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Profitability and risk in interest-free banking industries: a dynamic panel data analysis

Author

Listed:
  • Mohamed Ali Trabelsi

    (Faculty of Economic Sciences and Management of Tunis)

  • Naama Trad

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

Abstract
Purpose - The purpose of this paper is to examine whether Islamic finance could replace or complement the traditional financial system and could guarantee stability in times of crisis. Design/methodology/approach - To achieve the aim, the authors examined both risk-taking and profitability of 94 Islamic banks (IBs) operating in 18 countries observed during the 2006-2013 financial crisis period. A series of bank-specific and other country-specific indicators are combined to explain profitability of IBs as measured by return on assets and return on equity, and risk divided into credit risk measured by impaired loans/gross loans and total equity/net loans, and insolvency risk measured by Z-score. Indeed, a bank is stronger than another if it is stable with a higher capacity to absorb risks, on the one hand, and increased performance on the other. Findings - Using dynamic panel data econometrics (generalized moment method system), the authors estimated five regressions and found the following results: bank capital is found to be the main indicator that contributes to maximizing profitability and stability of IBs and reducing their credit risk. However, the study of liquidity and asset quality determinants often leads to inconclusive results. Nevertheless, they found that Gulf region-operating IBs are more profitable, more solvent and less risky than those operating in the South East Asian region. At the macroeconomic level, the authors could not find a significant relationship between inflation rate and IBs profitability. However, unlike for IBs in Southeast Asia, the authors found that inflation rate improves IBs stability and reduces their credit risk level. Practical implications - The results of this study have numerous implications for bank management and the different stakeholders (investors, customers). This study identified several factors that may help bank managers to improve their financial outlook by controlling risk level and profitability. These factors co
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Mohamed Ali Trabelsi & Naama Trad, 2017. "Profitability and risk in interest-free banking industries: a dynamic panel data analysis," Post-Print halshs-01656758, HAL.
    • Handle: RePEc:hal:journl:halshs-01656758
    DOI: 10.1108/IMEFM-05-2016-0070
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    as
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