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Determinants of profitability of Islamic banks, A case study of Pakistan

Syed Atif Ali Lecturer Lahore Business School, the University of Lahore Azam Shafique Asst. Professor Hailey College of Commerce, The University of Punjab Amir Razi Lecturer Lahore Business School, the University of Lahore Umair Aslam Lahore Business School, the University of Lahore Abstract This research paper focus on Determinants of profitability of Islamic banks. It includes literature review on determinants. Hypothesis are tested and discussion is done on basis of data. Different tests are applied to draw conslusions at the end. Keywords: Determinants ; Profitability ; Islamic banks; Case study ; Pakistan I. Introduction The banking sector is well thought-out to be an important source of financing for most businesses. The common assumption, which underpins much of the financial performance research and discussion, is that increasing financial performance will lead to improved functions and actions of the Organizations. The subject of financial concert and research into its measurement is well advanced within finance and management fields. It can be argued that there are three principal factors to improve financial performance for financial institutions; the institution size, its asset management, and last one the operational efficiency. Since the first institution was established in 1963, Islamic banks have gained a foothold in almost every majority Muslim country and in a few non-Muslim countries. Not only do Islamic banks provide Profit-sharing (instead of pre-determined interest payments) banking conveniences, but they are also expected to undertake business and trade activities on the basis of fair and legal profits. In such banks, ensuring fair practices in dealings with customers and shareholders takes centre stage, more so than in conventional banking where much fair practice needs to be

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imposed by external regulation (further details on the concepts and operations of Islamic banking system are available elsewhere, e.g. Haron, 1995).While there is plenty of literature on performance studies, these studies are confined to conventional banks. Up to this date, there has been little research on the profitability of Islamic banks. Nienhaus (1983) tried to link the profitability of Islamic banks with the market structure. Based on his simplistic equilibrium model, he postulated that the profit-sharing ratio (the percentage of profit paid by the entrepreneur) of Islamic banks was positively related to the lending rate of the conventional banks. Nienhaus (1983) not only suggested that Islamic banks use the interest rate as basis for calculating profit-sharing ratio, but also recommended that the profit-sharing ratio be equivalent to the interest rate offered by the conventional banks. He also alleged that in the long run, interest based banking would be more successful than Islamic banking. Unfortunately, Nienhauss hypotheses were not supported with any empirical evidence. Khan (1983) expanded Nienhauss model and postulated that the average return of an Islamic bank in the long run will be higher than the interest rate. Khan believed that Nienhauss argument was valid in the case where profit-sharing products were provided by conventional banks. Interestingly, Khan recognized that the profit-sharing ratio would have a positive relationship with interest rate. Like Nienhaus, Khans framework was not empirically verified by any proofs. Using adaptive expectation model, Haron and Ahmad (2000) verified Nienhauss (1983) and Khans (1983) hypotheses and found that conventional interest rates had a series positive relationship with deposits of Islamic banks. The work by Samad (1999) is considered the pioneer study, which links efficiency and performance of Islamic banks. Comparing the efficiency of conventional and Islamic banks, Samad found that Islamic banks be inclined to become inefficient when operating within the dual banking environment. Applying financial ratios in their works, Samad and Hassan (1999) pragmatic that in some aspects, Islamic banks out performed conventional banks. Hassan and Bashir (2003) studied the effects of proscribed and uncontrolled variables on Islamic banks profitability. While factors such as capital, overhead, gross domestic product and conventional interest rates were confidently related to profitability; loan ratios, reserves taxes, and size were adversely related. The objective of this study is to examine the impact of profitability determinants on performance of Islamic banks in a manner corresponding to such studies conducted with conventional banks.

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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Literature Review:

