Islamic Financial Services and Profitability of Islamic Banks
DOI:
https://doi.org/10.13135/2421-2172/11781Keywords:
Cost-plus, Exchange-based, Equity-based financing, Islamic banks, ProfitabilityAbstract
The adoption of shariah-compliant financial services has been reflected in Islamic banking’s contribution to the growth of the Islamic financial market in recent years. However, Islamic banks occupy a small share of domestic banking markets worldwide. The low market share has raised some questions regarding the profitability of various Islamic financial services. This study, therefore, examined the effect of Islamic financial services on the profitability of Islamic banks in selected countries. Specifically, the study assessed the effects of exchange-based, equity-based, fee-based, and supporting financial services on the profitability of Islamic banks. Quarterly data were collected from the Islamic Financial Services Board (IFSB) database between 2014Q1 and 2022Q4. Fixed Effects Regression analysis was used to analyse the data. The study found that Murabaha (coef = 0.12, p = 0.004), Istisna' (coef = 0.03, p = 0.001), Musharaka (coef = 0.09, p = 0.000), and Ijarah (coef = 0.05, p = 0.000) had positive, significant effects while Mudharaba (coef = −0.25, p = 0.021) and Qard Hasan (coef = −0.68, p = 0.007) had negative effects on Islamic banking profitability in selected countries. The study concluded that exchange-based, equity-based, fee-based, and supporting financial services had a significant impact on the profitability of Islamic banks. It was therefore recommended that Islamic banks focus on providing excellent customer service to enhance customer satisfaction and loyalty, thereby increasing their profitability.
References
Afrizal, Y., Aliamin & Shabri, M. (2023). The effect of musyarakah, mudharabah, and murabahah financing on the financial performance of sharia commercial banks in Indonesia. Journal of World Science, 2(5), 738-744. DOI: 10.58344/jws.v2i3.235
Ali, Z., Anjum, G. M., Iqbal, J., & Ahmad, I. (2024). The role of Islamic values in promoting social justice and community welfare. International Research Journal of Management and Social Sciences, 5(1), 575–585. https://doi.org/10.1108/978-1-83549-906-120241007
Almanaseer, S. R., & AlSlehat, Z. A. (2016). The impact of financing revenues of the banks on their profitability: An empirical study on local Jordanian Islamic banks. European Journal of Business and Management, 8(12), 195–202.
Almutairi, S., Zainal Abidin, S., Azizan, N. A., & Said, T. F. (2024). Are there Variations in Business Strategies adopted by Islamic Financial Institutions in Different Regions? Saudi Journal of Economics and Finance, 8(6), 209-219. DOI: 10.36348/sjef.2024.v08i06.006
Alzoubi, T. (2017). Profitability of Islamic Financing Tools. Banking and Finance Review, 1, 76-84.
Ar Rumaishaa, Z., & Zamzami, R. M. (2022). The effect of murabahah and istishna financing on net profit with TPF as a moderating variable in Islamic commercial banks for the 2018–2020 period. Current Advanced Research on Sharia Finance and Economic Worldwide (CASHFLOW), 1(4), 115–130. https://ojs.transpublika.com/index.php/CASHFLOW/
Aress, A. H., & Abdul, F. (2023). Islamic banking products and financial performance of banks in Nairobi County, Kenya. International Academic Journal of Economics and Finance, 3(9), 374–394. https://iajournals.org/articles/iajef_v3_i9_374_394.pdf
Bananuka, J., Katamba, D., Nalukenge, I., Kabuye, F., & Sendawula, K. (2020). Adoption of Islamic banking in a non-Islamic country: Evidence from Uganda. Journal of Islamic Accounting and Business Research, 11(5), 989–1007. https://doi.org/10.1108/jiabr-08-2017-0119
