profitability determinants of islamic and traditional banks pre and post the financial crisis

Abstract

This study aims to empirically investigate and compare the profitability determinants of 30 banks of which15 are Islamic and 15 are traditional, pre and post the recent financial crisis in the following countries Bahrain, Jordan and Saudi Arabia, using the panel data with the fixed effect method, during the study period 2000-2014. The researcher examines the relationship between these banks' profitability represented by the Return On Equity (ROE) and the Return On Assets (ROA), and a number of bank-specific internal characteristics (efficiency, deposits growth, capital, liquidity and risk) representing the microeconomic variables, a number of external profitability determinants including macroeconomic factors ( inflation and GDP growth) and structural factors (bank size). Before making the analyses, the researcher applies some preliminary tests to ensure the validity of the used data: Unit Root Test where, the LLC test is used, the multicollinearity and the Autocorrelation test. The results indicate the absence of the unit root (all the study variables are stationary at the level), the absence of the Autocorrelation and the absence of the multicollinearity problem. The hypotheses' testing indicates that first; the determinants of Islamic banks are different from the determinants of traditional banks. Second, the determinants of both types of banks are different for each country. Third, the determinants of both Islamic and traditional banks are different before and after the financial crisis. Finally, the most influencer factor on the profitability determinants of both Islamic and traditional banks before and after the financial crisis is capital, followed by the efficiency whereas, risk, deposits growth and the GDP tend to have the same effect on the profitability.