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What determines the profitability of Islamic banks: lending or fee?

journal contribution
posted on 2019-01-01, 00:00 authored by Sohel AzadSohel Azad, Saad Azmat, Abdul Hayat MuhammadAbdul Hayat Muhammad
This paper analyses the effect of bank lending and fee income on Islamic and conventional bank's performance. The paper builds a theoretical model and provides empirical evidence to show that Islamic banks as compared to conventional banks can have a greater reliance on fee-based income than returns from loans to increase their profitability. Using data from a sample of 20 countries for the period from 2000 to 2015 for Islamic and conventional banks, we find that the bank fee is an important determinant of the profitability of an Islamic bank. Interestingly, many commonly used measures such as loan to deposit ratio do not affect the Islamic banks' profitability as much as they do for conventional banks. Our findings imply that Islamic banks' lower sensitivity to loan to deposit ratio may contribute to lower credit risk. However, an over-reliance on fee-based income may affect their growth, profitability and sustainability in the long run.

History

Journal

International review of economics & finance

Pagination

1-15

Location

Amsterdam, The Netherlands

ISSN

1059-0560

Language

eng

Publication classification

C Journal article, C1 Refereed article in a scholarly journal

Publisher

Elsevier