Profitability Determinants of Islamic Banking in Sri Lanka

Abstract

Amana Investments was established in 1997 as the first Islamic bank in Sri Lanka. Islamic Finance is Sharia compliant finance because and is based on the teachings in the Holy Quran and sacred scripture of the religion of Islam. The aim of this research is to provide an overview on the Islamic Finance Industry of Sri Lanka by identifying the factors that affect the profitability of the industry. The profitability of Islamic banks is measured by three dimensions, i.e. return on assets, and return on equity, earnings per share. Internal explanatory variables include bank size, gearing ratio, asset management, deposit ratio, non-performing loans ratio, asset composition, capital adequacy ratio and operating efficiency, whereas external explanatory variables include gross domestic product (GDP) and consumer price index (CPI). Since Islamic Banking is a relatively new industry within Sri Lanka, there is a high potential to make profits by considering the components of the ratios used as independent variables in the study. Although some components indicated to be profitable, the risk associated with those variables and the other factors such as liquidity and profitability also have to be considered. Results were similar to the other researches done for other countries