Business Research Method (BUS485)

Section 04
Report on determinants of profitability in Islamic Bank in Bangladesh

Submitted To:
Dr. Samiul Parvez Ahmed
Assistant Professor
School of Business
Independent University, Bangladesh

Date of Submission: 25/07/2017

Group: Business Researchers

Submitted By:

Member Name Member ID

Sultana Akter 1310409

James Clinton Baroi 1420237

Mousumi Rahman Mou 1420320

Mohammad Abdullah 1421039

Sazzad Hossain 1421420

 LETTER OF TRANSMITTAL

25th July, 2017

To

Dr. Samiul Parvez Ahmed

Assistant Professor

School of Business

Independent University, Bangladesh

Subject: Submission of Research Report.

Dear Sir,

It is a great pleasure to present the report titled determinants of profitability in Islamic Bank in
Bangladesh. This has been assigned to us as part of our course. We are very happy to submit this
report on the topic you provided us. During preparing this report we have gathered extended
knowledge on working procedure of identifying the relationship between dependent and
independent variables. This report is based on secondary data from banks annual report.

We worked hard to prepare this report. We would be highly oblige if the content of the report have
been acceptable to you. We have tried our best to preparing the report.

We hope that the report will worthy of your consideration. If there is any clarification required we
would be glad to provide them as best as we can.

Sincerely yours,

Sultana Akter - 1310409

James Clinton Baroi - 1420237

Mousumi Rahman Mou - 1420320

Mohammad Abdullah - 1421039

Sazzad Hossain - 1421420

 ACKNOWLEDGEMENT

The research on determinants of profitability in Islamic Bank in Bangladesh has been assigned to
us as a part of our course.

First and foremost we would like to thank God for giving us assistance in the way of life. Second
we would like to thank our honorable faculty Dr. Samiul Parvez Ahmed for the supervision and
help in this whole semester. Third we would like to thank our group members. The support that
they gave was truly helpful. A lot of effort and study have been put to make this report. This wont
be possible without those help and support.
 EXECUTIVE SUMMARY

This report covers study on Determinants of profitability in Islamic Bank in Bangladesh. In

this report we are trying to analyze the profitability in Islamic Bank in Bangladesh. We choose
five Islamic banks with their latest five years data. We take recent years data and time period is
2012 to 2016.

Our regression equation has seven independent variables which are EQTA, LONTA, NIEATA,
LATA, GDPPC, GDPGR and INF and one dependent variable which is ROA. This study aimed
to explore how to determinants of profitability in Islamic Bank in Bangladesh.

The annual reports of all the five Islamic banks for the period of five years are taken from the
Dhaka stock exchange used for the source of data. Regression model was used for identifying the
relationship between the dependent and independent variable.

This report is compiled with literature review, hypothesis, data analysis etc. This report was done
with the help of our selected journal and the topic related journal. And the last part of our report is
about the methodology, conclusion and references. The study of our goal is to determinants of
liquidity in Islamic Bank in Bangladesh.
Table of Contents
Introduction .................................................................................................................................................. 7

Background of the research ......................................................................................................................... 8

Problem Statement ...................................................................................................................................... 9

Objective of the study ................................................................................................................................ 10

Literature Review ....................................................................................................................................... 11

Dependent Variable ......................................................................................................................... 11

ROA ............................................................................................................................................... 11
Independent Variables ..................................................................................................................... 12
EQTA ............................................................................................................................................. 12
Relationship between ROA and EQTA ......................................................................................... 12
LONTA ........................................................................................................................................... 13
Relationship between ROA and LONTA....................................................................................... 13
NIEATA .......................................................................................................................................... 14
Relationship between ROA and NIEATA...................................................................................... 14
LATA .............................................................................................................................................. 15
Relationship between ROA and LATA ......................................................................................... 15
Macroeconomic Indicators: ......................................................................................................... 16
Relationship between ROA and Macroeconomic Indicators: ..................................................... 17
Conceptual framework............................................................................................................................... 18

Research Question ..................................................................................................................................... 19

Model - 1........................................................................................................................................... 19
Model - 2........................................................................................................................................... 19
Hypotheses ................................................................................................................................................. 20

Model - 1........................................................................................................................................... 20
Model - 2........................................................................................................................................... 21
Descriptive Statistics .................................................................................................................................. 22

Correlations ................................................................................................................................................ 24

Estimate Equation: (Regression Analysis) ................................................................................................. 26

 Model - 1........................................................................................................................................... 26
Model - 2........................................................................................................................................... 28
Methodology .............................................................................................................................................. 30

Conclusion .................................................................................................................................................. 31

References .................................................................................................................................................. 32
 Introduction
The consistent extension of Islamic banks has been the sign of the Muslim world budgetary scene
in the 1990s. With a system that traverses more than 60 nations and an advantage base of more
than $166 billion, Islamic banks are presently assuming an inexorably noteworthy part in their
particular economies. In this regard Islamic banks are quickly picking up pieces of the overall
industry in their local economies. Evaluating the performance of Islamic banks is essential for
managerial as well as regulatory purposes (Profitability of banking industry, Investopedia).