The profitability of banks can be divided into two parts. One is internal determinants and other one is external determinants. Internal determinant include financial statement variables and non financial statement variables. The internal determinants are controlled under the bank management. While external determinants include inflation, government policies, taxes and also competition, bank management, scarcity of capital. The very first researcher who felt that internal variables are the part of profitability was Bourke (1989). He included capital ratios, staff expenses and liquidity ratios in the internal variables for profitability. The dependent variables were comprised of the net profit before taxes against total capital ratio and net profit before taxes against total assets ratio. According to Bourke these internal variables were related to the profitability positively. This research by Bourke was confirmed by Molyneux and Thornton (1992) who also found the same results. In 1979, another researcher was Short who included scarcity of capital as a variable for determining the profitability. He was sure that this variable can be use to determine the profit. Short used both central bank discount rates and the interest rates on long-term government securities. He found that these have positive relationship with the profitability. Hester and Zoellner (1996) studied the relationship between the items of balance sheet and the earnings of all the banks in Kansas City and Connecticut. He found out some results and he found that when there are some changes in balance sheet it has some significant impact on the earnings of the banks. Haslem (1968) used 64 operating ratios to measure the effects of management, size, location and time on profitability of commercial banks. He found that all the variables have significant impact on the profitability. Mullineaux (1978) said that balance sheet has impact on profitability. He said that it depends upon the nature of the balance sheet; this relationship can be positive or negative. Smirlock (1985) found that demand deposits are the cheaper source of funds and it does have significant impact on the profit of the balance sheet. Vernon (1971) studied on the effect of ownership on profitability. He found that if ownership of one bank is controlled by the owner and other bank is owned by the management. In this way, the first bank which is owned by the owner will earn less then the second bank which is owned by the management of the bank. Short (1979) examined that government have an impact on profitability, as the government banks are non profit oriented. He found that the government ownership variable was significantly adversely related to profits.

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The banking industry is one of the most heavily regulated industries in the world. Main reason for this regulation is to provide a sound, stable and healthy financial system. Peltzman (1968) was among the first researchers to empirically test the effects of regulation on performance. Peltzmans research showed that a prohibition on interstate branching and a legal restriction to new entry had a significant impact on the market value of a banks capital. Revell (1980) was the first person who discussed the effect of inflation on bank profitabilitys. This hypothesis was empirically tested by Bourke (1989) and Molyneux and Thornton (1992), Using the consumer price index (CPI) as a proxy for inflation, both studies found that inflation had a significant relationship with profit. Sudin Haron (2004) examined that The profit-sharing ratio between banks and the users of funds seems to be very favorable to the bank, whereas the profit-sharing ratio between the banks and the providers of funds indicates a mutual advantage. He further found that interest rates, inflation and size have significant positive impact on the profits of conventional banks, similar results were found for Islamic banking. In the case of market share and money supply, these variables were found to have an adverse effect on profits. Saleh and Rami (2006) for the purpose of evaluating the Islamic banks performance in Jordon examine and analyze the experience with Islamic banking for the first and second Islamic bank, Jordan Islamic Bank for Finance and Investment (JIBFI), and Islamic International Arab Bank (IIAB) in Jordon. This study also tells about the domestic as well as global challenges faced by this sector. the paper finds many interesting results taking profit maximization, capital structure, and liquidity tests as performance evaluation methodology. Firstly, the efficiency and ability of both banks increased and both banks have expanded their investment and activities. Second, both the banks played an important role in financing projects in Jordan. Third, these banks focused on short-term investment. Fourth, Bank for Finance and Investment (JIBFI) founded to have maximum profitability. Finally, this study concludes that Islamic banks have high growth in the credit facilities and in profitability. Bashir (2000) examined the determinants of Islamic banks performance in eight Middle Eastern countries between 1993 and 1998. By using the cross-country bank-level data on income statements and balance sheets of 14 Islamic banks in eight Middle Eastern countries for each year from 1993 to 1998, this study examines the relationships between profitability and the banking characteristics. After controlling for economic and financial structure indicators such as macroeconomic environment, financial market structure, and taxation, the study shows some very important and interesting results. First, the profitability measures

