Empirical analysis of impact of macroeconomic indicators on Profitability of Islamic Banking Industry in Pakistan

Abstract

The Islamic banking has been found showing a great performance around the globe, which make it an important to understand the factors affecting the Islamic banking. This paper is aimed at studying the role of Interest Rate as economic indicator, Total assets and credit risk as bank specifics, on maintaining sustainable profitability measures, ROE and ROA of all full fledge Islamic banks in Pakistan during the period of 2006-2018. The data collection includes all full fledge Islamic banks of Pakistan i.e., Al Baraka Bank (Pakistan) Ltd, Bank Islami Pakistan Ltd (BIPL), Dubai Islamic Bank Pakistan Limited (DIB) and Meezan Bank Limited. Furthermore, there are two measures of profitability i.e. Return on equity (ROE) & Return on assets (ROA). The regression analysis in the results show that there is a significant role of bank specific variables (total assets, and credit risk) and macroeconomic indicator (interest rate) on ROE, moreover, the role of Credit Risk and Interest Rate is also found significant in influencing the ROA.