Determinants of Profitability of Islamic Banking Sectors of Pakistan

Abstract

This study is investing potential determinants which influence the profitability of Islamic bank in Pakistan. The researcher has incorporated both internal as well as external factors to identify their impact on Islamic Banks profitability .panel data of five years for the sample period of 2010 to 2014 for the five Islamic banks is constructed for the study. Earnings per share (EPS) and Return on Assets (ROA) are the dependent variable whereas Liquidity Ratio (LR),Deposit Ratio ,Capital Adequacy Ratio (CAR) , Expense Management (EM),Bank Size (BS) Branch Network (BN),and macroeconomic factors i.e Gross Domestic Product (GDP) and inflation Rate (INF) are the independent variable ; two regression model are developed for each dependent variable, Secondary sources such as financial statements and SBP reports are used for data collection .Least square method is used for testing the proposed hypothesis. The results revealed that bank size (BS), Expense Management (EM), and Gross Domestic product (GDP) are significant factors in determining the profitability of the Islamic bank EM and BS are statistically significant with WPS at 5% level of significance and have a positive relationship with the bank’s profitability. GDS is statistically significant with ROA as well as EPS at 5% level of significance and negative related. This research will help the policy makers, bank managers and practitioners to control the impact of these variables and make decisions accordingly and can be used as reference for making policies and future researches. Future researches can add more variables in the model, increase the sample size and add primary data to explore new factors for Islamic bank's profitability.