A dissertation of the Requirements for Masters of Science in Accounting and Finance of Mzumbe University
The aim of this study was to determine the determinants of the profitability of Islamic banks in Zanzibar as measured by return on assets (ROA).
Nine variables were drawn from the Islamic banking literatures which were divided into internal and external (macroeconomic) variables. The internal variables were capital, bank size, liquidity, and asset quality and expenses management while external variables were Gross Domestic (GDP), Inflation, Money Supply and Competition. Secondary data was collected from 3 Islamic banks in Zanzibar from year 2008 to 2012.
Financial ratios technique was applied to calculate on these variables and Ordinary Least Square (OLS) and Generalized Least Square (GLS) was used to run the regression model using STATA econometric software.
The estimation result showed that expenses management, money supply and Competition were significant in determining the Islamic banks profitability. In terms of expenses management which has a significant positive relationship with the profitability of Islamic banks, this can lead the Islamic banks to find opportunity for company to search for good quality’s employees. Other than that, banks should also regulate policy and manage the maximum expenses in each department, so that it helps to reduce the cost of banks and maximize the profitability of Islamic banks.
In terms of money supply, the policy maker should consider the possibility of increasing the money supply when Islamic banking industries is having recession problem, this may help Islamic banks to have more opportunities to improve profit by increasing their financing activities. On the other hand Competition which is negatively related to profitability of Islamic bank. Islamic bank should enhance their competitive advantages in order to maximize their profitability.
Finally, for future studies, it is recommended to use more than one dependent variable, instead of using return on assets than to use return on equity is better, also more sample size and determinant factors can be included in determining the effects on bank profitability as the Islamic banks in Zanzibar will expected to be increased.