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of the Islamic banks react positively to the increases in capital and loan ratios, which is instinctive and consistent with previous studies. Second, the study shows the empirical role that adequate capital ratios and loan portfolios play in explaining the performance of Islamic banks. Third, the results specify that customer and short-term funding, non-interest earning assets, and overhead are also important for promoting banks profits. Fourth, the results expose that foreign-owned banks are more profitable than their domestic counterparts. Fifth, keeping other things constant, there is proof that implicit and explicit taxes affect the bank performance measures negatively. Sixth, favorable macroeconomic conditions have positive effect on performance of the bank. In the end, the results of the study show that stock markets are complementary to bank financing. The efficiency of financial intermediaries can be measured through ex ante and ex post spreads. For traditional banks, ex ante spreads are calculated through the contractual rates charged on loans and rates paid on deposits. In the case of Islamic banks, though, the spread can be calculated from the rates of return generated from various noninterest banking activities, including participation in direct investment. As an efficiency sign, we use the ex post spreads consisting of revenues generated from banking operations such as Murabaha, Bai Mu'jal, and service charges, minus all expenses of carrying such activities . Accounting values from the banks financial statement were being used to calculate the ex post spread (net non-interest return). The bank's before-tax profit over total assets (BTP/TA) is used as a measure of the bank profitability. This measure is calculated from the bank's income statement as the sum of noninterest income over total assets minus overhead over total assets minus loan loss provision over total assets minus other operating income. It is obvious that banks in rich countries are larger in size. Large size is expected to promote economies of scale and reduce the cost of gather and processing information (Boyd and Runkle, 1993). thus, large size is attractive because it is expected to enable Islamic banks provide larger menu of financial services (Bashir, 1999). The tax variable shows the explicit (average) tax rate levied on each bank in a specific country. The reserve to GDP ratio (RES) reflects implicit taxes due to reserve and liquidity restrictions Together, the explicit and implicit taxes disclose the degree of financial repression practiced in the respective country. It seems likely that banks in oil-rich countries face lower or no taxes on their profits. In distinction, banks in low-income countries, like Jordan and Sudan, suffer from high taxes. Meanwhile, Islamic banks rely heavily on activities such as murabaha, direct investment, service charges, fees,

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Profitability.

and currency trading. These activities distinguish the main sources of margin

and

Seven bank characteristics are used as internal determinants of the performance. These supplemental measures are mostly useful for detailed understanding of the factors underlying a bank's net margin and return on assets. They include fund source management (CSTFTA), funds use management (OVRHEAD and NIEATA), capital and liquidity ratios (EQTA and LOANTA), risk (LATA) and a fake variable for ownership (FRGN). Each one of these determinants, except risk variable, was also interacted with GDP to capture the effects of GDP on the performance of bank. Previous studies of the determinants of bank and profitability. This supports that profitable banks profitability in the United States found a strong and statistically significant positive relationship between the EQTA remain well capitalized or well capitalized banks enjoy access to cheaper (less risky) sources of funds with consequent improvement in profit rates (see Bourke, 1989). A positive relationship between ratio of bank loans to total assets, LOANTA, and profitability was also found from using international database (Demirguc-Kunt and Huizinga, 1997). Bank loans are expected to be the main resource of revenue, and are expected to impact profits positively. Though, since most the Islamic banks' loans are on the form of profit and loss sharing, the loan effect may be negative during times of financial stress. Since the volume of the earnings of Islamic banks come from non-interest activities, the ratio of non-interest assets to total assets, NIEATA, is expected to impact profitability positively. The ratio of consumer and short-term funding to total assets, CSTFTA, is a liquidity ratio that comes from the liability side. this consists of current deposits, saving deposits and investment deposits. Since liquidity holding represent an expense to the bank, the coefficient of this variable is expected to negative. In general, Islamic banking operations are specified by a high degree of financial risks. In the absence of guaranteed returns on deposits, Islamic banks take on risky operations in order to be able to generate comparable returns to their customers. We use the ratio of total liabilities to total assets (LATA) as a alternate for risk. The ratio is also a sign of lower capital or greater leverage. Using LATA adds a greater deepness in understanding the risks a bank takes when trying to obtain higher returns. When bank chooses (assuming this is allowed by its regulators) to take more capital risk, its leverage multiplier and return on equity, ceteris paribus, are higher. We expect LATA to be positively linked with performance measures. On the other hand, in the absence of the deposit insurance, the

