Profitability Determinants of Islamic Banking in Sri Lanka

Abstract

AttachedAmana Investments was established in 1997 as the first Islamic bank in Sri Lanka. Islamic Finance is ShaJ1a compliant finance because and is based on the teachings in the Holy Quran and sacred scripture of the religion of Islam. The sim of this research is to froyjde an overview on the Islamic Finance Industry of Sri Lanka by identifYing the tsctors that affect the profitabi1ity of the industry: The profitabi1ity of Islamic banks is measured by three dimensions, ie. return on assets, and return on equj{y, earnings per share. Internal explsnstoty van"ables include bank size, gearing ratio, asset msnsgemem; deposit ratio, non-perfonning loans ratio, asset composition, capital adequacy rata and operating efficiency, whereas external explanatory variables include gross domestic product (GDP) and consumer price index (CP!). Since Islamic Banking is a relatively new industry within Sri Lanka, there is a high potential to make profits by considering the components of the ratios used as independent variables in the study. Although some components indicated to be protkebk, the risk associated with those variables and the other mctors such as liquidity and proDtability also have to be considered. Results were sin1l7ar to the other researches done for other couatries