Bananuka, J., Mukyala, V., Tumwebaze, Z., Ssekakubo, J., Kasera, M., & Najjuma, M. S. (2020). The intention to adopt Islamic financing in emerging economies: Evidence from Uganda. Journal of Islamic Accounting and Business Research, 11(3), 610–628. https://doi.org/10.1108/jiabr-07-2017-0108
Bensalem, S., & bouherb, H. (2021). Analysis on Islamic Banking Financing Difficulties for SMEs Using Musharakah and Mudaraba Financing Instruments. Al Bashaer Economic Journal, 7(2). https://doi.org/10.33704/1748-007-002-050
Berguiga, I., Said, Y. B., & Adair, P. (2020). The social and financial performance of microfinance institutions in the Middle East and North Africa region: Do Islamic institutions outperform conventional institutions? Journal of International Development, 32(7), 1075–1100. https://doi.org/10.1002/jid.3488
Bhattacharya, A., Morgan, N. A., & Rego, L. L. (2021). EXPRESS: Examining Why and When Market Share Drives Firm Profit. Journal of Marketing, 002224292110319. doi:10.1177/00222429211031922
Bularafa, B. A. (2023). Determinants of Murabahah adoption intention among MSMEs in Nigeria. Psocialsciences, 3(2), 1–21. https://doi.org/10.1016/s2212-5671(16)30118-6
Chen, L., Li, H., Liu, F. H., & Zhou, Y. (2021). Bank regulation and systemic risk: Cross-country evidence. Review of Quantitative Finance and Accounting, 57(1), 353–387. https://doi.org/10.2139/ssrn.2208948
Chowdhury, M. A. M., & Haron, R. (2021). The efficiency of Islamic banks in the Southeast Asia (SEA) region. Future Business Journal, 7, 1–16. https://doi.org/10.1186/s43093-021-00062-z
Cortelezzi, F. (2022). Global Islamic finance: Principles and products. In Contemporary Issues in Islamic Law, Economics and Finance (pp. 97–116). https://doi.org/10.4324/9781003155218-10.
Craig, B., & Ma, Y. (2022). Intermediation in the interbank lending market. Journal of Financial Economics, 145(2), 179–207. https://doi.org/10.1016/j.jfineco.2021.11.003
Diana, H. I., & Maria, M. M. (2020). The importance Of profitability indicators In assessing The financial performance Of economic entities. The Annals of the University of Oradea, 29(2020), 219. https://doi.org/10.37945/cbr.2021.04.05
El Maghrebi, N., Mirakhor, A., Akın, T., & Iqbal, Z. (2023). Behavioural norms and institutional structure of Iqtiṣād. In Revisiting Islamic Economics: The Organizing Principles of a New Paradigm (pp. 241–284). Springer International Publishing. https://doi.org/10.1007/978-3-031-41134-2_7
Gelbard, E., Hussain, M., Maino, R., Mu, Y., & Yehoue, E. (2014). Islamic finance in Sub-Saharan Africa: Status and prospects (IMF Working Paper No. WP/14/149). International Monetary Fund, African Department.
Guru, B. K., & Yadav, I. S. (2019). Financial development and economic growth: Panel evidence from BRICS. Journal of Economics, Finance and Administrative Science, 24(47), 113–126. https://doi.org/10.1108/jefas-12-2017-0125
Hailu, S. M., & Yatoo, N. A. (2021). Islamic finance in Ethiopia: Current status, prospects and challenges. International Journal of Islamic Banking and Finance Research, 6(1), 1–18. https://doi.org/10.46281/ijibfr.v6i1.1317
Halim, S. (2020). Effect of financing in sharia business units on profitability and financing risk management. Journal of Islamic Economics & Social Sciences (JIESS), 1(1), 11–27. https://doi.org/10.22441/jiess.2020.v1i1.002
Hassan, M. K., Aliyu, S., Saiti, B., & Halim, Z. A. (2020). A review of Islamic stock market, growth and real-estate finance literature. International Journal of Emerging Markets, 16(7), 1259-1290. https://doi.org/10.1108/ijoem-11-2019-1001
Hassan, M.K., Kayed, R.N. & Oseni, U.A (2013). Introduction to Islamic Banking and Finance. Edinburgh, England: Pearson Education Limited.
Hussain, M., Shahmoradi, A., & Turk, R. (2015). An overview of Islamic finance (IMF Working Paper No. WP/15/120). International Monetary Fund.
