02 May This section describes the determining factors of bank profitability, which is divided into internal and external factors
3.1 Data and methodology
This study extracts cross-country bank-level data from the income statements and balance sheets of 730 banks drawn from the commercially available (and widely used) BankScope database (Table II). The period of the study, 1989-2008, is chosen to omit the effect of the world financial crisis.
The sample reduced from 730 to 686 banks. This is related to the unavailability of data for some countries, and other countries have only Islamic banks (Iran and Sudan); the number of countries included is 52 out of 57 because of the aforementioned constraints. Also, mainstream banks with Islamic windows and converted banks (converted period) are excluded from our sample.
To be noted that this study used different sources such as banks websites and data from central banks to make sure that our sample is made of pure conventional banks because BankScope database is not comprehensive on its classification. For instance, it classifies some Islamic banks as conventional banks and vice versa and does not indicate if a bank is converted from conventional banking to Islamic banking.
A linear equation is used to perform the regression analysis. The model used for this analysis is represented by equation (1):
The two-way fixed-effects (FE) model has been chosen because the Hausman test shows that the FE (cross-section and time) model is consistent. Further, our sample is not random and contains almost all the conventional banks in the countries of the study.
Heteroscedasticity is not present in our sample based on white test, and the data cleaned from outliers. In addition, Durbin–Watson’s results indicated that multicollinearity is not significant.
3.2 Measures of bank profitability
In this study, two measures of performance are used: ROA and NIM. ROA is defined as profit after tax to total assets and shows the profit earned per dollar of assets. For this study, NIM is defined as the net interest revenue income over earning assets and measures interest spread for conventional banks.
3.3 Determinants of bank profitability
External factors are further divided into variables encompassing macroeconomic factors, oil shocks, taxation, deposit insurance schemes and financial structure. Following Bourke’s (1989) who included internal variables in his cross-country study on banks’ profitability, many researchers followed his footsteps and used internal variables in their studies on banks’ profitability in single or multiple countries (Table I). Following these studies, numerous internal variables are used in this paper to investigate the profitability of banks in OIC countries.
The literature suggests that external factors such as macroeconomic trends, stock ent and policy influence banks just like they https://homeloansplus.org/payday-loans-wa/ affect any other type of firm. In this study, several sets of external determinants are examined: national macroeconomic conditions, oil shocks, taxation, deposit insurance and financial structure. Table III displays the variables used to measure banks’ profitability as well as the variables employed to examine the determinants of banks’ profitability.
Table IV represents the descriptive statistics of the variables, and Tables V and VI represent the regression results of ROA and NIM, respectively.
5. Discussion of results
This section provides the summary statistics of the variables used in the study, and the analysis of the performance of the banks in OIC countries.
5.1 Descriptive statistics
The ratios and indicators in Table IV give an idea about the economic and financial environments in which the banks in this study operate. Columns 2 through 3 in the table present the three macroeconomic variables: GDP per capita, GDP growth rate and real interest rate. GDP per capita was measured in 2005 prices (USD) and was highest in Qatar (43,) followed by the UAE (31,) and then by Kuwait (31,). The lowest per capita GDP was for Afghanistan, with a value of . In general, the countries in this study had low per capita GDPs. GDP growth varies significantly throughout the sample, ranging from a high of 11 per cent per year in Qatar to a low of ? in Suriname. The real interest rate is highest in Kyrgyzstan () and lowest in Suriname (?). Albania, Benin, Burkina Faso, Iraq, the Ivory Coast, Kazakhstan, Niger, Nigeria, Qatar, Senegal and Togo have negative real interest rates.