Factors Causing Profitability: An Empirical Evidence of Pakistani Islamic Banks

Abstract

This study seeks to analyse the factors for the profitability of Pakistani Islamic Banks, both micro as well as macroeconomic variables. A panel data of 5 full-fledged Islamic Banks operating in Pakistan, i.e. “Al Baraka Bank”, “Dubai Islamic Bank”, “Burj Bank”, “Meezan Bank” and “Bank Islami” are undertaken for empirical evidence. The selected sample consists of eight years’ time series data 2007-2014. For each bank data is collected on annual basis, for internal bank determinants data is gathered from the financial statistics of State Bank of Pakistan, while the data of macroeconomic variables as Real GDP and inflation is extracted from World Bank data base. Regression method is being used on data by Ordinary Least Square technique applied in E-views Software. “ROA” is taken as a proxy for the profitability of Bank. The findings imply that macroeconomic variables impacts negatively on the “ROA”, it suggests that when there is high inflation in the country the profitability of the banks shrinks. Assets size has a positive and significant impact on profitability, whenever a bank increases its assets size its profitability will also increase. Non-performing loans as well as Operating efficiency employs negative but significant impact, lower the number of non-performing loans of the banks higher will be the profitability. For operating efficiency, a lower ratio is preferred so it infers an increase in operating efficiency will lead to shrinkage in profits. Effective and Efficient management is needed to improve and enhance internal factors for Islamic Banks to be more profitable and sustainable in the future. This paper will be of great importance for Pakistan Islamic Banks in order to know the elements that influence profitability