Impact of Partnership Based and Non-Partnership Based Shariah Complaint Products on the Financial Performance of Islamic Banks

Abstract

The present study evaluates the impact of Shariah compliance on profitability. By applying the fixed effect model, this study examines the impact of investment in partnership-based and non-partnership-based modes of financing on the financial performance of Islamic banks. Unbalanced panel data has been extracted from the financial reports (2008-2021) of all full-fledged Islamic banks operating in Pakistan. Shariah compliance is measured using two self- constructed proxies following experts’ survey; whereas financial performance is calculated as “net income to average total assets”. The study finds that investment in partnership-based modes of financing had a positive association with financial performance. However, the study fails to find any association between investments in non-partnership based modes of financing and financial performance of Islamic banks. Moreover, the study recommends that Islamic banks should increase their investment in partnership based mode of financings as it will increase their profitability and improve their public image of being ‘Islamic’.