PROFITABILITY DETERMINANTS IN ISLAMIC BANKING INSTITUTIONS IN PAKISTAN

Abstract

Purpose-This research study is designed to investigate and identify the potential determinants from bank‟s internal environment and from macroeconomic environment that have a significant impact on profitability of full-fledged Islamic banking institutions operation in Pakistan. Methodology/sample- Five full-fledged Islamic banks are selected for the study and five years panel data for the sample period of 2010 to 2014 from the secondary sources i.e. financial statements and SBP reports and publications. EPS and ROA are selected as dependent variable while LR, DR, CAR, EM, BS, BN GDP & INF are among the independent variables; two regression models are developed for each dependent variable. Least square method is used for testing the proposed hypothesis and other statistical tools are like descriptive statistics and correlation matrix are also applied. Findings- The results revealed that EM and BS are statistically significant with EPS at 5% level of significance and have a positive relationship with the bank‟s profitability. GDP is negatively related but statistically significant with ROA at 5% level of significance. The research result suggested that Islamic banks of Pakistan need to increase the size by creating awareness and exploring new locations for establishing the branch network. Moreover, large bank size enables the Islamic banks to achieve economies of scale. Expense management is crucial for achieving the operational efficiency, the expansionary stage of the industry demands more expenditure for retaining the human capital and running the branch operations smoothly. Practical Implications- This research will help the policy makers, bank managers and practitioners to control the impact of the variables and make decisions accordingly and can be used as reference for IBs for making policies and future researchers. Future researchers can include more critical variables, increase the sample size and add primary data in form of expert opinions for making the research results more appropriate.