Determining the variables affecting financial performance of participation banks: An application on developing and emerging countries

The history of banks, the most important institutions of the financial system, dates back to ancient times. Conventional banks collecting deposits and providing loans to people in need for interest are the most prominent banks. In the last fifty years, a new type of banking called interest-free banking has begun to develop which prohibits all kinds of interest-based transactions in its financial activities. In recent years, these banks called Islamic bank in the world began to develop rapidly especially in the MENA region and Asian countries where Muslim population inhabits densely are operating as participation banks in Turkey. Although there are many studies on financial performance of conventional banks in the literature, studies on financial performance of participation banks are relatively limited. In this study conducted to investigate the factors affecting the financial performance of participation banks, firstly concepts of financial system and financial institution are emphasized. The development process of Islamic finance in the world, the current outlook of Islamic finance in the world and the principles of participation banking and the mechanism of operating are explained. In addition, a large literature study on the subject was conducted. In the study, panel data analysis method was applied on the data set covering the period of 2008-2018 of 46 participation banks from 14 countries operating as commercial banks in the world. As the performance criteria, return on assets (ROA) and return on equity (ROE) were examined by panel data analysis method. As a result of empirical studies, the efficiency ratio (EFF), defined as the ratio of non-profit share expenses to operating income and the ratio of loan loss provision to average net loans (LLP), which are internal variables from bank-specific variables, affect both ROA and ROE statistically significant and negative, the ratio of non-profit share income to the sum of pre-tax income and dividend expenses (DIV), on the other hand, affected both ROA and ROE in a statistically significant and positive. While the capital adequacy (CAP), defined as the ratio of equity to total assets and the ratio of loans to deposits (LD) had significant and positive effect on ROA, they had statistically significant and negative effect on ROE. Bank size (SIZE), which is defined as the natural logarithm of total assets, had no statistically significant effect on bank performance. While inflation rate (INF), one of the macroeconomic variables, affected both ROA and ROE statistically significant and positive, annual real growth rate (GDP) did not have a significant effect on bank performance.