconomic Determinants of Profitability in Taiwanese Banking System: Under Panel Data Estimation Indranarain Ramlall DETERMINANTS OF ISLAMIC BANK PROFITABILITY Creating Dynamic Leaders Working Paper Series 002 By Professor Sudin Haron March 2004 Financial Structure and Bank Profitability Asli Demirguc-Kunt and Harry Huizinga1 January 2000 Performance of Islamic Banking and Conventional Banking in Pakistan: BY Muhammad Shehzad Moin The Arab Bank R E V I EW Vol.
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