Chapter 3 Determinants of Performance of Islamic Banks in GCC Countries: Dynamic GMM Approach

Purpose The main objective of this study is to identify the main determinants of the Islamic banks’ performance in Gulf Cooperation Council (GCC) regions. Methodology/approach The research uses both static model (fixed effects and random effects) and Generalized method of Moments (GMM). The data for this study are obtained from the annual reports of 29 Islamic banks from GCC countries using Bankscope database for the period from 2005 to 2013. Findings The empirical findings reveal that Islamic banks’ specific factors such as the equity financing and bank size are positive and statistically significant to the profitability of Islamic banks. The operating efficiency ratio is negatively and statistically significant to return on asset. It is also found that macroeconomic variables such as money supply and inflation are negatively and statistically significant to the performance of Islamic banks whereas oil price has been found positive and statistically significant to the performance of Islamic banks in the GCC region. Research implications The present study seeks to fill a demanding gap in the literature by providing new empirical evidence on the factors that influence the profitability of the Islamic banking sector in GCC regions. Originality/value These findings have significant contribution to the literature by comprehensively clarifying and critically analyzing the current state of profitability among the Islamic banks in GCC regions.