Risk and Profitability Measures in Islamic Banks: The Case of Two Sudanese Banks

Abstract

The paper examines the effects of scale (total assets) on the performance of Islamic banks. The analysis is done in the context of agency and financial intermediation theories. Using data from two Sudanese banks, our empirical investigation provides limited support to the theoretical predictions. The relationships between size and profitability measures are statistically significant, indicating that Islamic banks become more profitable as they grow in size. However, the negative relationship between size and the ratio of equity to capital implies that the larger bank is systematically highly levered. Moreover, the negative and statistically significant relationship between size and the risk index indicates that large size is economically efficient. The negative and slightly significant relationship between size and market valuation contradicts the predictions of theory.

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