Ibrahim, A. A., Hussein, J. M., & Kulmie, D. A. (2024). Islamic Banking in Africa: A Booming Market with Growing Pains. International Journal of Religion, 5(9), 318-333. https://doi.org/10.61707/3dg7rh70
Iqbal, Z., & Mirakhor, A. (2020). Ethics of Risk-Sharing Economics and Finance. Handbook of Ethics of Islamic Economics and Finance, de Gruyter GmbH, Berlin, 1-20. https://doi.org/10.1515/9783110593419
Islam, M. T. (2024). The Shari’ah foundation of Islamic banking. Dirasah International Journal of Islamic Studies, 2(1), 36–67. https://doi.org/10.59373/drs.v2i1.24
Islamic Financial Services Board. (2018). Islamic Financial Services Industry Stability Report. https://www.ifsb.org/wp-content/uploads/2023/10/Islamic-Financial-Services-Industry-Stability-Report-2018_En.pdf
Islamic Financial Services Board. (2020). Islamic Financial Services Industry Stability Report. https://www.ifsb.org/wp-content/uploads/2023/10/Islamic-Financial-Services-Industry-Stability-Report-2020_En.pdf
Islamic Financial Services Board. (2023). Islamic Financial Services Industry Stability Report. https://www.ifsb.org/wp-content/uploads/2023/10/Islamic-Financial-Services-Industry-Stability-Report-2023_En.pdf
Jatmiko, W., Iqbal, A., & Ebrahim, M. S. (2024). On the ethicality of Islamic banks' business model. British Journal of Management, 35(1), 115–136. https://doi.org/10.2139/ssrn.4299156
Jimoh, A. T., Ijaiya, M. A., Attah, J. A, Abdulmumin, B. A. & Etudaiye-Muhtar, O. F. (2022). Comparative analysis of technical efficiency of Islamic banks in selected low-income countries of Africa and Asia. Journal of Business Management and Accounting, 12(2), 81-102. Available online at https://doi.org/10.32890/jbma2022.12.2
Jimoh, A.T. (2021). Risk and efficiency of islamic banks in the low-income countries of africa and asia: A comparative study. Unpublished Doctoral Thesis Submitted to the Department of Finance, University of Ilorin, Ilorin, Nigeria.
Jimoh, A.T., Attah, J.A., Bamigbade, D. & Abdurraheem, A.A. (2022). Effects of credit, liquidity and operational risks on efficiency of Islamic banks in Africa. Journal of Contemporary Business and Islamic Finance, 2(2), 135-154. Available online at https://journals.iub.edu.pk/index.php/jcbif/issue/view/96.
Khalatur, S., Pavlova, H., Vasilieva, L., Karamushka, D., & Danileviča, A. (2022). Innovation management as basis of digitalization trends and security of financial sector. Entrepreneurship and Sustainability Issues, 9(4), 56. https://doi.org/10.9770/jesi.2022.9.4(3)
Kulmie, D. A., Abdulle, M. A., Hussein, M. S., & Mohamud, H. A. (2023). Effects of Islamic modes of financing on profitability of banking institutions. International Journal of Business and Management, 18(5), 237–254.
Kulmie, D. A. (2024). Musharakah financing: Profitability improvement tool for Islamic banks. International Journal of Religion, 5(6), 609–619. https://doi.org/10.61707/mzpevj08
Mabrouk, A. & Farah, L. (2021). Liquidity Risk Management in the Islamic Banking: Portfolio of Ijara and Murabaha. European Journal of Islamic Finance,18, 1-12. 10.13135/2421-2172/5848.
Mahdi, F. M., & Aprilianto, F. (2023). The impact of financing product scheme on Islamic banking financial performance. Jurnal Ilmiah Ekonomi Islam, 9(3), 3356–3363. https://doi.org/10.29040/jiei.v9i3.10766
Mansour, I. H. F. (2019). Customers’ perceptions of selection criteria used by Islamic bank customers in Sudan: The importance of Shariah compliance. Journal of Research in Emerging Markets JREM, 1(4). https://doi.org/10.2139/ssrn.3480464
Maouloud, V. M., Kassim, S., & Othman, A. H. A. (2021). Does usage of Islamic microfinance products influence the income, education, and health in Mauritania? Al Qasimia University Journal of Islamic Economics, 1(2), 161–182. https://doi.org/10.52747/aqujie.1.2.65
Menacer, A., Saif-Alyousfi, A. Y., & Ahmad, N. H. (2020). The effect of financial leverage on the Islamic banks' performance in the Gulf Cooperation Council (GCC) countries. International Journal of Financial Research, 11(1), 13–24. https://doi.org/10.5430/ijfr.v11n1p13
Mirakhor, A., & Hamid, I. S. De Gruyter (2020). Handbooks of Islamic Economics and Finance. Journal of Finance and Business. https://doi.org/10.1515/9783110593419.
