Maturity transformation risk and profitability of Islamic banks – An international evidence

Abstract

This study aims to analyze the impact of IFSBs' proposed new structural measure of liquidity on financial performance of Islamic banking sector. We apply a 2-step system GMM technique for the period covering 2006 -2015. We demonstrate that profitability persists and there exists a significant and negative relationship between maturity transformation risk and Islamic banks' profitability. Our findings reveal that the inclusion of NSFR leads to a better financial performance of Islamic banks, thus providing support for the adoption of new liquidity regulation. In addition, we find bank capital, market concentration and gross domestic product as significant contributors to the increased profitability of Islamic banks. Whereas, bank size, management efficiency, asset quality and inflation are the restraints to the Islamic banks' profitability. Our results remain consistent after applying for alternative profitability measure and estimation technique.