Does Islamic Bank Performance Differ by Region?: A Study on the Characteristics that Impact Profitability within Islamic Banking Among its Main Geographical Regions

Abstract: This paper seeks to examine the determinants of the profitability of the Islamic banking sector during the period 1999-2007. The empirical findings from this study suggest that equity/total assets, non interest-earning assets/total assets, bank credit/GDP, GDP growth and GDP per capita have statistically significant impact on world-wide Islamic bank profitability. My data reveal differences in level of profitability within Islamic banking among its main regions. Middle East represents the region with highest profitability and South Asia is reported having the lowest profitability. With subsequent analysis I also find that the impacts of the determinants on Islamic bank profitability are not uniform across the regions. There exist significant differences among the regions in the impact of equity/ta and customer and short term funding/ta. The ratios are reported negatively related to profitability in South Asia but positively in the other regions. A high non-interest earning assets/ta appears to lower profits in the Middle Eastern region while it has a positive impact on profits in North Africa and on return on equity in South Asia. GDP growth is a determinant of profitability in Middle East and North Africa, although the impact is significantly differing between the regions, with a positive impact in Middle East and a negative one in North Africa. GDP per capita, the income level of the country, only appears to affect profits directly in North Africa and the relation is reported positive. However, when investigating the income level’s impact of the level of influence of the bank-level variables on profitability, the findings reveal a statistically significant impact among all regions. The results also indicate that the impact of the interaction variables differs significantly between regions. Finally, the oil price is found determining profitability in North Africa and South Asia. The relation is positive in North Africa and the reverse in South Asia.