The recent trends of financial liberalization and deregulation have created new challenges and new
realities for Islamic banks. The integration of global financial markets has put Islamic banks in an
aggressive competition with traditional banks. To compete in local and global deposit markets,
Islamic banks have to design and innovate islamically acceptable instruments that can cope with
the continuous innovations in financial markets. What's more Islamic banks should discover
venture openings that offer focused rates of return at adequate degrees of hazard. Similarly banks
administration should precisely consider collaborations between various execution measures
keeping in mind the end goal to expand the estimation of the bank (Profitability of banking
industry, Investopedia).

The reason for the investigation is to nearly look at the connection amongst benefit and the saving
money qualities in the wake of controlling for monetary and budgetary structure pointers. The aim
is to choose which among the potential determinants of execution has all the earmarks of being
imperative. To start with, using bank level information the paper gives rundown measurements
relating to Islamic banks benefit. Second, the paper utilizes relapse investigation to decide the
fundamental determinants of Islamic banks execution. To this end, a far reaching set of inner
qualities is analyzed as determinants of banks net edges and benefit. Third, while considering the
connection between banks inward attributes and execution, the paper controls the effect of outer
elements for example: macroeconomic markers. In addition a portion of the determinants were
additionally connected with the nations GDP per capita to check whether their effects on bank
execution contrast with levels of pay.

Page - 7
 Background of the research
The main role of the financial system is to channel the funds from savers to borrowers. On the off
chance that this procedure is done productively than the benefit ought to enhance the stream of
assets to increment as well and there to be better quality administrations for clients.

Productivity is an impression of how banks are run, given the earth in which they work. All the
more accurately it should reflect the nature of a banks administration and the investors conduct,
the banks aggressive methodologies, proficiency and hazard administration abilities Aburime
(2007). Benefits influence banks cost of bringing capital up in both routes as an immediate
supporter of value financing and as marker for outside speculators evaluation of the budgetary
quality of the bank. Additionally, regardless of the possibility that dissolvability is high, poor
benefit debilitates the banks ability to retain negative stuns which will in the end influence
dissolvability. By and large, sound and practical productivity is imperative in keeping up the
security of the saving money framework and adds to the condition of the monetary framework. In
this manner, the determinants of bank execution have pulled in light of a legitimate concern for
scholastic research and of bank administration, monetary markets and bank directors.

Inner drivers of bank execution or productivity can be characterized as elements that are impacted
by a banks administration choices. Such administration impacts will influence the working
consequences of banks. In spite of the fact that a quality administration prompts a decent bank
execution, it is troublesome if certainly feasible to evaluate administration quality
straightforwardly. Truth be told, it is verifiably expected that such a quality will be reflected in the
working execution Krakah and Ameyaw (2010).

External determinants of bank profitability are factors that are beyond the control of a banks
management. They represent events outside the influence of the bank. However, the management
can anticipate changes in the external environment and try to position the institution to take
advantage of anticipated developments. The two major components of the external determinants
are macroeconomic factors and financial structure factors Krakah and Ameyaw (2010).

With regards to the above exchanges, the motivation behind this examination is to survey actors
influencing the budgetary execution gainfulness of banks in Bangladesh.
Page - 8
 Problem Statement
The Islamic banks in the world have been facing a number of challenges. Side by side the Islamic
banking in Bangladesh is also facing numerous problems of challenges.

In the first place, they have not yet been effective in conceiving an intrigue free component to put
their assets on a fleeting premise. They confront a similar issue in financing customer credits and
government deficiencies.

Second, the hazard required in benefit sharing is by all accounts so high that the greater part of the
Islamic banks in Bangladesh have depended on those systems of financing which present to them
a settled guaranteed return. Subsequently, there is a considerable measure of honest to goodness
feedback that these banks have not abrogated premium but rather they have in actuality just
changed the terminology of their exchanges.

