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

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.