Impact of the Islamic Modes of Finance on the Profitability of Islamic Banking Sector in Pakistan
Abstract
Abstract Views: 106
The persistence of Islamic finance in any economy is arguably essential to
address the economic needs of the society. The golden principles of Islam
that is, profit and loss sharing, honesty, and doing business keeping in view
the welfare of the people can play a vital role in alleviating poverty. The
primary objective of the current study is to investigate empirically the impact
of the Islamic modes of finance and their contribution in enhancing
profitability. For this purpose, time series quarterly data ranging from
2014Q1-2020Q4 of the Islamic modes of finance (including Sukuk) were
used to find their impact on the profitability of the Islamic banking sector as
measured by Return on Asset (ROA). The ARDL and bounds cointegration
approach were used to examine the level relationship among the underlying
variables. The results provided strong evidence of a long-run equilibrium
relationship. The results also showed that Murabaha, Musharaka, Istisnaa,
and Diminishing Partnership have a prominent positive and significant
impact on ROA. However, the impact of Murabaha on profitability remains
significantly higher as compared to the other modes of finance. The second
most important determinant of profitability is Musharaka, followed by
Istisnaa. The estimated value of error correction term showed a significant
adjustment towards the long-run equilibrium. These findings may help the
managers of Islamic banks in allocating funds to different modes and
portfolios for optimal returns. They may also have a big impact on the ability
of policymakers to create policies appropriate for interest-free windows and
branches. Moreover, they would allow Islamic banks to retain their
competitive edge and improve the quality of their services.
Downloads
References
Abdeen, A., & Shook, D. N. (1984). The Saudi financial system, in the context of Western and Islamic finance. Wiley.
Abozaid, A. (2021). Penalty and compensation in financial commitments a critical shariah review. Journal of College of Sharia & Islamic Studies, 38(2), 253–266. https://doi.org/10.29117/jcsis.2021.0276
Akintan, I., Dabiri, M., & Salaudeen, J. (2021). A literature review on islamic finance modes as an alternative approach to finance the business model of a circular economy. Inernational Research Journal of Shariah, Muamalat and Islam, 3(8), 31–48. https://doi.org/10.35631/IRJSMI.38003
Ali, A. S., & Hailu, S. M. (2022). Efficiency of islamic banks: evidence from islamic windows of conventional banks in Ethiopia. International Journal of Islamic Banking and Finance Research, 9(1), 21–31. https://doi.org/10.46281/ijibfr.v9i1.1768
Alqahtani, F., & Mayes, D. G. (2018). Financial stability of Islamic banking and the global financial crisis: Evidence from the Gulf Cooperation Council. Economic Systems, 42(2), 346–360. https://doi.org/10.1016/j.ecosys.2017.09.001
Arafat, Q. Y., Rashid, A., & Jan, Q. W. (2021). Impact of COVID-19 on the performance and stability of conventional and Islamic banks in the GCC region, Malaysia, and Pakistan. Islamic Banking and Finance Review, 8(1), 24–37. https://doi.org/10.32350/ibfr.81.02
Ayeni, A. P., Ibrahim, J., & Adeyemi, A. O. (2017). Tax revenue and Nigerian economic growth. European Journal of Accounting, Auditing and Finance Research, 5(11), 75–85.
Bakhita, H. G. B. (2017). Impact of Islamic modes of finance on economic growth through financial stability. Journal of Business & Financial Affairs, 6(1), Article e1000249.
Bashir, A.-H. M., & Kabir, M. H. (2005). Determinants of Islamic banking profitability. In M Iqbal & R. Wilson (Eds.), Islamic perspectives on wealth creation. Oxford Academics. https://doi.org/10.3366/edinburgh/9780748621002.003.0008
Boyante, R. A. (2014). The effect of the Islamic financing modes on the profitability of commercial banks in Kenya [Master thesis, University of Nairobi]. University of Nairobi Research Archive. http://erepository.uonbi.ac.ke/handle/11295/76898
Bukhari, M. S., & Harrathi, N. (2015). Bank efficiency analysis: Islamic banks versus conventional banks in the gulf cooperation council countries 2006 - 2012. International Journal of Financial Research, 6(4), 143–150. https://doi.org/10.5430/ijfr.v6n4p143
Chapra, M. U. (2008). The Islamic vision of development in the light of Maqāsid al-sharī ‘ah (Islamic Research and Training Institute Working Paper no. 235). https://doi.org/10.13140/RG.2.1.4188.5047
Erfani, G. R., & Vasigh, B. (2018). The impact of the global financial crisis on profitability of the banking industry: A comparative analysis. Economies, 6(4), e66. https://doi.org/10.3390/economies6040066
Hafnida, H., Selamah, M., & Hussain, A. (2015). An empirical study of the relationship between Islamic modes of finance and financial intermediation. International Journal of Business and Management, 10(7), 93–98. http://doi.org/10.5539/ijbm.v10n7p93
Hassan, M. K., Saraç, M., & Alam, A. (2020). Circular economy, sustainable development and the role of Islamic finance. In M. SARAÇ & M. K. HASSAN (Eds.), Islamic perspective for sustainable financial system (pp. 1–26). Instanbul University Press.
Ichsan, R. N. (2021). Determinant of Sharia Bank's financial performance during the Covid-19 pandemic. Budapest International Research and Critics Institute Journal, 4(1), 298–309.