Third, the Islamic banks don't have the lawful help of the Central bank in Bangladesh don't have
the essential mastery and prepared labor to assess, screen, assess a review the undertakings that
are required to back. Subsequently they can't extend notwithstanding having gigantic abundance
budgetary liquidity. The usage of a premium free keeping money in Banking brings up various
issues and potential issues which can be seen from the large scale and miniaturized scale
operational perspective. The above problems are some of the burning problems confronting the
Islamic banks in Bangladesh. However it is felt that much operational work and in depth research
work has to be undertaken to allow the Islamic banks to flourish with highest quality and strength.

Islamic rules and regulation are followed for conducting several activities of Islamic Bank in
Bangladesh. So it is necessary to know the overall activities and performance of Islamic Bank in
Bangladesh to get the relationship between independent variables with dependent variables.

Therefore the problem statement is To identify the relationship between EQTA, LONTA,
NIEATA, LATA, GDPPC, GDPGR and INF as well as to link all these variables together to
find the total effect on ROA.

Page - 9
 Objective of the study
The purpose of this study is to find out the factors in Islamic Banks that can effect on profitability.
It will help the researchers to look into the overall condition of Islamic Banks. The objectives of
the study are given below;

To understand the profitability.

To identify the factors of profitability.
To find out the problems of profitability.
To identify the problems in operation in Islamic Banks.
To know the terms, rules and condition of profitability In Islamic Banks.

Page - 10
 Literature Review
Dependent Variable
ROA
Profit for Assets (ROA) measures how much the bank is acquiring after duty for every taka put
resources into the benefits of the firm. Van Horne (2005) expressed that Return on resources
demonstrates the benefit on the advantages of the firm after all costs and taxes. Ross and
Westerfield (2005) expressed that it is a typical measure of administrative execution. Islam and
Salim (2011) communicated that it is the most stringent and superfluous trial of return to financial
specialists. If an association has no commitment, the landing on assets and benefit for esteem
figures will be the same.

Various studies have been conducted to identify determinants of profitability of banks in different
countries. They checked the impact of bank specific and business sector variables on its
profitability. They reported an impact of labor and assets on net interest margin (NIM) only whilst
bank market share and unemployment rate are relevant for explaining ROA.

Chirwa (2003) examined the profits of commercial banks in Malawi utilizing data from 1970 to
1994. He found a positive relationship between market fixation and profits of banks. Bashir (2003)
investigated the determinants of profitability in 14 Islamic banks of 8 nations (i.e. UAE, Egypt,
Kuwait, Jordan, Bahrain, Sudan, Qatar and Turkey) for the period 1993 - 1998 utilization ROA
variable.

The OLS regression reported that high capital to asset and loan to asset ratios lead to higher
profitability. The regression results also found that implicit and explicit taxes affect the bank
profitability negatively.

Al-Tamimi (2005) studied the determinants of UAE bank profitability for the period from 1987 -
2002. He found that the banks portfolio has statistically significant impact on performance and
profitability ROA. However Islamic banks are better capitalized. The empirical results also
suggested that interest free lending in Islamic banking advocate profitability.

Page - 11
Independent Variables
EQTA
Book estimation of an advantage is the incentive at which the benefit is carried on an accounting
report and computed by taking the cost of an advantage short the collected devaluation. Book
esteem is likewise the net resource estimation of an organization, computed as aggregate resources
less immaterial resources, licenses, goodwill and liabilities.

For the underlying expense of a speculation, book esteem might be net or gross of costs for
example: exchanging costs, deals charges, benefit charges (Book Value, Investopedia).

Capital ratio is measured by total equity over total assets. It shows how equity of a bank influences
the profit made. We expect a positive relationship between capital ratio and Islamic banks
profitability.

This is on account of higher the capital proportion, there will be less need of outside subsidizing
and there for higher productivity (Abreu and Mendez, 2002). Very much promoted banks are
anticipated to be less hazardous and thus bring down benefit (Athanasoglou et al, 2005).

Relationship between ROA and EQTA

Izhar and Asutay (2007) found an inconsequential negative connection amongst capital and
benefit which demonstrates that value is a little extent of aggregate resources. Wasiuzzaman and
Ahmed Tarmizi (2010) likewise found a negative relationship which they clarified that Islamic
banks in Malaysia ought not to center expanding the value execution to build benefit.

The bank particular attributes that identify with banks productivity are capital, liquidity, credit
hazard, money related hazard, operation proficiency and banks size.

Abreu and Mendez (2002) found that very much promoted banks confronted bring down
expected chapter 11 costs that upgrade benefit therefore demonstrating a positive relationship
capital and productivity. Similar outcomes were found on contemplates done on Islamic banks
specified above aside from Izhar and Asutay (2007), and Wasiuzzaman and Ahmed Tarmizi
(2010).

