Impact of Shariah Compliance on Financial Performance of Islamic Banks: Evidence from Pakistan
Despite the remarkable growth of the Islamic banking industry over the past few decades, its Shariah legitimacy is still debatable. In this regard, most of the pronouncements of Shariah scholars are deduced from the secondary sources of Islamic jurisprudence which are open to diverse interpretation. In general, the well-known Islamic legal maxim “Al-Khraj bil Dhaman” suggests that each Shariah-compliant business should expose to some kind of risk. Arguably, while pursuing the goal of profit maximization, Islamic banks offer such risk-free modes of financing that undermine their Shariah legitimacy. In this context, some studies explored the relationship between Shariah compliance and profitability and reported mixed findings as they measured Shariah compliance using irrelevant or limited proxies. The purpose of the present study is to revisit this relationship by applying a more comprehensive proxy to measure Shariah compliance of Islamic banks. The study analyzes unbalanced panel data extracted from the annual reports (2008-2020) of full-fledged Islamic banks operating in Pakistan. Applying, fixed effect robust model, the study finds a significant positive relationship between Shariah compliance and financial performance suggesting that better Shariah compliance leads to improved financial performance.
Copyright (c) 2022 Muhammad Mansoor Javed, Syed Muhammad Hassan Bukhari, Adnan Bashir
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