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higher risk-taking would expose the bank to the risk of insolvency. Therefore, the coefficient of LATA may be the negative. The ratio of overhead to total assets, OVRHD, is used to provide information on variation in bank costs through the banking system. It reflects employment as well as the total amount of the wages and salaries. OVRHEAD is expected to impact performance negatively because efficient banks are expected to operate at lower costs. In the end, the binary variable representing foreign ownership, FRGN is expected to affect profitability positively, indicating that foreign banks benefit from tax breaks and other preferential treatments. In Bangladesh, Hassan (1999) examined performance of Islamic Bank Bangladesh Limited and compared it with the other private banks in Bangladesh. The result showed that, in terms of deposit growth and investment growth, performance of Islamic Bank Bangladesh Limited was better than performance of the private banks during the period from 1993-1994. though, due to the lack of statistical technique, this study is not good enough (Samad and Hassan, 2000). in Pakistan, Mahmood (2005) compared the financial performance of the Islamic bank with that of conventional bank. He found that, almost in all of the ratios, Islamic bank was superior to conventional bank during the period of 2000-2004. In Bahrain circumstances Samad (2004) examined comparative financial performance of Islamic banks and the conventional banks during 1991-2001. The result showed that there was no significant difference between Islamic banks and conventional banks in respect of profitability and liquidity. There is a Similar study in other Middle East country, Kader, et al. (2007) also examined comparative financial performance of Islamic banks and conventional banks in the UAE. The finding showed that there was no major difference between Islamic banks and conventional banks with respect to profitability and liquidity. Ari KuncaraWidagdo and Siti Rochmah Ika (2008), examined that financial performance of Islamic banks in Indonesia might not associate with fatwa issued by MUI. It was experienced that macro economy indicator, such as interest rate, might affect the performance of Islamic banks in Indonesia. It was supported by the finding of previous studies (Gerard and Cunningham, 1997; Metawa and Almossawi, 1998; Haron and Ahmad, 2000; Ghafur, 2003) that told motivation of depositors of Islamic banks is the return of the money (welfare maximization premise). The increasing competition in the national and international banking markets, the change over towards monetary unions and the new technological innovations sign major changes in the banking environment, and challenge all of the banks to make timely preparations for the

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purpose to enter into new competitive financial environment. ( Spathis, and Doumpos, 2002 ) investigated the usefulness of Greek banks that were based on their assets size. They did use in their study a multi criteria methodology to categorize Greek banks according to the return and operation factors, and to confirm the differences of the banks profitability and efficiency between small and the large banks. Usually, the concept of efficiency can be regarded as the relationship between outputs of a system and the matching inputs used in their production. Within the financial efficiency literature, efficiency is treated as a relative measure that reflects the deviations from maximum achievable output for a given level of input (1992 English M). Though, there have been several studies analyzed the efficiency of financial institutions. Along with these, ( Rangan N. and Grabowski, 1988 ) use data envelopment analysis to analyze the technical efficiency in US banking into clean technical and scale efficiency. Another study by ( Aly H., and Rangan 1990 ) extend this analysis to contain analysis of assign efficiency, and ( Field, 1990 ), ( Dark, 1992 ), ( Chu-Meiliu, 2001 ), ( Tser- Yieth Chen, and Tasi Yeh,1998 ), and ( Leigh D.,and Howcroft, 2002 ) have conducted some studies into the efficiency of the bank. Anouar Hassoune has also studied on profitability of Islamic banks and he concluded that, If returns on assets are high and non-interest charges are low (which is the case when the cycle is in its upward phase), the possibility of the Islamic bank being more profitable than conventional banks is low. In short, if we assume that Islamic banks completely control the rate at which they share profits, then they are surely always more profitable. If, on the opposing, it is assumed that this rate is fixed, then Islamic banks are characterized by another interesting feature: their profitability, over the cycle, is in fact less volatile than that of conventional banks, thanks to the cushioning role that played by profit and loss sharing. The Islamic banks ROE is less unstable than that of the conventional one. Such a smoothing effect comes from the ability of the Islamic bank to absorb shock on assets returns throughout profit and loss sharing. This particular technique plays the role of a cushion, or an insurance against cyclicality in returns, which the conventional bank cant rely, because it has to pay the interest charges, which are the less flexible. Abdus Samad (2004) in his paper determines the comparative performance of Bahrains interest-free Islamic banks and the interest-based conventional commercial banks through the post Gulf War period 1991-2001. By using nine financial ratios in measuring the performances with respect to (a) profitability, (b) liquidity risk, and (c) credit risk, and by applying Students t-test to these financial ratios, it concludes that there exists a significant

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difference in credit performance between two sets of banks. Though, the study finds no major distinction in profitability and liquidity performances between Islamic banks and conventional banks. (Arzu Tektas, and Gunay, 2005 ) discuss the asset and liability management in financial crisis. They argued that an efficient asset-liability management requires maximizing bank's profit as well as controlling and lowering various risks, and their study showed how shifts in market perceptions can form trouble during crisis. The impact of interest rate on banks profits operates through two main channels of the revenues side. First, a climb in interest rate scales up the amount of income a bank earns on new assets it acquires. But, speed of revenue adjustment will be a function of speed of interest rate adjustment. Second, the effect hinges on the sum of loans and securities held. Indeed, in case of rising interest rates, rates on loans are advanced than marketable securities so that strong incentives succeed for banks to have more loans rather than buying securities. While Molyneux and Thornton (1992) and Demirg-Kunt and Huizinga (1999) indicate a positive association between interest rate and bank profitability, Naceur (2003) identifies a negative affiliation. Demirguc-Kunt and Huizinga (1999) show that rapid economic growth increase fertility for a large number of countries. In technically words, GDP captures upswings and downswings manifesting in the business cycles. Consequently, movements in general activity level are expected to produce direct impacts on profitability of banks. The empirical literature generally resorts towards two versions of GDP. First, there is cyclical output which basically reflects the variation of GDP from an HP-Filtered GDP. Second, there is the use of GDP per capita to outfit for the level of economic development