Page - 12
LONTA
Liquidity ratio is measured by loans to total deposit and short term funding. This ratio shows the
relationship between liquidity management and bank performance.

Advances are the biggest segments of enthusiasm bearing resources of a bank and are required to
positively affect benefit (Vong and Chang, 2006). Benefits are relied upon to be higher when
more stores are moved into credits. Thus it is anticipated a positive connection between this
proportion and productivity.

Relationship between ROA and LONTA

Liquidity on the other hand is defined as the banks ability in meet its obligations, mainly those of
depositors of funds to the bank (Ongore & Kusa, 2014). The availability of liquidity is
influences profitability since it enhances the capacity of the bank to acquire cash, in order
to fulfill present and essential needs.

For the commercial banks to gain public assurance, they should have sufficient liquidity to meet
the demands loan holders and depositors needs (Chinoda, 2014).

Small liquidity level serves as ground reality of failure of a bank. Liquidity problems also lead to
issues in generating funds and failure to fulfill current and unanticipated variations in the sources
of financing (Tariq et al., 2014).

Loan to assets ratio is normally used to calculate the liquidity position of a bank and the ratio
indicates percentage of total assets used to provide loans.

Haron (2004) and Wasiuzzaman and Ahmed Tarmizi (2010) found a critical positive
connection amongst gainfulness and liquidity. Comparative discoveries can be found in Molyneux
and Thornton (1992) and Steinherr and Huveneers (1994).

Page - 13
NIEATA
Credit risk is measured by loan loss reserves to gross loans. Though loans are the main sources of
banks revenues, it is also considered a largest source of credit risk. Hypothesis propose that
expanded introduction to credit chance is typically connected with diminished productivity and if
borrowers can reimburse obligation and premiums we can state from the proof that higher this
proportion is the higher the benefit of banks (Srairi, 2009).

Relationship between ROA and NIEATA

Credit risk indicator can be represented by different measurements including loans loss
provision to total loans ratio as well as growth in bank deposits. Higher provisions for loan
losses could signals a possibility of future loss on loans and could also be a sign of a timely
recognition of bad loan by cautious banks (Munyambonera, 2011).

A higher ratio of NPLs to total loans and an absolute deterioration of credit portfolio quality
negatively affect commercial banks profitability (Roman and Tomuleasa, 2013). In addition,
raise in credit risk increases the marginal cost of loans, obligations and equity leading to the
enlargement of the cost of finance for the bank (Tariq et al., 2014).

Bashir (2003), Srairi (2009) and Wasiuzzamanand Ahmed Tarmizi (2010) found a noteworthy
positive connection amongst benefit and introduction to credit chance. Bank progresses are the
essential wellsprings of salary along these lines if borrowers can repay their commitment and
advantage (premium) the higher will be banks profitability.

Abreu and Mendez (2002), Naceur (2003) and Kunt and Huizinga (2000) likewise discovered
comparable outcomes. Curiously the examination done by Izhar and Asutay (2007) found a
noteworthy negative connection between advances to add up to resource (credit chance). This
demonstrates Islamic bank portfolio is intensely one sided towards here and now exchange
financing credits.

Page - 14
LATA
Financial risk is measured by total liability over total assets. For Islamic banks we expect a positive
relationship between ROA and this ratio.

However in the absence of deposit insurance high risk taking will expose the bank to the risk of
insolvency (Srairi, 2009).

Relationship between ROA and LATA

In spite of the way that the result was insignificant Bashir (2003) and Izhar and Asutay (2007)
moreover found a positive association among benefit and operational efficiency of the banks.

However Ramadan et al (2011) found a noteworthy negative connection amongst gainfulness and
cost administration in view of concentrates done on Jordanian banks.

Page - 15
Macroeconomic Indicators:
The economic condition and the specific market environment would obviously affect the banks
profitability (Bashir, 2003). Three macroeconomic indicators were used in this study. They are
gross domestic product (GDP), GDP per capita growth rate and Inflation.

Right off the bat it is normal GDP development influence banks gainfulness emphatically. This is
on the grounds that the default hazard is bring down in upturns than in downturns. Other than
higher monetary development may prompt a more noteworthy interest for both premium and non-
premium exercises consequently enhancing the benefit of banks.

Furthermore per capita GDP is a measure of the aggregate yield of a nation that takes total national
output (GDP) and partitions it by the quantity of individuals in the nation. The per capita GDP is
particularly valuable when contrasting one nation with another in light of the fact that it
demonstrates the relative execution of the nations. An ascent in per capita GDP signals
development in the economy and has a tendency to mirror an expansion in efficiency.

