Publication - THE RETURN ON ASSETS AND PROFITABILITY GROWTH OF ISLAMIC BANKS

THE RETURN ON ASSETS AND PROFITABILITY GROWTH OF ISLAMIC BANKS

Syed Muhammad Ali Tirmizi; Shahbaz Khan; Shahzad Hussain

Abstract:

In this study the impact of bank specific microeconomic factors including capital adequacy, liquidity and investment to total assets on Return on Assets, the profitability measure of the Islamic banks operating in Pakistan has been investigated with special focus on assets. Financial statements of Islamic banks including Bank Islami, Meezan Bank, Dubai Islamic Bank, Al Baraka Bank and Burj Bank have been utilised to analyse financial data over the period 2008 to 2015. The outcome of panel data regression has highlighted that capital adequacy has impacted negatively and significantly due to tight control measures and prevalence of risk. However, liquidity has impacted positively but insignificantly, while investment to total assets has a positive and significant influence on the profitability. This implies that, it is vital for Islamic banks to focus more aggressively on a return on assets driven investment approach in order to gain and maintain sustainability in their profit margins. Moreover, Islamic banks may increase their year-on-year profitability in the future if they accordingly plan adjustments in liquidity and capital adequacy allocations by deploying moderate control measures and risk management practices.

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