Profitability and Competition Determinants of Islamic and Conventional Banks: the case of QISMUT+3

The aim of this study is to assert profitability and competition determinants of Islamic and Conventional banks operating in top nine Islamic Finance oriented countries that are named as QISMUT+3 (Qatar, Indonesia, Saudi Arabia, Malaysia, UAE, Turkey, Bahrain, Kuwait and Pakistan). For this purpose, it uses bank specific, market structure, and macroeconomic variables that are utilized from Orbis Bank Focus and World Bank database. In addition to static models, to capture endogeneity problem and unobserved heterogeneity, a dynamic approach is used by employing system GMM estimation. The major findings of the study show higher profit persistency of Islamic banks (IBs) than conventional banks (CBs). The results also suggest that profitability determinants of IBs and CBs are different. Concerning the risk behavior, bank capitalization and credit risk variables are more important for CBs. Credit risk enhances the degree of competition in both types of banks. The size is matter only in Islamic banks, and it is in line with efficient structure hypothesis. Liquidity management reduces the competitiveness of conventional banks. IBs outperform CBs in terms of competitiveness. Crisis results attribute better resilience to Islamic banks. Keywords: Profitability, Competition, Islamic Banking, QISMUT+3, Conventional Banking, Service Industry.