Impact of the Islamic Modes of Finance on the Profitability of Islamic Banking Sector in Pakistan

Mudeeba Gul () and Atta Ullah Khan
Additional contact information
Mudeeba Gul: Allama Iqbal Open University, Islamabad, Pakistan
Atta Ullah Khan: Allama Iqbal Open University, Islamabad, Pakistan

Islamic Banking and Finance Review, 2023, vol. 10, issue 1, 1-23

Abstract: 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 (includingSukuk) wereused 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.

Keywords: Conventional Banks (CBs); Islamic Banks (IBs); Islamic modes of finance; profitability; Return on Asset (ROA) (search for similar items in EconPapers)
JEL-codes: B17 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
https://journals.umt.edu.pk/index.php/IBFR/article/view/3631/1789 Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:ibfumt:0001

Access Statistics for this article

Islamic Banking and Finance Review is currently edited by Mohammad Ayaz

More articles in Islamic Banking and Finance Review from University of Management and Technology, Lahore, Pakistan School of Business and Economics, University of Management and Technology, Lahore, Pakistan. Contact information at EDIRC.
Bibliographic data for series maintained by Mehar Tahir Fareed ().