Islamic Bank Sustainability: An Econometric Approach

Abstract

This paper aims to assess the behavior of Islamic banks regarding their financial sustainability. It employed an econometric approach to estimate the financial sustainability of Islamic banks in ten predominantly Muslim countries. We derived financial sustainability indicators using the Bellman equation to demonstrate when Islamic banks achieved sustainability performance. We estimated the model with a refined Heckman selection through simulated maximum likelihood. Most of the results confirmed the findings of previous studies that financial sustainability of Islamic banks is influenced by ROA and efficiency. According to our estimation, we predicted that the majority of Islamic banks in ten Muslim countries failed to deliver Islamic moral economy. Islamic bank financing activities are still dominated by commercial financing rather than maqasid concepts. This paper explicitly shows a strong message for Islamic banks in Muslim countries to implement maqasid to improve the mandates of Islamic moral economy. We have presented a quantitative approach to produce robust estimations and predict bank sustainability according to the latest econometric methods. Contribution/Originality: This study contributes to the existing literature on Islamic bank sustainability. This study used new estimation methodology that introduces Islamic bank behavior with a refined Heckman selection methodology that has not previously been used. This study introduces a new formula of Islamic bank sustainability with dynamic optimization through the Bellman equation.

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