THE IMPACT OF CAPITAL STRUCTURE ON ISLAMIC BANKS PROFITABILITY: EVIDENCE FROM GCC COUNTRIES
Keywords:
Capital Structure, Profitability, Islamic Banks, GCC Countries, Panel Data
Abstract
This paper aims to reveal the relationship between capital structure variables and the Profitability of Islamic banks. The examination has been performed using panel data for a sample of 05 Islamic banks operating in the Gulf Cooperation Council GCC countries (2010-2020). Capital Structure is measured by Deposit to Total Assets (DTA) and Equity to Total Assets (ETA) ratio. In contrast, return measures Profitability on Assets (ROA), Return on Equity (ROE), and Net Profit Margin (NPM). Data collected were analyzed by using E-Views10 software. The research results indicate that the ETA ratio has a positive and significant relationship with ROA. Whereas, The Deposit to Total Assets (DTA ratio) has no significant relationship with Return on asset (ROA). There is an insignificant relationship between (ETA ratio, DTA ratio) and the ROE ratio. Moreover, there is a significant solid effect between the ETA ratio and Net Profit Margin (NPM). At the same time, there is no significant relationship between the DTA ratio and Net Profit Margin (NPM). Therefore, the study can guide The GCC Islamic bank executives, The Shariah Supervisory Board, and the decision-makers in the GCC area to rely on specific capital structures for Islamic banks to improve their profitability.
JEL Classification Codes: G32, L25, G21, C23, C33.
References
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Güner, A. (2016). The determinants of capital structure decisions: New evidence from Turkish companies. Procedia Economics and Finance, 38, 84–89. https://doi.org/10.1016/S2212-5671(16)30180-0
Hafeez, M. M., Khan, H. H., Majeed, F., & Azeem, A. (2018). Impact of Capital Structure on Islamic Banks Performance:(Evidence from Asian country). Global Journal of Management And Business Research. https://doi.org/10.13106/jafeb.2019.vol6.no4.65
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Hassan, M. K. (2010). A return to the Qur’ānic paradigm of development and integrated knowledge: The Ulū al-Albāb model. Intellectual Discourse, 18(2).
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the Econometric Society, 1251–1271.
Hirdinis, M. (2019). Capital structure and firm size on firm value moderated by Profitability. VII(1), 174–191. https://doi.org/10.35808/ijeba/204
Jaara, B. O. A., AL-Dahiyat, M. A., & AL-Takryty, I. (2021). The Determinants of Islamic and Conventional Banks Profitability in the GCC Region. International Journal of Financial Research, 12(3), 78–91. https://doi.org/10.5430/ijfr.v12n3p78
Jamilah Tawfeeq Al-Najdawi. (2019). The Impact of Capital Structure Determinants on Financial Performance for Jordanian Commercial Banks. PhD thesis. Amman Arab University.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
Lee, C., Ning, S., & Lee, C. (2015). How does bank capital affect bank profitability and risk? Evidence from China's WTO accession. China & World Economy, 23(4), 19–39. https://dx.doi.org/10.1111/cwe.12119
Meero, A. A. (2015). The relationship between capital structure and performance in Gulf countries banks: A comparative study between Islamic banks and conventional banks. International Journal of Economics and Finance, 7(12), 140–154. https://doi.org/10.5539/ijef.v7n12p140
Modigliani, F., & Miller, M. H. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. The American Economic Review, 53(3), 433–443.
Mostak Ahamed, M. (2017). Asset quality, non-interest income, and bank profitability: Evidence from Indian banks. Economic Modelling, 63, 1–14. https://doi.org/10.1016/j.econmod.2017.01.016
Mulyadi, D., Sihabudin, & Sinaga, O. (2020). Analysis of current ratio, net profit margin, and good corporate governance against company value. Systematic Reviews in Pharmacy, 11(1), 588–600.
Myers, S. C. (1984). Capital structure puzzle. NBER Working Paper, w1393.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221.
Noreen, U. (2019). Impact of capital structure on Profitability: A comparative study of islamic and conventional banks of Pakistan. The Journal of Asian Finance, Economics, and Business, 6(4), 65–74.
Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of Banks' Profitability: Evidence from EU 27 Banking Systems. Procedia Economics and Finance, 20, 518–524.
Ricca, L. T., Jucá, M. N., & Junior, E. H. (2021). Tax benefit and bankruptcy cost of debt. The Quarterly Review of Economics and Finance, 81, 82–92.
Rivard, R. J., & Thomas, C. R. (1997). The effect of interstate banking on large bank holding company profitability and risk. Journal of Economics and Business, 49(1), 61–76.
Saona, P. (2016). Intra-and extra-bank determinants of Latin American Banks' Profitability. International Review of Economics & Finance, 45, 197–214.
Setyawati, I., Suroso, S., Suryanto, T., & Nurjannah, D. S. (2017). Does financial performance of Islamic banking is better? Panel data estimation. European Research Studies Journal, 20(2), 592–606. https://doi.org/10.35808/ersj/661
Shawtari, F. A. M. (2018). Ownership type, bank models, and bank performance: the case of the Yemeni banking sector. International Journal of Productivity and Performance Management.
