Determinants of bank profitability: Islamic versus conventional banks

Abstract

This research analyzes the determinants of bank profitability by investigating the internal factors that affect the profitability of Islamic banks and conventional banks. It then compares the results from the two types in order to understand how they differ from each other. As previous researchers focus on either Islamic or conventional banks, this research will analyze both by comparing how they are each influenced by profitability factors. Few researches have attempted to compare the profitability of Islamic and conventional banks using a relatively small sample. This research uses a fixed effect panel data analysis on a large sample of 68 banks (42 Islamic and 26 conventional banks) from 13 MENA countries, covering the period of 2006 until 2016. Using several variables, including bank size, equities to assets, loans to assets, deposits to assets, cash to assets and securities to assets, the results show that bank size, equities to assets and deposits to assets have a significant positive effect on Islamic banks’ profitability, while they have a significant negative effect on conventional banks’ profitability; loans to assets and cash to assets have no effect on bank profitability for either Islamic or conventional banks; and securities to assets has a significant negative effect on Islamic banks’ profitability, while it has a significant positive effect on conventional banks’ profitability. The results also show that bank size, equities to assets, deposits to assets and cash to assets contribute more to Islamic banks’ profitability compared to conventional banks, while loans to assets and securities to assets contribute more to conventional banks’ profitability compared to Islamic banks.

Determinants of Islamic Bank Profitability: Evidence from Indonesia

“…This is in accordance with the economics of scale which states that larger companies will be able to lower their operating costs (Adelopo, Lloydking & Tauringana, 2018). Previous research shows that the size of Islamic banks has a positive impact on profitability (Alzoubi, 2018;Alharbi, 2017). Islamic banks have a better chance in a diversified portfolio of investments and assets.…”

Examining the Correlation Between Islamic Banks Profitability and the Business Cycle in Indonesia

“…This result supports the conclusion from the research by Alarussi & Alhaderi (2018) which explained that the FDR has no significant effect on the banking profitability in Malaysia. In contrast, Sriyana (2015), Alzoubi (2018) and Sudarsono (2017) stated that FDR statistically affecting the Islamic banks' profitability ratio.…”

The Effect of Liquidity According to the Requirements of the Basel III Committee on the Profitability of Banks: Evidence from Saudi Banks

“…Therefore, there is a tendency for national authorities to attempt to improve the profitability of the banking sector and its efficiency. Alzoubi (2018) and Yao et al (2018) indicated that banks' profitability has several determinants, such as size, capital, risk, etc. Each variable has a different relationship with profitability.…”

“…This variable provides a source of funding to banks and, thus, it evaluates the capital adequacy. Based on Alzoubi (2018), bank capital is measured as the total equity to total assets. In terms of the relationship between bank capital and profitability, it is suggested that, when the assumption of a perfect market is lightened, a rise in capital would lower the costs related to bankruptcy and financial crises and therefore, banks would be more profitable.…”

“…Loans are the fundamental source of banks' profitability (Borio et al, 2017). Bank specialization is calculated by dividing total loans to total assets (Alzoubi, 2018). According to Mashamba (2018), high specialization in lending leads to banks being able to generate high profits from loans and, thus, increase their profitability.…”