The impact of 1998 and 2008 financial crises on profitability of Islamic banks

Islamic banks today exist in all parts of the world, and are looked upon as a viable alternative system which has many things to offer. While it was initially developed to fulfill the needs of Muslims, Islamic banking has now gained universal acceptance. Islamic banking is recognised as one of the fastest growing areas in banking and finance. Islamic banking total assets worldwide are estimated to have exceed $250 billion and are growing at an estimated pace of 15 per cent a year.

The paper investigates the profitability of 78 Islamic banks in 25 countries for the period of 1992-2009. The Fixed Effect Model (FEM) used to analyse profitability shows that profit efficiency is positive and statistically significant with operating expenses against asset, equity, high income countries and non-performing loans against total loans. Interestingly, the empirical results show that more profitable banks are those that have higher operating expenses against asset, more equity against asset and concentrated at high income countries demonstrating close relationship between monetary factors in determining Islamic banks profitability. The findings for 1998 Asian Financial Crisis and 2008 Global Financial Crisis are negative and imply that Islamic banks’ profitability has not been impacted during Asian and Global Financial crises.