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Performance and Profitability of Islamic Banks in Saudi Arabia: An Empirical Analysis

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  • Saima Javaid
  • Suha Alalawi

Abstract

The Present study examines all the internal and external determinants contributing the profitability of 9 Islamic Banks in the region of Saudi Arabia over a period of 2000-2013, that is a period of 14 years. During this period the region of Saudi Arabia has witnessed structural changes as it enters into WTO membership. Also, the period is sufficient enough to see to effects such major changes happened in the region over the financial intermediaries. Using the unbalanced panel data and robust fixed effect model of regressions, the paper examines the impact of bank specific, industry specific and macro-economic variables on profitability. Results indicate that bank characteristics, industry characteristics, and macroeconomic variables are significant in determining Islamic banks’ profitability. Our empirical findings indicate that the coefficient of the capital adequacy is positive and highly significant, with both the measures of profitability, reflecting the sound financial condition of Saudi banks. On the other hand, the positive and significant leverage ratio implies that the Saudi Islamic banks are relying heavily debt financing, suggesting that Saudi Islamic banks are more risky in nature, though profitable to a certain extent, but these might be badly hit in times of recession in the economy. Thus, diversified portfolio is necessary to maintain stability in the future and to reduce the risk and uncertainty. The findings relating the industry specific variables, we find that banking sector in Saudi Arabia is highly competitive. The study further emphasizes optimal policies to bank management that helps the policy makers, bank managers and executives in improving the overall efficiency and maintaining the sound profitability in the Islamic banks in Saudi Arabia.

Suggested Citation

  • Saima Javaid & Suha Alalawi, 2018. "Performance and Profitability of Islamic Banks in Saudi Arabia: An Empirical Analysis," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 8(1), pages 38-51.
  • Handle: RePEc:asi:aeafrj:v:8:y:2018:i:1:p:38-51:id:1659
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    Citations

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    Cited by:

    1. Fahd Al-Shaghdari & Barjoyai Bardai, 2020. "The Impact of Bank Characteristics and Macroeconomic Variables on the Islamic Commercial Banks Financial Performances: Case of Indonesia," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 7(10), pages 16-21, October.
    2. Puji Sucia Sukmaningrum, 2020. "Determinants of Islamic Bank Profitability: Evidence from Indonesia," GATR Journals jfbr167, Global Academy of Training and Research (GATR) Enterprise.
    3. Dr. Sana Fayyaz & Dr. Syed Wahid Ali & Tariq Khalid, 2024. "Profitability of Islamic Banks in Pakistan: An Empirical Analysis," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 13(2), pages 741-746.
    4. S. Yu. Babenkova, 2022. "The development of the financial system of Saudi Arabia as one of the key areas in the country’s economy," Entrepreneur’s Guide, JSC “Publishing Agency “Science and Educationâ€, vol. 15(1).
    5. Nathaniel Karel DJAYA & Ika YANUARTI, 2021. "The Influence Of Capital Adequacy Ratio And Non-Performing Loan On Profitability Of Commercial Banks Listed On The Indonesia Stock Exchange In 2017-2019," Business Excellence and Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 11(4), pages 80-94, December.
    6. Eissa A. Al-Homaidi & Mosab I. Tabash & Anwar Ahmad & David McMillan, 2020. "The profitability of islamic banks and voluntary disclosure: empirical insights from Yemen," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1778406-177, January.
    7. Ghaith N. Al-Eitan & Ayman M. Alkhazaleh & Ahmad S. Alkazali & Bassam Al-Own, 2021. "The Internal and External Determinants of the Performance of Jordanian Islamic Banks: A Panel Data Analysis," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(8), pages 644-657, August.

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