Specific risks and profitability of Islamic Banks in MENA region

Abstract

Islamic banks offer Sharia-compliant financial products. In addition to conventional risks, these banks face specific risks which will have negative effects. We investigate the effects of specific risks on the performance and the stability of a sample of 53 Islamic banks located in 11 Middle East North Africa countries including five oil-rich monarchies. Data are drawn from the Bankscope database and the annual reports of these banks over the period of 1998-2014. Using Data Envelopment Analysis, first of all, we designed a series of composite indicators to quantify specific risks of non-Sharia-compliance. In the second step, we applied correlation analysis, Spearman and Kendall correlation tests and a panel analysis in order to address the relationship between the performance and specific risks upon a subsample. According to the results, the relationship between performance and specific risks is significantly positive whereas the impact of each partial indicator remains ambiguous.