Do CAMEL Indicators Contribute Towards Profitability of Islamic Banks?

Abstract

Given the remarkable growth of Shariah-based banking in Pakistan and worldwide, the question does arise if Islamic banks contribute in the overall development of banking. The paper is an attempt to discover the role of Islamic banks towards the banking sector development in Pakistan. The study covers a period of 12 years (2006-2017) where the impact of Islamic banks in overall development of banking sector, is estimated by using deposits by Islamic banks as a percent of GDP. Deposits are an important parameter here since these reflect the resource mobilization by Islamic banks and their ability to marshal the deposits into activities that generate revenue for them. The study also makes use of variables e.g. financial sector’s development, growth of GDP and inflation. The role of Islamic banks towards the overall banking development is also estimated through penetration propensity of Islamic banks over the period of analysis. A regression analysis has been used to estimate the impact of the dependent variable across the explanatory ones. The research offers some managerial as well as policy implications along with an agenda for future research. Keywords: Islamic banks, Banking sector, Panel data, Financial sector development, Pakistan