Gross domestic product is one of the essential markers of a nations monetary execution. It is
ascertained by either including the yearly salaries of all working age natives or by totaling the
estimation of every last great and administrations created in the nation amid the year. Per capita
GDP is here and there utilized as a marker of way of life with higher per capita GDP likening to a
higher standard for living.

Thirdly swelling is related with higher expenses and in addition higher pay. In the event that a
banks wage rises more quickly than its costs expansion is relied upon to apply a constructive
outcome on productivity. Then again a negative coefficient is normal when its costs increment
speedier than its salary.

Page - 16
Relationship between ROA and Macroeconomic Indicators:
Monetary development or GDP development is one of the principle macroeconomic pointers that
influence the gainfulness of Islamic banks. In view of 14 Islamic banks in 8 nations Bashir (2003)
recognized that utilizing return on resource (ROA) as reliant factors, gainfulness has huge positive
relationship. This was trailed by Srairi (2009) and Wasiuzzaman and Ahmed Tarmizi (2010)
in their investigations on determinants of Islamic gainfulness in GCC nations and in Malaysia
separately. The two examinations additionally found that GDP development has huge positive
association with Islamic banks gainfulness.

Ramadan et al (2011) contemplated the determinants of gainfulness of Jordanian banks over the
time of 2001 - 2010. They found a positive yet immaterial association with GDP development and
gainfulness. Kunt and Huizinga (2000) and Vong and Chang (2006) found that there is an
inconsequential connection between benefit of banks and financial development. Sufian and
Parman (2009) distinguished the determinants of non-business banks/monetary establishments
productivity and they found a negative critical connection between GDP development and
gainfulness.

Izhar and Asutay (2007) said that the impact of swelling on bank benefit was first talked about
by Revell (1980) who held that expansion could be a factor in the causation of varieties in a banks
gainfulness. Thinks by Wasiuzzaman and Ahmed Tarmizi (2010), Bashir (2003),
Athanasoglou et al (2005), Izhar and Asutay (2007), Vong and Chang (2006), Kunt and
Huizinga (2000) and Haron (2004) found a positive basic association with expansion and
advantage of Islamic bank and besides broad banks. However Sriari (2009) and Naceur (2003)
found that favorable position of banks does not have any basic association with improvement.

Athanasoglou et al. (2006) measured effects of selected determinants on banks profitability in the
South Eastern European (SEE) region from 1998 to 2002 period. The study found a positive
relationship of concentration and inflation on the bank profitability, whereas banks profits were
not significantly affected by real GDP fluctuations.

Page - 17
 Conceptual framework
Model - 1:

= + + + + + +

Model - 2:

= + + + + + +

Where independent variables are,

EQTA = Book value of equity (assets-liabilities) over total assets

LONTA = Ratio of (PLS) loans to total assets

NIEATA = Ratio of none interest earning assets to total assets

LATA = Ratio of total liabilities to total assets

GDPPC = Real GDP per capita (in constant US $, 1995)

GDPGR = Annual growth rate of real GDPPC

INF = Annual Inflation rate

Where dependent variable is,

ROA = Return on Assets (Net income divided by total assets)

Where,

0 = Constant

1, 2, 3, 4, 5 = Co-efficient

= Error Term

Page - 18
 Research Question
Model - 1
Q1: Does EQTA has any relationship with profitability?

Q2: Does LONTA has any relationship with profitability?

Q3: Does GDPPC has any relationship with profitability?

Q4: Does GDPGR has any relationship with profitability?

Q5: Does INF has any relationship with profitability?

Model - 2
Q1: Does NIEATA has any relationship with profitability?

Q2: Does LATA has any relationship with profitability?

Q3: Does GDPPC has any relationship with profitability?

Q4: Does GDPGR has any relationship with profitability?

Q5: Does INF has any relationship with profitability?

Page - 19
 Hypotheses
Model - 1
Q1. H0: EQTA does not have any significant relationship with profitability.

H1: EQTA has a significant relationship with profitability.

Q2. H0: LONTA does not have any significant relationship with profitability.

H1: LONTA has a significant relationship with profitability.

Q3. H0: GDPPC does not have any significant relationship with profitability.

H1: GDPPC has a significant relationship with profitability.

Q4. H0: GDPGR does not have any significant relationship with profitability.

H1: GDPGR has a significant relationship with profitability.

Q5. H0: INF does not have any significant relationship with profitability.

H1: INF has a significant relationship with profitability.

