The determinants of bank profitability, do Islamic ethics perspective matter ? A comprehensive study on Islamic banks vs. conventional ones

Kaouther Toumi Lajimi (), Rana El Bahsh and Serge Agbodjo ()
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Kaouther Toumi Lajimi: LGCO - Laboratoire Gouvernance et Contrôle Organisationnel - UT3 - Université Toulouse III - Paul Sabatier - UT - Université de Toulouse, IUT Paul Sabatier - Institut Universitaire de Technologie - Paul Sabatier - UT3 - Université Toulouse III - Paul Sabatier - UT - Université de Toulouse, LGTO - Laboratoire de Gestion et des Transitions Organisationnelles - UT3 - Université Toulouse III - Paul Sabatier - UT - Université de Toulouse, UT3 - Université Toulouse III - Paul Sabatier - UT - Université de Toulouse
Rana El Bahsh: GJU - German Jordanian University
Serge Agbodjo: LGCO - Laboratoire Gouvernance et Contrôle Organisationnel - UT3 - Université Toulouse III - Paul Sabatier - UT - Université de Toulouse

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Abstract: We examine whether the level of diversification, risk, efficiency and ethical governance influence Islamic banks (IBs) profitability compared to conventional (CBs) and hybrid banks (HBs). Using a sample of 205 banks; divided into 92 CBs, 92 IBs and 22 HBs from 18 countries for the period 2005-2015, we find that IBs are more profitable than CBs based on return on assets, return on deposits and net margin ratio. However, IBs are observed to be less profitable based on the return on equity. IBs appear to be less diversified in terms of sources of revenue, types of earning assets and types of funding sources. Furthermore, IBs appear to have slightly more diversified portfolios in terms of liabilities and assets components. In terms of risk, IBs present lower financial risk, liquidity risk and insolvency risk but higher margin risk and credit risk. We provide initial confirmation that diversification and risk impact differently the profitability of the sampled groups of banks. Regarding the impact of the Shariah governance, we find two principal results. First, the availability of a Shariah supervisory board in the governance structure increases banks profitability. Second, banks governed under a centralized Shariah governance model is found to influence positively the profitability of IBs revealing that such Shariah governance model increases the credibility and the reputation of IBs in the industry which improves thus their profitability.

Keywords: Profitability; diversification; risk; efficiency; Shariah/Ethical governance (search for similar items in EconPapers)
Date: 2017-05-31
Note: View the original document on HAL open archive server: https://ut3-toulouseinp.hal.science/hal-04109833v1
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Published in 34ème conférence annuelle de l'association française de finance, Université grenoble Alpes, May 2017, Valence, France

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