The Impact of financing on the financial performance

Abstract

There is no doubt that banks play a vital role in the economy of all countries. Stability of economy depends on bank's sound performance within a country. In the recent decades, a new sector of banking, Islamic Banking, was introduced and was capable of achieving widespread and accelerating growth of total assets and market share on a global basis, including non-Muslim countries. Numerous empirical studies attempt to measure the financial performance of the dissimilar banks in an attempt to gain more insights into Islamic banking. Thus, the purpose of this study is to compare the financial performance of both banking system and to investigate the different impact of financing products (Islamic loans and conventional loans) on bank's profitability in GCC countries (Saudi Arabia, United Emirate, Bahrain, Qatar, Kuwait, and Oman) over the period from 1999- 2014. The study used two profitability measures namely, return on average assets (ROAA) and return on average equity (ROAE). The study used unbalanced panel data set of 1228 observations total of 45 Islamic banks and 49 conventional banks. The empirical results estimated by generalized method of moment indicate that loans of both banking system have positive and significant relationship with bank's profitability. The result also found that conventional banks performed better than its Islamic counterparts in terms of ROAA & ROAE signified by the dummy variable. Moreover, the study indicate that Islamic loans have significant different impact on ROAA comparing to conventional loans. While no significant different impact between Islamic loans and conventional loans on ROAE. Finally, Gross domestic product (GDP) have positive relationship with the profitability of Islamic and conventional banks while Inflation has negative but insignificant impact.