Page - 20
Model - 2
Q1. H0: NIEATA does not have any significant relationship with profitability.

H1: NIEATA has a significant relationship with profitability.

Q2. H0: LATA does not have any significant relationship with profitability.

H1: LATA has a significant relationship with profitability.

Q3. H0: GDPPC does not have any significant relationship with profitability.

H1: GDPPC has a significant relationship with profitability.

Q4. H0: GDPGR does not have any significant relationship with profitability.

H1: GDPGR has a significant relationship with profitability.

Q5. H0: INF does not have any significant relationship with profitability.

H1: INF has a significant relationship with profitability.

Page - 21
 Descriptive Statistics

Table 1

From table 1 we can see the mean value of ROA is 0.015904, the median value is 0.012300 and
the maximum value of ROA is 0.070200 and the minimum value is 0.003500. Standard deviation
from the maximum minimum value is 0.014887 for ROA.

From table 1 we can see the mean value of EQTA is 0.034021, the median value is 0.079259 and
the maximum value of EQTA is 0.974014 and the minimum value is -1.146897. Standard deviation
from the maximum minimum value is 0.538179 for EQTA.

From table 1 we can see the mean value of LONTA is 122.7805, the median value is 0.742325 and
the maximum value of LONTA is 1488.367 and the minimum value is 0.012030. Standard
deviation from the maximum minimum value is 392.2738 for LONTA.

From table 1 we can see the mean value of NIEATA is -121.7805, the median value is 0.257675
and the maximum value of NIEATA is 0.987970 and the minimum value is -1487.367. Standard
deviation from the maximum minimum value is 392.2738 for NIEATA.

Page - 22
From table 1 we can see the mean value of LATA is 0.965979, the median value is 0.920741 and
the maximum value of LATA is 2.146897 and the minimum value is 0.025986. Standard deviation
from the maximum minimum value is 0.538179 for LATA.

From table 1 we can see the mean value of GDPPC is 987.3840, the median value is 924.0600 and
the maximum value of GDPPC is 1316.040 and the minimum value is 842.0500. Standard
deviation from the maximum minimum value is 173.4971 for GDPPC.

From table 1 we see the mean value of GDPGR is 0.064500, the median value is 0.065200 and the
maximum value of GDPGR is 0.071100 and the minimum value is 0.060100. Standard deviation
from the maximum minimum value is 0.004073 for GDPGR.

From table 1 we can see the mean value of INF is 0.060200, the median value is 0.061900 and the
maximum value of INF is 0.075400 and the minimum value is 0.038500. Standard deviation from
the maximum minimum value is 0.013117 for INF.

Page - 23
 Correlations

Table 2

From table 2 we can see the correlation between ROA and EQTA is 0.037732 which places a
positive correlation and positive correlation indicates that if EQTA increases, ROA increases at
same rate.

From table 2 we can see the correlation between ROA and LONTA is -0.224757 which places a
negative correlation and negative correlation indicates that if LONTA decreases, ROA decreases
at same rate.

From table 2 we can see the correlation between ROA and NIEATA is 0.224757 which places a
positive correlation and positive correlation indicates that if NIEATA increases, ROA increases at
same rate.

From table 2 we can see the correlation between ROA and LATA is -0.037732 which places a
negative correlation and negative correlation indicates that if LATA decreases, ROA decrease at
same rate.

From table 2 we can see the correlation between ROA and GDPPC is -0.184463 which places a

Page - 24
negative correlation and negative correlation indicates that if GDPPC decreases, ROA decrease at
same rate.

From table 2 we can see the correlation between ROA and GDPGR is -0.038182 which places a
negative correlation and negative correlation indicates that if GDPGR decreases, ROA decrease at
same rate.

From table 2 we can see the correlation between ROA and INF is -0.234283 which places a
negative correlation and negative correlation indicates that if INF decreases, ROA decrease at
same rate.

Page - 25
 Estimate Equation: (Regression Analysis)
Model - 1

Table 3A

Step - 1

From the above table 3A we can read out our equation as ROA = 0.091982 + 0.002376 EQTA +
(-8.43E-06) LONTA + 3.76E-06 GDPPC + (-0.849275) GDPGR + (-0.399577) INF +

Step - 2

From the table we can found out error of 0.007170 when we calculate EQTA, 1.01E-05 when we
calculate LONTA, 6.88E-05 when we calculate GDPPC, 3.702796 when we calculate GDPGR
and 0.678007 when we calculate INF.

This is such a valid indication that the data we have calculated may not give a true representation

Page - 26
of an Islamic bank industry and the relationship that we are taking to establish.

