Islamic Banking in Pakistan: Analysing Growth and Determinants of Profitability

Abstract

In Islamic banks, deposits are the main source of funds which are converted to investment and assets to generate profit through Islamic Modes of financing and investment. There is limited research, especially in Pakistan, where the impact of deposits, investments, and total assets on performance is investigated for Islamic Banks along with the analysis of growth of Islamic Banking since its inception. The purpose of this paper is to fill this gap. Quarterly data of 10 years (2007 to 2016) published by the State Bank of Pakistan is applied for descriptive statistics, correlation and regression analysis. Assets while data from 2003-2016 is used for growth analysis. Assets, Investments, and deposits are used as independent variables while ROA and ROE are used as dependent variables. The results show that although there is a robust growth in deposits, investment, assets, and branch network of Islamic Banks during the study period, the profitability is not very impressive. This is evidenced from the negative relationship of assets with performance. However, the relationship of deposits and investment & financing is significantly positive with performance. Therefore, the Islamic Banks’ management should pay attention towards improving the efficiency by managing assets more prudently and by reducing costs, particularly the operational cost.