Does Working Capital and Financial Structure Impact Profitability of Islamic and Conventional Banks Differently?

Islamic Banking and Finance Review, 03 (01), 50-67, 2016

18 Pages Posted: 15 Aug 2016

See all articles by Ejaz Aslam

Ejaz Aslam

Minhaj University

Farrukh Ijaz

University of Management and Technology

Anam Iqbal

(UMT) University of Management and Technology (Pakistan), Students

Date Written: March 1, 2016

Abstract

The essential factor for the financial growth of a country is a stable banking system. Over the past few years, Islamic banking industry of Pakistan has grown substantially; however, it faces many challenges regarding its financial stability. This study examines the impact of working capital and financial structure on Pakistan banking sector profitability. The study used generalize least square (GLS) estimation analysis on 5 Islamic banks over the period 2006 to 2014 and 15 conventional banks from 2008 to 2014. Return on assets (ROA), return on equity (ROE) and net income (NI) are used as dependent variables. Working capital and proportion of funds provided by bank creditors are used as independent variables. Bank size, deposit ratio, gross domestic product (GDP) and inflation (CPI) are used as control variables to control heterogeneity and co-linearity among variables. Study found an increase in working capital results decrease in the profitability of Islamic and conventional banks. However, financial leverage has statistically significant positive impact on profitability of Islamic banks and vice versa for conventional banks.

Keywords: Financial Structure, Working Capital, Islamic Banks, Conventional Banks, Profitability

Suggested Citation

Aslam, Ejaz and Ijaz, Farrukh and Iqbal, Anam, Does Working Capital and Financial Structure Impact Profitability of Islamic and Conventional Banks Differently? (March 1, 2016). Islamic Banking and Finance Review, 03 (01), 50-67, 2016, Available at SSRN: https://ssrn.com/abstract=2820277

Ejaz Aslam

Minhaj University ( email )

School of Islamic Economics, Banking and Finance
School of Islamic Economics, Banking and Finance
Lahore
Pakistan

Farrukh Ijaz (Contact Author)

University of Management and Technology ( email )

C-II
Lahore, Punjab 54770
Pakistan

Anam Iqbal

(UMT) University of Management and Technology (Pakistan), Students ( email )

Pakistan

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