Using a panel data approach to determining the key factors of Islamic banks’ profitability in Bahrain

Figures & data

Table 1. Summary of key factors used to determine of Bank profitability in previous studies

	Bank Specific Factors					Macroeconomic Factors
Authors	Capital Adequacy	Bank Size	Financial Leverage	Credit Risk	Operating Efficiency	GDP Growth	Inflation
Abduh & Idrees, 2013							✓
Idris at al. (2011)	✓	✓		✓	✓
Aggarwal, 2016			✓
Al-Smadi & Al-Wabel, 2011							✓
Ahmed et al.[2011]	✓	✓	✓	✓	✓
Ramadan, 2011	✓	✓		✓	✓
Mirzaei et al., 2013		✓
Abdullah et al., 2014		✓					✓
Karim et al. (2010)	✓	✓		✓	✓	✓	✓
Trujillo-Ponce, 2013	✓
Masood & Ashraf, 2013	✓			✓		✓	✓
Ibrahim (2017)			✓
Petria et al. (2015)			✓		✓
Al-Tamimi & Charif, 2011					✓
Ramadan (2011)						✓	✓
Rachdi, 2013		✓	✓
Wasiuzzaman & Tarmizi, 2010						✓	✓
Poposka & Trpkoski, 2016						✓

Table 2. Variables in this study

Variable	Description	Calculation
Return on Assets (ROA)	Shows profitability of firm’s asset	ROA = Net Income/Total Assets
Return on Equity (ROE)	Measures profitability of stockholders faced during a year, and illustrates the amount of money the firm earns by utilizing one dollar of its equity.	ROE = Net Income/Equity
Capital adequacy	Measures the capitalization of a bank, known as bank’s risk weighted credit exposure	CA = Capital/Total Assets
Bank size	Iindicates bank’s assets book value including cash, loans, securities’ market value and short-term investments.	BS = Ln (total assets)
Financial leverage	Refers to company’s potentiality to pay off its obligations by employing available resources	FL = Total Liability/Total Assets
Credit risk	This risk could happen when a borrower cannot repay the loan and thus the lender will lose the loan principle or the loan’s interest.	CR = Gross Loans/Total Assets
Operating efficiency	Measures operation costs that a bank incurred while managing its total assets	OE = Operating Expenses/Total Assets
Inflation	Increasing price level during a certain period of time	INF = Percentage change in consumer price index (CPI)
GDP growth rate	Measures the change in real GDP during a certain period of time as reflected on people’s standard of livings	GG = Percentage change in Real GDP

Sources: Masood et al. (2009), Aslam et al. (2016), Rashid and Jabeen, (2016), Karim et al. (2010), Trujillo-Ponce (2013), Paleckova, (2016)

Table 3. Statistical properties of the variables

	Mean	Max.	Min.	Std. Dev.	Skewness	Kurtosis	Jarque-Bera	Prob.	Obs.
ROA	−0.071	1.35	−4.33	1.141	−1.749	5.547	32.78	0.000	42
ROE	−1.805	11.95	−42.3	11.31	−1.17	6.33	41.82	0.000	42
CA	15.89	28.19	4.78	7.169	1.19	1.54	3.963	0.013	42
BS	3.111	3.96	2.62	0.328	1.044	3.893	9.04	0.010	42
FL	83.75	95.1	71.81	7.117	−1.089	1.549	3.735	0.015	42
CR	41.08	71.81	11.97	15.37	−2.107	2.77	2.66	0.031	42
OE	3.141	7.09	0.04	1.569	3.551	3.006	2.127	0.004	42
INF	2.014	3.3	−0.37	1.1	−1.17	3.56	10.26	0.005	42
GG	3.74	5.41	1.98	1.048	−4.166	2.289	1.075	0.005	42

Sources: Researchers’ calculations

Figure 1. Mean values of the study variables over the period 2013–2016.

Figure 2. Conceptual model.