Step - 3

Lets assume our significant level is = 0.1

From the above table we can see the EQTA Probability is 0.7440 which is greater than = 0.1 and
we do not reject null. If we do not reject null, there is no significant relationship thats why there
has high item error.

From the above table we can see the LONTA Probability is 0.4163 which is greater than = 0.1
and we do not reject null. If we do not reject null, there is no significant relationship thats why
there has high item error.

From the above table we can see the GDPPC Probability is 0.9570 which is greater than = 0.1
and we do not reject null. If we do not reject null, there is no significant relationship thats why
there has high item error.

From the above table we can see the GDPGR Probability is 0.8210 which is greater than = 0.1
and we do not reject null. If we do not reject null, there is no significant relationship thats why
there has high item error.

From the above table we can see the INF Probability is 0.5626 which is greater than = 0.1 and
we do not reject null. If we do not reject null, there is no significant relationship thats why there
has high item error.

R in this case is 0.136439 which means that 13.6439% variance can be explained by this five
independent variables together.

F-test: Our F-testing value is 0.600386 which is greater than 0.1 and the model is not a good fit
model.

Page - 27
Model - 2

Table 3B

Step - 1

From the above table 3B we can read out our equation as ROA = 0.094350 + 8.43E-06 NIEATA
+ (-0.002376) LATA + 3.76E-06 GDPPC + (-0.849275) GDPGR + (-0.399577) INF +

Step - 2

From the table we found out error of 1.01E-05 when we calculate NIEATA, 0.007170 when we
calculate LATA, 6.88E-05 when we calculate GDPPC, 3.702796 when we calculating GDPGR
and 0.678007 when we calculate INF. This is such a valid indication that the data we have
calculated may not give a true representation of an Islamic bank industry and the relationship that
we are taking to establish.

Page - 28
Step - 3

Lets assume our significant level is = 0.1

From the above table we can see the NIEATA Probability is 0.4163 which is greater than = 0.1
and we do not reject null. If we do not reject null, there is no significant relationship thats why
there has high item error.

From the above table we can see the LATA Probability is 0.7440 which is greater than = 0.1 and
we do not reject null. If we do not reject null, there is no significant relationship thats why there
has high item error.

From the above table we can see the GDPPC Probability is 0.9570 which is greater than = 0.1
and we do not reject null. If we do not reject null, there is no significant relationship thats why
there has high item error.

From the above table we can see the GDPGR Probability is 0.8210 which is greater than = 0.1
and we do not reject null. If we do not reject null, there is no significant relationship thats why
there has high item error.

From the above table we can see the INF Probability is 0.5626 which is greater than = 0.1 and
we do not reject null. If we do not reject null, there is no significant relationship thats why there
has high item error.

R in this case is 0.136439 which means that 13.6439% variance can be explained by this five
independent variables together.

F-test: Our F-testing value is 0.600386 which is greater than 0.1 and the model is not a good fit
model.

Page - 29
 Methodology
The bank specific variables being examined in this study are derived from both income statements
and balance sheets of 5 Islamic banks. The data set cover 5 year period from 2012 2016. The
study used only 5 Islamic banks because of the limited availability of data. The data for
macroeconomic variables were collected from website.

The study used panel data regression techniques to analyze the determinants of profitability of
Islamic bank in Bangladesh. Panel data are commonly used because of the following reason.

It has the advantage of giving more informative data as it consists of both the cross sectional
information which captures individual variability and the time series information which captures
dynamic adjustment. To study the determinants of profitability of Islamic banks, this study adopt
the following regression equation;

Model - 1:

= + + + + + +

Model - 2:

= + + + + + +

Where dependent variable ROA is the return on assets (net income divided by total assets),
independent variables EQTA is book value of equity (assets-liabilities) over total assets, LONTA
is ratio of (PLS) loans to total assets, NIEATA is ratio of none interest earning assets to total assets,
LATA is ratio of total liabilities to total assets, GDPPC is real GDP per capita (in constant US $,
1995), GDPGR is annual growth rate of real GDPPC, INF is annual Inflation rate, 0 is constant,
1, 2, 3, 4, 5 are co-efficient and is error term.

Page - 30
 Conclusion
After all the tests that have been conducted and shown above, it can be said that the model is not
a good fit model. The calculated results show that there are no relationships between any of the
independent variables (i.e. EQTA, LONTA, NIEATA, LATA, GDPPC, GDPGR and INF) and the
dependent variable (i.e. ROA) as none of the null hypothesis could be rejected. The values of the
estimated errors are also high.