DATA METHODOLOGY:
To determine the profitability of Islamic banking in Pakistan, five external economic factors are taken. 1) GDP (real growth rate) 2) industrial production rate, 3) interest rate, 4) inflation, 5) unemployment. The profitability is determined through return on asset (ROA) and return on equity (ROE). Return on assets is calculated by the formula of net income divided by average total assets, while the return on equity is calculated through the formula of net income divided by total average equity. The time period of the data was taken from 2003 to 2009. There are six listed Islamic banks in Pakistan. The names of the banks are, Dubai

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Bank Islami and Albarka Islamic bank.

Islamic bank, Meezan Islamic bank, and Emirates global Islamic bank, Dawood Islamic bank,

Analysis & conclusion Effects on ROA Testing of Hypothesis: (a) There is no difference between all five factors, (interest rate, unemployment, industry production growth rate, GDP growth rate and inflation) of all six Islamic banks in Pakistan with respect to Return on Asset. (b) There is difference between all five factors, (interest rate, unemployment, industry production growth rate, GDP growth rate and inflation) of all six Islamic banks in Pakistan with respect to Return on Asset.
H0: 1= 2 =3= 4= 5

H1: At least two means are not equal Level of significance: = 0.05 (suppose) Calculation:
SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA Regression Residual Total df 5 15 20 SS 0.00223502 0.002032264 0.004267284 MS 0.000447 0.00013548 F 3.2993044 Significance F 0.033016152

0.723710537 0.523756941 0.365009254 0.011639772 21

Critical region: P 0.05 We have p-value 0.033016152 & 0.033016152 0.05

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Result:

P value is smaller than level of significance thats why we reject null hypothesis; we have assumed that our null hypothesis was the no difference between all five factors of Islamic banks. So we conclude that through analysis of variance, all the factors (interest rate, unemployment, industry production growth rate, GDP growth rate and inflation) have not great difference to each other. REGRESSSION ANALYSIS
Coefficients Intercept GDP INFLATION -0.061757068 0.806807565 -0.092528962 Standard Error 0.079776864 0.729874166 0.047974385 t Stat -0.77412253 1.10540639 -1.92871595 P-value 0.45088809 0.28639888 0.07290988 Lower 95% -0.231797428 -0.748882388 -0.194783944 Upper 95% 0.10828329 2.36249752 0.00972602 Lower 95.0% -0.23179743 -0.74888239 -0.19478394 Upper 95.0% 0.10828329 2.36249752 0.00972602

UNEMPLOYEMENT INTREREST RATE INDUSTRIAL PRODUCTION

1.11445877 -0.366273883 -0.215321793

0.877794796 0.150703389 0.210785557

1.26961196 -2.43042898 -1.02152062

0.22356729 0.02810021 0.32320144

-0.756516541 -0.687490552 -0.664600571

2.98543408 -0.0450572 0.23395698

-0.75651654 -0.68749055 -0.66460057

2.98543408 -0.04505721 0.23395698

CONCLUSION P-value is the probability of obtaining a test statistic at least as extreme as the one that was actually observed that usually we get from the ANOVA and Regression analysis. Usually we P value is calculated through SPSS or excel program of require data. Here as using excel we calculated different p- values. These p values depend upon external factors and we will compare these p values with given level of significance for knowing the affect of profitability of Islamic banks. The 95% confidence interval gives us information that we are 95% confident about the Regression modal.Coefficient of determination, R2 is used in the context of statistical models whose main purpose is the prediction of future outcomes on the basis of other related information. Thats why here R2 gives us information about effect of the all external factors on profitability of Islamic Banks. The standard error is an estimate of the standard deviation of the coefficient that tells us the variation of the five factors to each other. From above calculation of regression, we conclude that out of five economic factors which are, GDP, inflation, unemployment, interest rate and industrial production, there is only one factor which does have a significant impact on the profitability of the Islamic banks. All the other factors dont have much significant affect on the profitability. The p value of the interest rate is 0.02810021 which is less than significant value that is 0.05, so we can say that interest rate is highly significant than any other factor, and interest rate has significant impact on the profitability of the banks. In many research articles, it is found that only interest rate is
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proven to be true in this case of ROA.