Staikouras, C. K., & Wood, G. E. (2004). The determinants of European bank profitability. International Business & Economics Research Journal (IBER), 3(6).
Sufian, F. (2007). The efficiency of Islamic banking industry: A non-parametric analysis with non-discretionary input variable. Islamic Economic Studies, 14(1). https://ssrn.com/abstract=3161398
Sufian, F., & Habibullah, M. S. (2009). Bank specific and macroeconomic determinants of bank profitability: Empirical evidence from the China banking sector. Frontiers of Economics in China, 4(2), 274–291.
Sun, P. H., Mohamad, S., & Ariff, M. (2017). Determinants driving bank performance: A comparison of two types of banks in the OIC. Pacific-Basin Finance Journal, 42, 193–203. https://doi.org/10.1016/j.pacfin.2016.02.007
Sutrisno, H. (2009). Financial management theory, concept and application. Yogyakarta: Ekonosia.
Toumi, K., Louhichi, W., & Viviani, J.-L. (2012). Alternative financial decision principles: Theoretical foundations of Islamic banks' capital structure. In Recent developments in alternative finance: Empirical assessments and economic implications. Emerald Group Publishing Limited.
Yao, H., Haris, M., & Tariq, G. (2018). Profitability determinants of financial institutions: evidence from banks in Pakistan. International Journal of Financial Studies, 6(2), 53. https://doi.org/10.3390/ijfs6020053
Al-Homaidi, E. A., Tabash, M. I., Farhan, N. H. S., & Almaqtari, F. A. (2018). Bank-specific and macro-economic determinants of Profitability of Indian commercial banks: A panel data approach. Cogent Economics & Finance, 6(1), 1548072. https://doi.org/10.1080/23322039.2018.1548072
Al-Hunnayan, S. H. (2020). The capital structure decisions of Islamic banks in the GCC. Journal of Islamic Accounting and Business Research. https://doi.org/10.1108/JIABR-02-2017-0026
Al-Kayed, L. T., Zain, S. R. S. M., & Duasa, J. (2014). The relationship between capital structure and performance of Islamic banks. Journal of Islamic Accounting and Business Research. https://doi.org/10.1108/JIABR-04-2012-0024
Alexandri, M. B. (2008). Business Financial Management. Bandung: Alfabeta, First Print.
Almaqtari, F. A., Al‐Homaidi, E. A., Tabash, M. I., & Farhan, N. H. (2019). The determinants of Profitability of Indian commercial banks: A panel data approach. International Journal of Finance & Economics, 24(1), 168–185. https://doi.org/10.1002/ijfe.1655
Bashir, A.-H. M. (2001). Assessing the performance of Islamic banks: Some evidence from the Middle East. Topics in Middle Eastern and North African Economies, 3.
Berger, A. N., Herring, R. J., & Szegö, G. P. (1995). The role of capital in financial institutions. Journal of Banking & Finance, 19(3–4), 393–430. https://doi.org/10.1016/0378-4266(95)00002-X
Dietrich, A., & Wanzenried, G. (2011). Determinants of bank profitability before and during the crisis: Evidence from Switzerland. Journal of International Financial Markets, Institutions and Money, 21(3), 307–327. https://doi.org/10.1016/j.intfin.2010.11.002
Goh, C. F., Tai, W. Y., Rasli, A., Tan, O. K., & Zakuan, N. (2018). The determinants of capital structure: evidence from Malaysian companies. International Journal of Supply Chain Management, 7(3), 225–230. https://doi.org/10.1108/APJBA-09-2019-0202
Grossman, S. J., & Hart, O. D. (1982). Corporate financial structure and managerial incentives. In The economics of information and uncertainty (pp. 107–140). University of Chicago Press.
Güner, A. (2016). The determinants of capital structure decisions: New evidence from Turkish companies. Procedia Economics and Finance, 38, 84–89. https://doi.org/10.1016/S2212-5671(16)30180-0
Hafeez, M. M., Khan, H. H., Majeed, F., & Azeem, A. (2018). Impact of Capital Structure on Islamic Banks Performance:(Evidence from Asian country). Global Journal of Management And Business Research. https://doi.org/10.13106/jafeb.2019.vol6.no4.65
Hailu, A. (2015). The impact of capital structure on Profitability of commercial banks in Ethiopia. Accounting and Finance PhD thesis. Addis Ababa University.
Haris, M., HongXing, Y., Tariq, G., & Malik, A. (2019). An evaluation of performance of public sector financial institutions: evidence from Pakistan. International Journal of Business Performance Management, 20(2), 145–163. https://dx.doi.org/10.1504/IJBPM.2019.098642
Hassan, M. K. (2010). A return to the Qur’ānic paradigm of development and integrated knowledge: The Ulū al-Albāb model. Intellectual Discourse, 18(2).