The objective of this study was to investigate the determinants of Islamic banks profitability in the
context of Bangladesh. The study found that profitability depends upon different bank specific
factors and external factors. The results show that return on assets (ROA) depends on the EQTA,
LONTA, NIEATA, LATA, GDPPC, GDPGR and INF. Therefore these factors need attention to
develop a sound structure to control ROA. Managers need to focus on these factors too while
making strategies.

The current research is limited to only five Islamic banks of Bangladesh and is not applicable to
other countries Islamic banks. Further research can be done by comparing the Islamic banking
system to the conventional banking stream. Apart from this it could further be improved if a
comparison is made with other countries Islamic banking systems and its usefulness be provided
to the target audience.

Page - 31
 References
Aburime, 2007. Business Bank Interest Margins and Profitability: Evidence for some EU
Countries. Preparatory draft.

Krakah and Ameyaw, 2010. Bank Specific and Macroeconomic Indicators of Profitability -
Empirical Evidence from the Commercial Banks of Pakistan. Global Journal of Business and
Social Science, 2(6): 235-242.

Van Harne, 2003. Determinants of Profitability in Islamic Banks: Some Evidence from the Middle
East. Islamic Economic Studies, 11(1): 31-57.

Ross and Westerfield, 2005. On the Performance of Differently Regulated Financial Institution:

Some Empirical Evidence. Diary of Banking and Finance, pp: 271-306.

Islam and Salim, 2011. Profitability of Islamic Banks in Malaysia: An Empirical Analysis. Journal
of Islamic Economics, Banking and Finance, 6(4): 51-68.

Chirwa, 2003. The Determinants of Commercial Bank Profitability in Sub Saharan Africa. IMF
Working Paper.

Bashir, 2003. Determinants of Islamic Bank Profitability. Global Journal of Finance and
Economics, 1 (1).

Al-Tamimi, 2005. The Determinants of Bank Performance in China. SSRN Working paper series.

Abreu and Mendez, 2002. Studies in Islamic Economics. Leicester, United Kingdom: Islamic
Foundation.

Athanasoglou, Izhar, H. and M. Mendes, 2005. Estimating the Profitability of Islamic Banking:
Evidence from Bank Muamalat Indonesia. Review of Islamic Economics, 11(2): 17-29.

Izhar and Asutay, 2007. Financial Structure and Bank Profitability. Development Research Group
World Bank.

Page - 32
Wasiuzzaman and Ahmed Tarmizi, 2010. International Financial Statistics Yearbook, CD-

ROM, Washington, DC.

Vong and Chang, 2006. The Determinants of the Tunisian Banking Industry Profitability: Panel
Evidence. University Libre de Tunis working paper.

Ongore and Kusa, 2014. Gainfulness of Islamic Banks Competing with Interest Banks. Diary of

Research in Islamic Economics, 1(1): 37-47.

Chinoda, 2014. Determinants of Bank Profitability: Evidence from Jordan. International Journal
of Academic Research, 3(4): 180-191.

Tariq, R., and T. Yousef (2014), Islamic banks and investment financing, Journal of Money,
Credit, and Banking, vol. 32, No.1, pp. 93-120.

Haron, 2004. Elements Influencing the Profitability of Conventional and Islamic Commercial
Banks in GCC Countries. Audit of Islamic Economics, 13(1): 5-30.

Molyneux and Thornton, 1992. Bank Specific and Macroeconomic Determinants of Bank
Profitability: Empirical Evidence from the China Banking Sector. Boondocks of Economics in
China, 4(2): 274-291.

Steinherr and Huyeneers (1994), Theoretical Studies in Islamic Banking and Finance, Houston:
IRIS Books.

Srairi, 2009. Specialization and different determinants of non-business bank money related
organizations' benefit: Empirical Evidence from Malaysia. Concentrates in Economics and
Finance, 26(2).

Munyambonera, 2011. Determinants of Bank Profitability in Macao. University of Macao

Working Paper.

Kunt and Huizinga, 2000. Deposit Insurance, Bank Regulation and Interest Rates: Some
International Evidence. Memo, University of Otago, New Zealand.

Page - 33
Ramadan, G. Boyle, and R. Stover, 2011. Fiscal Policy and Resource Allocation in Islam.

Sufian and Parman, 2009. Equity Capital, Profit Sharing Contracts and Investment: Theory and
Evidence. Journal of Business Finance and Accounting Vol. 20, N0. 5: 639-651.

Revell, 1980. Risk and Profitability Measures in Islamic Banks: The Case of Two Sudanese
Banks. Islamic Economic Studies, Vol. 6, No. 2: 1-24.

Page - 34