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Assignments explains proposal on the topic concern about impact on the determinants of profitability in Islamic Banks

Home, - DETERMINANTS OF THE PROFITABILITY OF ISLAMIC BANKS A SURVEY OF ZANZIBAR ISLAMIC BANKS.

CHAPTER ONE RESEARCH OVERVIEW

This chapter explains the proposal on the topic concern about the impact on the determinants of the profitability in Islamic banks in Zanzibar. It comprises background and statement of the problem, objectives of the study, research questions, and significance of the study and limitation of the study. Islamic banking is playing an important role in today’s banking industry. Islamic banking has grown rapidly in Zanzibar recently. There are now total of 3 Islamic banks in Zanzibar. During these years, there are more researchers started to carry out their research to determine the factors affecting the profit of Islamic banks in many countries.

Research Background

Islamic finance has grown rapidly since it first emerged in the 1970s. Current global Islamic banking assets and assets under management have reached USD750 billion and is expected to hit USD1 trillion BNM (2011).

There are over 300 Islamic financial institutions worldwide across 75 countries. Based on Asian Banker Research Group, the global Islamic industry has an average growth of 15% to 20% annually and The World’s 100 largest Islamic banks have set an annual asset growth rate of 26.7% BNM (2011).

Zanzibar Islamic financial industry was started from 2008. Most of the conventional banks in Zanzibar have involved in Islamic industry as well. They have a subsidiaries bank that running the Islamic Shariah concept or have an Islamic window to operate the Islamic product and financing.

This study is shown that how the determinants affect profitability for Islamic Bank in Zanzibar and better understanding about importance of determinants of profitability. There are few studies about Islamic banking, they found out there are many factors influence the profitability of Islamic bank.

Problem Statement

Islamic banking is based on profit and loss sharing ( PLS) between the borrower and the bank (Khan and Mirakhor 1987). Islamic banks maintain profit by mixing investment and commercial banking operations to engage in acceptable rates of return for depositors but in accordance to Islamic rules and principles. Islamic banking rules are according to the Islamic shariah derived from the Quran. The three main practices clearly prohibited in the Quran and the prophet’s sayings are: Riba ( Interest), Gharar (Uncertainty), and Maysir (Betting). Nowadays Muslims and non Muslims as well get trouble on how Islamic bank operate as the interest is free and as we know that interest is key factor for the success of the business in the banks.

Therefore the aim of this research is to assess the determinants of profitability of Islamic banks in Zanzibar. While there is abundant of literature on performance studies, these studies are confined to convectional banks. Up to this date, there has been little research on the profitability of Islamic banks.

Specific Objectives

The purpose of this research was to closely examine how internal factors such as capital ratio, bank size, asset quality, liquidity and expenses management affect the Islamic banks’ Return of Asset (ROA). In addition, the objectives of this research was to examine how external factors such like Gross Domestic Product (GDP), inflation rate, money supply and competitions affect the ROA of Islamic banks. It is critical to determine which factors essentially determine the ROA of the Islamic banks.

Research Questions.

In this competitive banking industry, what are the factors that affect the Return of Asset (ROA) of Islamic banks in Zanzibar?

General Objective

The objective of this paper is to determine the factors that affect the Return of Asset (ROA) of Islamic banks in Zanzibar.

Hypotheses of the Study (for Quantitative Research)

The major hypothesis of this study is to evaluate whether external factors as well as internal factors are important in explaining Islamic banks’ profitability. The internal factors include capital ratio, bank size, liquidity, asset quality and expenses management while external factors include Gross Domestic Product (GDP), inflation, money supply and competition. This study follows an extensive literature that focuses on internal as well as external factors as main determinants of banks’ profitability.

Significance of the Study

In this study, we examine a series of variables by introducing internal and external factors that may significantly affect the Islamic banks’ profitability. The study can

be used as a reference for Islamic banks to focus and control over the variables that bring negative effects to its profitability.

The finding from this study is beneficial to many parties such as the management, Policy maker, Regulators and Academic. The study contributes to the more understanding of the factors that influence Islamic banks? performance. This study of comparison is useful in providing valuable information to relevant parties, such as bank customers, bank management and bank regulators in constructing an efficient management policy decision for Islamic banks to gain higher profits. This research also contributes to the relationship between Islamic banks? performance and Islamic financial development as a whole. .

In the last four decades, many studies have been conducted to investigate the profitability determinants of conventional banks. Alkasim, F.A. (2005),Bashir, A.M. (2003) and Bashir, A&Hassan, M. (2004) have been conducted to determine the profitability of Islamic banks. Hence, this study provides a significant additional evidence to postulate some profitability theories related to Islamic banking.

 

Organization of the Study

This study is divided into five (5) chapters; the first chapter consists a brief review of introduction about Islamic banking in Zanzibar, background of the research problem, that is a brief explanation of the topic being studied, problem statement consisting of the contracts in Islamic banking, specific objectives, research questions, general objectives, significance of the study and the organization of the study.

 

The proceeding chapters can be arranged as follows; Chapter two (2) holds an explanation and presents both the theoretical and Empirical literature review together with conceptual framework.

 

Chapter three (3) presents the details of procedures and methodology used. The chapter includes type of research, study area, research design, data sources and collection methods, study population, data analysis, model specification, variables and measurements as well as statistical approach which can be used.

 

Chapter four (4) entails the presentation of research findings and discussion that is a critical assessment of what has been found.

 

Lastly, chapter five (5) gives a summary, conclusion and key contribution which will be made by this study. It is also provide the recommendations, policy implications, limitations and highlights the area for further study in the Islamic banking.

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