The Impact of Capital Structure on Islamic Bank's Profitability Evidence From the Top Islamic Finance Countries for the Period 2003-2022.

Abstract

The main objective of this study is to examine the impact of capital structure on the profitability of Islamic banks, focusing on the top Islamic finance countries: Indonesia, Malaysia, Saudi Arabia, the United Arab Emirates, and Qatar, using annual data over a period of 20 years from 2003 to 2022. The study employs three profitability metrics: Return on Assets (ROA), Return on Equity (ROE), and Net Profit Margin (NPM), while the capital structure is measured by the equity-to-total assets ratio (ETA) and the deposits-to-total assets ratio (DTA). Utilizing panel data regression models, the relationships between these variables are analyzed. Overall, the empirical results indicate that a higher equity ratio (ETA) has a positive and significant impact on the profitability of Islamic banks, as measured by ROA, ROE, and NPM. In contrast, the deposits-to-total assets ratio (DTA) shows a less consistent influence on profitability. These findings suggest that well-capitalized Islamic banks with higher equity levels perform better. The results provide critical insights for policymakers, bank managers, and investors in the Islamic finance sector, highlighting the importance of optimizing capital structures to enhance financial performance while adhering to Shariah principles.