IFSB Stability Report. (2020). The IFSB Islamic financial services industry (IFSI) stability report 2020. https://www.ifsb.org/download.php?id=5724&lang=English&pg=/sec03.php
Isiaka, L., Mustapha, L., & Irom, M. (2018). Financial risk management and the profitability: An empirical evidence from commercial banks in Nigeria. Sahel Analyst: Journal of Management Sciences, 16(2), 117–137.
Islam, R., & Ahmad, R. (2020). Mudarabah and musharakah as micro-equityfinance: perception of Selangor’s disadvantaged women entrepreneurs. ISRA International Journal of Islamic Finance, 12(2), 128–197. https://doi.org/10.1057/s41287-019-00225-3
Mercia, M. C., Evren, O., & Hassan, T. (2002). Bank performance around the introduction of subsidiary banks in the US. Journal of Banking and Finance, 17, 389–400.
Mustafa, O. A. (2019). Assessment of the financial performance of Islamic commercial banks in Sudan under credit risk and inflation pressures (1995-2017). Journal of Islamic Banking and Finance, 7(1), 14–26. https://doi.org/10.15640/jibf.v7n1a2
Olalekan, L. I., Mustapha, L. O., Irom, I. M., & Emily, B. N. (2018). Corporate board size, risk management and financial performance of Listed Deposit Money Banks in Nigeria. European Journal of Accounting, Auditing and Finance, 6(1), 1–20.
Rashid, A., & Khalid, S. (2017). Impacts of inflation and interest rate uncertainty on performance and solvency of conventional and Islamic Banks in Pakistan. Journal of Islamic Business and Management, 7(2), 156–177. https://doi.org/10.26501/jibm/2017.0702-002
Rashid, A., Khaleequzzaman, M., & Jabeen, S. (2015). Analyzing performance of banks in Pakistan: Conventional versus Islamic banks. Journal of Islamic Business and Management, 5(2), 17–42.
Rehman, U. J., & Rashid, A. (2022). Impacts of bank-specific and macroeconomic risks on growth and stability of islamic and conventional banks: An empirical analysis from Pakistan. Journal of Asian Finance, Economics and Business, 9(2), 1–14.
Risfandy, T., Harahap, B., Hakim, A. R., Sutaryo, S., Nugroho, L. I., & Trinugroho, I. (2020). Equity Financing at Islamic Banks: Do Competition and Bank Fundamentals Matter? Emerging Markets Finance and Trade, 56(2), 314–328. https://doi.org/10.1080/1540496X.2018.1553160
S&P Global Ratings. (2020). Islamic Finance Outlook 2020. https://www.spglobal.com/_assets/documents/ratings/research/islamic_finance_2020_screen.pdf
Saâdaoui, F., & Khalfi, M. (2022). Revisiting Islamic banking efficiency using multivariate adaptive regression splines. Annals of Operations Research, 1–29. https://doi.org/10.1007/s10479-022-04545-2
Safiullah, M., & Shamsuddin, A. (2020). Technical efficiency of Islamic and conventional banks with undesirable output: Evidence from a stochastic meta-frontier directional distance function. Global Finance Journal, 51, Article e100547 https://doi.org/10.1016/j.gfj.2020.100547.
Shehu, F. M., Hayati, N., & Ahmad, B. (2020). Interest Based Micro-Credit Is A Problem For Women Entrepreneurs : Considering Murabaha Financing As An Alternative In The Light Of Maqasid Al- Shari’ah. International Journal of Zakat and Islamic Philanthropy, 2(2), 188–198.
Sitompul, S., Ichsan, R. N., & Nasution, L. (2021). The influence of exchange rate, inflation, for the results of the development assets of Islamic banks. Journal of Economics, Finance and Management Studies, 4(3), 138¬–148. https://doi.org/10.47191/jefms/v4-i3-05
State Bank of Pakistan. (2020). Islamic banking bulletin. https://www.sbp.org.pk/ibd/bulletin/2020/Sep.pdf
Tahir, U., & Rashid, A. (2021). Evaluation of Contemporary Takaful Practices from the Perspective of Maqasid al-Shariah. Journal of Islamic Business and Management, 11(2), 296–311. https://doi.org/10/26501/jibm/2021.1102-005
Turki, A. (2017). Performance differences between Islamic and conventional banking forms. Banks and Bank Systems, 12, 237–46. https://doi.org/10.21511/bbs.12(3-1).2017.08
Usman, A., & Khan, M. K. (2012). Evaluating the financial performance of islamic and conventional banks of Pakistan: A comparative analysis. International Journal of Business and Social Science, 3(7), 253–257.
Usmani, M. T. (2002). An introduction to Islamic finance. Kluwer Law International.
Waluyo, B., & Rozza, S. (2020). A model for minimizing problems in salam financing at Islamic banks in Indonesia. International Review of Management and Marketing, 10(2), 1–7. https://doi.org/10.32479/irmm.9149
Zafar, M. B., & Sulaiman, A. A. (2020). Islamic banking in Pakistan: Emergence, growth, and prospects. In A. Rafay (Eds.), Growth and emerging prospects of international Islamic banking (pp. 61–77). IGI Global. https://doi.org/10.4018/978-1-7998-1611-9.ch004
Copyright (c) 2023 Mudeeba Gul, Atta Ullah Khan
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgement of the work’s authorship and initial publication in this journal.