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica: Journal of the Econometric Society, 1251–1271.
Hirdinis, M. (2019). Capital structure and firm size on firm value moderated by Profitability. VII(1), 174–191. https://doi.org/10.35808/ijeba/204
Jaara, B. O. A., AL-Dahiyat, M. A., & AL-Takryty, I. (2021). The Determinants of Islamic and Conventional Banks Profitability in the GCC Region. International Journal of Financial Research, 12(3), 78–91. https://doi.org/10.5430/ijfr.v12n3p78
Jamilah Tawfeeq Al-Najdawi. (2019). The Impact of Capital Structure Determinants on Financial Performance for Jordanian Commercial Banks. PhD thesis. Amman Arab University.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
Lee, C., Ning, S., & Lee, C. (2015). How does bank capital affect bank profitability and risk? Evidence from China's WTO accession. China & World Economy, 23(4), 19–39. https://dx.doi.org/10.1111/cwe.12119
Meero, A. A. (2015). The relationship between capital structure and performance in Gulf countries banks: A comparative study between Islamic banks and conventional banks. International Journal of Economics and Finance, 7(12), 140–154. https://doi.org/10.5539/ijef.v7n12p140
Modigliani, F., & Miller, M. H. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. The American Economic Review, 53(3), 433–443.
Mostak Ahamed, M. (2017). Asset quality, non-interest income, and bank profitability: Evidence from Indian banks. Economic Modelling, 63, 1–14. https://doi.org/10.1016/j.econmod.2017.01.016
Mulyadi, D., Sihabudin, & Sinaga, O. (2020). Analysis of current ratio, net profit margin, and good corporate governance against company value. Systematic Reviews in Pharmacy, 11(1), 588–600.
Myers, S. C. (1984). Capital structure puzzle. NBER Working Paper, w1393.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221.
Noreen, U. (2019). Impact of capital structure on Profitability: A comparative study of islamic and conventional banks of Pakistan. The Journal of Asian Finance, Economics, and Business, 6(4), 65–74.
Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of Banks' Profitability: Evidence from EU 27 Banking Systems. Procedia Economics and Finance, 20, 518–524.
Ricca, L. T., Jucá, M. N., & Junior, E. H. (2021). Tax benefit and bankruptcy cost of debt. The Quarterly Review of Economics and Finance, 81, 82–92.
Rivard, R. J., & Thomas, C. R. (1997). The effect of interstate banking on large bank holding company profitability and risk. Journal of Economics and Business, 49(1), 61–76.
Saona, P. (2016). Intra-and extra-bank determinants of Latin American Banks' Profitability. International Review of Economics & Finance, 45, 197–214.
Setyawati, I., Suroso, S., Suryanto, T., & Nurjannah, D. S. (2017). Does financial performance of Islamic banking is better? Panel data estimation. European Research Studies Journal, 20(2), 592–606. https://doi.org/10.35808/ersj/661
Shawtari, F. A. M. (2018). Ownership type, bank models, and bank performance: the case of the Yemeni banking sector. International Journal of Productivity and Performance Management.
Staikouras, C. K., & Wood, G. E. (2004). The determinants of European bank profitability. International Business & Economics Research Journal (IBER), 3(6).
Sufian, F. (2007). The efficiency of Islamic banking industry: A non-parametric analysis with non-discretionary input variable. Islamic Economic Studies, 14(1). https://ssrn.com/abstract=3161398
Sufian, F., & Habibullah, M. S. (2009). Bank specific and macroeconomic determinants of bank profitability: Empirical evidence from the China banking sector. Frontiers of Economics in China, 4(2), 274–291.
Sun, P. H., Mohamad, S., & Ariff, M. (2017). Determinants driving bank performance: A comparison of two types of banks in the OIC. Pacific-Basin Finance Journal, 42, 193–203. https://doi.org/10.1016/j.pacfin.2016.02.007
Sutrisno, H. (2009). Financial management theory, concept and application. Yogyakarta: Ekonosia.
Toumi, K., Louhichi, W., & Viviani, J.-L. (2012). Alternative financial decision principles: Theoretical foundations of Islamic banks' capital structure. In Recent developments in alternative finance: Empirical assessments and economic implications. Emerald Group Publishing Limited.
Yao, H., Haris, M., & Tariq, G. (2018). Profitability determinants of financial institutions: evidence from banks in Pakistan. International Journal of Financial Studies, 6(2), 53. https://doi.org/10.3390/ijfs6020053
Published
2022-03-27
How to Cite
Moustapha, L., & Benziane, R. (2022). THE IMPACT OF CAPITAL STRUCTURE ON ISLAMIC BANKS PROFITABILITY: EVIDENCE FROM GCC COUNTRIES. Indian Journal of Finance and Banking, 9(1), 203-212. https://doi.org/10.46281/ijfb.v9i1.1669
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2022 Larabi Moustapha, Roucham Benziane
This work is licensed under a Creative Commons Attribution 4.0 International License.
