Impact of Financial Risk on Islamic Banks’ Profitability in Pakistan

Abstract

This study analyzed the impact of financial risk on profitability of Islamic banks in Pakistan. Three independent (Interest rate risk, Liquidity Risk, Credit Risk) variables are included in study. For dependent variable return on asset (ROA) is taken as proxy for profitability. Three control variables are also included in study out of which two variables (Gross Domestic Product, Inflation) are macro-economic variables and one (Bank Size) is bank specific variable. This study is mainly focused on Islamic Banking industry of Pakistan and four full-fledged Islamic banks are included in the study out of five banks currently operating in Pakistan. Data for independent, dependent and bank specific variables is collected from published financial statements of banks from year 2011 to 2019. Inflation data is collected from Pakistan bureau of Statistics website and widely used consumer price index is used for inflation. For gross domestic product data is collected from World Bank. Panel Data analysis is used to analyze data as our data is in form of panel and random effect model is used for regression analysis. Results from analysis stated that all independent and control variables are significant in the study and only GDP is insignificant