Mohamed, Q. A. (2018). The effect of islamic banking products on financial performance of islamic banks in Kenya. Unpublished MBA Research Project, Submitted to School of Business, University of Nairobi, Kenya.
Moustapha, L., & Nadir, T. (2023). The impact of Islamic financing products on Islamic banks' profitability: The case of Al Rayan Bank (Qatar). The Journal of Muamalat and Islamic Finance Research, 20(2), 87–98. https://doi.org/10.33102/jmifr.522
Naushad, M. (2019). Intellectual capital and financial performance of Sharia-compliant banks in Saudi Arabia. Banks and Bank Systems, 14(4), 1. https://doi.org/10.21511/bbs.14(4).2019.01
Nguyen, T. N. L., & Nguyen, V. C. (2020). The determinants of profitability in listed enterprises: A study from Vietnamese stock exchange. Journal of Asian Finance, Economics and Business, 7(1), 47-58. https://doi.org/10.13106/jafeb.2020.vol7.no1.47
Novikov, V., Britikova, E., Yarushkina, E., & Kovalenko, L. (2020). Islamic banking in the global financial system: Current situation and global environment. In 5th International Conference on Economics, Management, Law and Education (EMLE 2019) (pp. 138–143). Atlantis Press. https://doi.org/10.2991/aebmr.k.191225.025
Nugroho, L., Miglietta, F., Nugraha, E., & Soeharjoto. (2022). Islamic bank profitability: Financing micro and small segment, promotion, financing quality, labor aspects (Indonesia cases). European Journal of Islamic Finance, 19, 38–46. https://doi.org/10.13135/2421-2172/6714
Oktaviani, I. N., Alaidrus, S. & Siswanto (2022). The influence of qard and zakat on profitability of islamic banks in Indonesia. Indonesian Interdisciplinary Journal of Sharia Economics, 1(2), 63-73.
Omran, M., Khallaf, A., Gleason, K., & Tahat, Y. (2021). Non-financial performance measures disclosure, quality strategy, and organizational financial performance: A mediating model. Total Quality Management & Business Excellence, 32(5–6), 652–675. https://doi.org/10.1080/14783363.2019.1625708
Oncioiu, I., Petrescu, A. G., Bîlcan, F. R., Petrescu, M., Popescu, D. M., & Anghel, E. (2020). Corporate sustainability reporting and financial performance. Sustainability, 12(10), 4297.
Prandi, S. & Colecchia, D. (2021). Pricing of Islamic Banking and Conventional Banking: An Empirical Study, European Journal of Islamic Finance, 18, 1-14. 10.13135/2421-2172/5465
Pyle, D. H. (1971). On the theory of financial intermediation. The Journal of Finance, 26(3), 737–747. https://doi.org/10.1007/978-3-031-11491-5_4
Risfandy, T. (2018). Equity Financing and Islamic Banks’ Profitability: Evidence from the Biggest Muslim Country. Jurnal Keuangan dan Perbankan, 22(3), 496–505. http://jurnal.unmer.ac.id/index.php/jkdp
Roziq, A. & Sukarno, H. (2021). The Effect of Islamic Financing Schemes on Risk and Financing Performance in Islamic Banks in Indonesia. IQTISHODUNA: Jurnal Ekonomi Islam, 10(1), 017-034. doi.org/10.36835/iqtishoduna.v10i1.729
Saiti, B., Ardo, A. A., & Yumusak, I. G. (2022). Why non-Muslims subscribe to Islamic banking? Qualitative Research in Financial Markets, 14(2), 247–269. https://doi.org/10.1108/qrfm-01-2018-0005
Salleh, M. S., Possumah, B. T., & Ahma, N. (2021). The impact of financing contracts on the profitability of Islamic banks. Jurnal Ekonomi Malaysia, 55(3), 149–164. http://dx.doi.org/10.17576/JEM-2021-5503-1
Belkhaoui, S., Alsagr, N., & van Hemmen, S. F. (2020). Financing modes, risk, efficiency and profitability in Islamic banks: Modeling for the GCC countries. Cogent Economics & Finance, 8(1), 1750258. https://doi.org/10.1080/23322039.2020.1750258
