Impact of Nominal Gdp and Inflation on Financial Performance of Islamic Banks in Pakistan

Impact of Nominal GDP and Inflation on financial performance of Islamic Banks in Pakistan

Abstract

The purpose of this paper is to assess the financial performance of non-conventional (Islamic Banks) in Pakistan. Financial performance of Islamic banks is measured through using ratio analysis. Profitability, Liquidity and Credit risk ratios are used to assess the financial performance. It also includes the impact of nominal GDP and inflation on profitability, credit risk and liquidity during the period of four years from 2007 to 2012. Regression analysis are used to observe the impact of Nominal Gross Domestic Product on variables. Analysis shows that GDP has significant impact on ROAA, EQTL (equity to Loans) and liquidity ratio. Log-Linear regression model between inflation and Nominal Gross domestic product shows that nominal gross domestic product has positive and significant impact on Return on average assets and Equity to loan  and liquidity ratio.  And inflation rate shows negative impact on Return on average asset and Return on average equity. Inflations rates do not effect profitability ratio. Results of this paper are limited to time series from 2007 to 2012.

Keywords: Financial Performance, Nominal gross domestic Product (GDP), Islamic Banking institutions, credit risk, liquidity.

Introduction:

No doubt banking is a developed industry in most of the countries. Now economies of countries are based on a flourished banking system. But in Islamic countries people are reluctant to invest in banks and other financial institutions due to their religious believes because there is an element of interest in most of the banking transactions which is totally prohibited in Islam. Therefore non-conventional banking system isn’t able to get that much success in Islamic countries as it get in other non-Muslim countries. Therefore Islamic banking is introduced in Muslim countries.

Over the last few year Islamic banking is developing as one of the most vibrant industry in Pakistan. State Bank of Pakistan has issued shariah compliance for the help of conventional and non-conventional banks in the country. With the help of shariah compliance now banks are enable to do banking with according to the teachings of Islam. Now non-Islamic banks are also providing Islamic banking services for their customers.

In the very early stage Islamic banking industry provide Muslims to avail banking services which are according to Islamic teachings and not prohibited in Islam. Through the introduction of Islamic banking there’s a revival in the true spirit of Islam which helps in human in each aspect of their life, Due to the Islamic banking now banking industry is flourishing in Pakistan and in other Muslim countries. The model of this industry (Islamic banking) is actually taken from the Malaysian Islamic banks who introduced the Islamic banking for the very first time.