Profitability of Islamic Banks in Pakistan: An Empirical Analysis

Abstract

The main object of this study is to investigate the Profitability of Islamic banks in Pakistan. The data duration of the study is 2006-2021 and penal regression analysis is used to test the Profitability of Islamic banks in the context of Pakistan. This study applied the Variance Inflation Factor (VIF), Breusch-Godfrey Serial Correlation LM and Breusch-Pagan-Godfrey tests to check the multicollinearity autocorrelation and heteroscedasticity respectively. According to the Hausman test, Redundant Effect Test is suitable for the current study. Results of the Random Effect Method indicate that the GDP and BS have statistically significant as well as positive effects on the Return on Assets (ROA). While the IR, NPL, and INF have statistically significant and negative effect on the Return on Assets (ROA). Results of the study suggest that factors that have a negative effect on the ROA, like interest rate, non-performing loan, and the inflation rate would be judgmentally investigated by the Islamic Bankers of Pakistan through structuring the bank’s policies. That would give support in the banks’ better performance and enhanced profitability, which would directly improve to their significant role in the economy.