Internal and external determinants of profitability of Islamic banks in Sudan: evidence from panel data

Abstract

This paper aims to explore the determinants of profitability of Islamic banks in Sudan, one of the few countries that have total Islamic economic and banking systems. Using a sample of Sudanese banks, the paper found that only the internal factors to these banks have a significant impact on banks’ profitability, as measured by return on assets (ROA), return on equity (ROE), and net financing margin (MARG). More specifically, cost, liquidity and size of the bank are found to have positive and significant effects on profitability. However, external macroeconomic factors are classified as redundant and have no significant effects on profitability. These results have precedence in the literature as some country-specific studies found no or very weak effects of macroeconomic variables on performance of commercial banks. Furthermore, the study found that the data are best represented with a random effects model vis-à-vis fixed effects or pooling estimation models. Finally, the study has many implications for banks, regulators and depositors with respect to liquidity, cost and bank structure in Sudan.

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