influence of the geographical environment on Islamic banking performance

Abstract

The main goal of this study is to examine the influence of the geographic environment on the performance of Islamic banks present in four regions: Africa, Asia, Europe and North America. To achieve this goal, we have used daily data from 113 Islamic banks between 2010 and 2019. We applied different methodological approaches, such as principal component analysis and quantile regression with fixed effects for panel data. As a result, we found that the analysis of the main components shows that the performance of Islamic banks varies between regions. The regression of the linear panel highlights that the geographic environment positively and significantly affects the Islamic banking system, suggesting the importance of this aspect’s effects. Finally, the environmental effect seems to vary with the quantiles, bringing positive effect to the lower quantile and negative effect to the highest quantile. This quantile specification points to the environment-performance nonlinear relationship of the Islamic bank, reflecting a discipline variable in the time imposed by the Council of Shariah or Islamic Law. This discovery helps to better explain the main difference between Islamic banks in the East and those in the West, and also allows investors to adjust their portfolio options when considering the products of Islamic banks according to regional specificities.