Source: Adopted by researchers from Masood and Ashraf (2013)

Table 4. Results of panel unit root tests

	LLC test H0: Unit root (assumes common unit root process)		IPS test H0: Unit root (assumes individual unit root process)
Variables	At level	first differences	At level	first differences
ROA	−4.53	-	−0.77	−1.905
	(0.000)*		(0.218)	(0.028)*
ROE	−4.45	-	−0.866	−1.98
	(0.0000)*		(0.19)	(0.023)*
CA	−2.34	-	−0.017	−1.942
	(0.009)*		(0.493)	(0.026)*
BS	−1.84	-	0.367	−1.926
	(0.032)*		(0.643)	(0.027)*
FL	−2.767	-	−0.205	−1.81
	(0.0028)*		(0.485)	(0.049)*
CR	−12.3	-	−3.35	−3.526
	(0.000)*		(0.0004)	(0.0002)*
OE	−3.88	-	−0.66	−2.243
	(0.0001)*		(0.254)	(0.012)*
INF	−4.44	-	−0.73	−2.564
	(0.000)*		(0.232)	(0.005)*
GG	−4.92	-	−1.01	−1.87
	(0.000)*		(0.154)	(0.043)*

Sources: Researchers’ calculations

Table 5. Covariance analysis

Correlation t-statistics Probability	ROA	ROE	CA	BS	FL	CR	OE	INF	GG
ROA	1	0.949	0.282	−0.052	−0.271	−0.203	−0.598	0.111	−0.110
		19.05	1.863	–0.33	–1.784	–1.31	–4.729	0.063	–0.705
		0.000*	0.069**	0.742	0.08**	1.96	0.000*	0.949	0.48
ROE		1	0.298	−0.210	−0.288	−0.165	−0.637	0.028	−0.032
			1.979	–1.362	–1.905	–1.059	–5.239	0.179	–0.203
			0.054**	0.180	0.063**	0.295	0.000*	0.858	0.839
CA			1	−0.410	−0.975	−0.023	−0.438	−0.090	−0.045
				–2.843	28.07	–0.146	–3.085	0.574	–0.286
				0.007*	0.000*	0.884	0.003*	0.568	0.775
BS				1	0.376	−0.002	0.173	0.047	0.301
					2.569	–0.015	1.111	0.300	0.190
					0.014*	0.988	0.272	0.765	0.850
FL					1	−0.006	0.479	0.053	−0.005
						–0.037	3.459	0.339	–0.036
						0.970	0.001*	0.735	0.971
CR						1	−0.298	0.054	−0.006
							–1.981	0.344	0.004
							0.054**	0.732	0.996
OE							1	−0.049	−0.081
								–0.316	–0.515
								0.753	0.609
INF								1	−0.304
									11.09
									0.000*
GG									1

Sources: Researchers’ calculations *significant at 5% level, ** significant at 10% level

Table 6. Variance inflation factor

Variables	CA	BS	FL	CR	OE	INF	GG
VIF	1.18E+07	1.23	1.18E+07	1.11	1.50	1.13	1.21
VIF (excluding FL)	1.66	1.23	-	1.11	1.45	1.11	1.17

Sources: Researchers’ calculations

Table 7. Estimation of the model

	ROA model		ROE model
	FEM	REM	FEM	REM
C	−5.99	4.93	−5.82	4.69
CA	0.016	−0.005	0.300	−0.140
	(0.787)	(0.82)	(0.532)	(0.551)
BS	3.76	0.287	2.73	1.736
	(0.002)*	(0.562)	(0.003)*	(0.711)
CR	−0.034	−0.042	−0.14	−0.309
	(0.243)	(0.000)*	(0.507)	(0.003)*
OE	−0.867	−0.708	−0.727	−0.599
	(0.000)*	(0.000)*	(0.000)*	(0.000)*
INF	0.585	0.652	0.337	0.387
	(0.039)*	(0.021)*	(0.116)	(0.081)**
GG	− 0.822	−0.838	− 0.449	− 0.466
	(0.005)*	(0.000)*	(0.043)*	(0.051)*
R^2	0.7422	0.618	0.763	0.591
F-stat.	7.853	9.459	8.81	8.43
	(0.000)*	(0.000)*	(0.000)*	(0.000)*
Hausman test	Chi-square stat. = 12.964 P-value = 0.0115		Chi-square stat. = 3.76 P-value = 0.447

Sources: Researchers’ calculations *significant at 5% level, ** significant at 10% level

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