an external economic factor that affects the profitability of the banks. So, this statement is

EFFECTS ON RETURN ON EQUITY (ROE)

Testing of Hypothesis: (a) There is no difference between all five factors, (interest rate, unemployment, industry production growth rate, GDP growth rate and inflation) of all six Islamic banks in Pakistan with respect to Return on Equity. (b) There is difference between all five factors, (interest rate, unemployment, industry production growth rate, GDP growth rate and inflation) of all six Islamic banks in Pakistan with respect to Return on Equity.
H0: 1= 2 =3= 4= 5

H1: At least two means are not equal Level of significance: = 0.05 (suppose) Calculation:
SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA df Regression Residual Total 5 15 20 SS 0.092748723 0.072845486 0.165594208 MS 0.018549745 0.004856366 F 3.81967619 Significance F 0.01972357

0.748395895 0.560096416 0.413461888 0.06968763 21

Critical region: P 0.05 We have p-value 0.01972357 & 0.01972357 0.05

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Result:

As we know that p value tells us whether the table is significant or not. In this variance test the p value is 0.01972357 which is less than the level of significance that is 0.01972357 0.05 so it means that we will reject the null hypothesis which was that there is no difference between all six economic factors on Islamic bank. So, we conclude that all the six economic external factors have no much difference with each other.

REGRESSION ANALYSIS FOR ROE

7 Intercept GDP INFLATION UNEMPLOYEMENT INTREREST RATE INDUSTRIAL PRODUCTION Coefficients 0.100938831 -0.283493644 -0.371010074 2.576191016 -1.909464747 0.448323053 Standard Error 0.47762623 4.369776249 0.287223934 5.255381036 0.90226524 1.261978795 t Stat 0.211334355 -0.06487601 -1.29171016 0.490200615 -2.11630091 0.35525403 P-value 0.835470809 0.949129449 0.216006712 0.631084517 0.051450816 0.727345255 Lower 95% -0.91709738 -9.5974512 -0.9832134 -8.62538845 -3.83259757 -2.24152106 Upper 95% 1.118975038 9.030463913 0.241193247 13.77777048 0.01366808 3.13816717 Lower 95.0% -0.917097376 -9.597451201 -0.983213396 -8.625388453 -3.832597573 -2.241521064 Upper 95.0% 1.118975038 9.030463913 0.241193247 13.77777048 0.01366808 3.13816717

CONCLUSION The above table for regression analysis indicates some interesting results. It shows that there is no single external economic factor that has significant impact on return on equity (ROE). All the factors have p value more than significant value. There is only one same factor again like in ROA case about which we can say that the factor is almost significant. And the factor is interest rate which has p value of 0.0514 that is almost equal to the significant value which 0.05. So interest rate has a little bit significant affect on ROE not highly significant. GDP, unemployment and industrial production are the factors that have highly insignificant value with values of 0.949129449, 0.631084517, and 0.727345255 respectively. These factors dont have any concern with the profitability of Islamic banks. Industrial production is also insignificant, the main reason could be that unawareness regarding Islamic banking in investors, or some times banks also hesitate to invest in some risky projects.

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References
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A Comparison of Financial Performance in the Banking Sector: Some Evidence from Omani Commercial Banks BY Medhat Tarawneh Pioneering efforts in Islamic banking by FAKIHAH AZAHARI Bank-Specific, Industry-Specific and Macroeconomic Determinants of Profitability in Taiwanese Banking System: Under Panel Data Estimation Indranarain Ramlall DETERMINANTS OF ISLAMIC BANK PROFITABILITY Creating Dynamic Leaders Working Paper Series 002 By Professor Sudin Haron March 2004 Financial Structure and Bank Profitability Asli Demirguc-Kunt and Harry Huizinga1 January 2000 Performance of Islamic Banking and Conventional Banking in Pakistan: BY Muhammad Shehzad Moin The Arab Bank R E V I EW Vol. 3, No. 1 April 2001 BY Diederik van Schaik Determinants of Islamic Banking Profitability M. Kabir Hassan, Ph.D. Determinants of Bank Profitability in Macao Determinants of Profitability in Turkish Banking Sector: 2002-2007 Gven Sayilgan

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