Sari, A. P. N. & Maharani (2022). The effect of murabahah, musyarakah, and ijarah financing on profitability with non-performing financing as a moderation variable in Islamic commercial banks for the 2016-2020 period. Current Advanced Research On Sharia Finance And Economic Worldwide Cashflow, 1(4), 151-168. https://ojs.transpublika.com/index.php/CASHFLOW/
Sutrisno, S., & Widarjono, A. (2022). Is profit-loss-sharing financing matter for Islamic bank's profitability? The Indonesian case. Risks, 10, 207. https://doi.org/10.3390/risks10110207
Sweezy, P. M. (1943). Schumpeter's theory of innovation. The Review of Economics and Statistics, 25(1), 93–96. https://doi.org/10.14386/sime.2023.31.3.75
Syahri, N. A., & Harjito, D. A. (2020). The effect of financing using the principle of profit-loss sharing on profitability level of commercial Islamic bank registered in Bank Indonesia. Asian Journal of Islamic Management, 2(1), 46–58. https://doi.org/10.1108/AJIM.vol2.iss1.art5
Taouab, O., & Issor, Z. (2019). Firm performance: Definition and measurement models. European Scientific Journal, 15(1), 93–106. https://doi.org/10.19044/esj.2019.v15n1p93
Tjoteng, A. A., Zoebaedi, F., & Munira, M. (2022). The effect of mudharabah and musyarakah financing on the profitability of Islamic general banks for the 2020–2021 period. JIAP, 2(2), 80–94. http://journal.univpancasila.ac.id/index.php/JIAP/
Ur Rehman, Z., Zahid, M., Rahman, H. U., Asif, M., Alharthi, M., Irfan, M., & Glowacz, A. (2020). Do corporate social responsibility disclosures improve financial performance? A perspective of the Islamic banking industry in Pakistan. Sustainability, 12(8), 3302. https://doi.org/10.3390/su12083302
Usmani, M. M. T. (2021). An introduction to Islamic finance. Brill. Arab and Islamic Law Series. Vol. 20. https://doi.org/10.1057/9780230361133.0011
Wahyudi, W., & Tristiarto, Y. (2020). Analysis of determinants for determining financial innovation and its impact on banking financial performance. Journal of Management and Leadership, 3(1), 1–14. https://doi.org/10.51675/jib.v4i1.826
Wulandari, J. R. (2017). The effect of mudharabah and musyarakah on the profitability of islamic banks. 3rd Parahayangan International Accounting and Business Conference, 2017, 69-84. https://piabc.fe.unpar.ac.id
Yustiardhi, A. F., Diniyya, A. A., Faiz, F. A. A., Subri, N. S., & Kurnia, Z. N. (2020). Issues and challenges of the application of Mudarabah and Musharakah in Islamic bank financing products. Journal of Islamic Finance, 9(2), 26–41. https://doi.org/10.20473/vol8iss20213pp255-263
Yusuf, M. S, & Isa, M. Y. (2021). The Impact of Ijarah/Lease Financing on Malaysian Islamic Bank Performance. International Journal of Islamic Business, 6(1), 49-58.
Zafar, M. B., & Sulaiman, A. A. (2021). CSR narrative under Islamic banking paradigm. Social Responsibility Journal, 17(1), 15–29. https://doi.org/10.1108/srj-09-2018-0230
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2026 Abdulrazaq Jimoh
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
EJIF content is licensed under a Creative Commons Attribution 4.0 International License.
Authors keep the copyrights for their work and give the journal the work's first publication copyright, which is at the same time licensed under a Creative Commons License – Attribution, which in turn allows other parties to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
EJIF has been approved for inclusion in 
EJIF is a member of 
EJIF is indexed by 
EJIF is listed in the ANVUR (Italian National Agency for the Evaluation of Universities and Research Institutes) as a scientific journal
