The internal factors of Islamic banking
Introduction to the Subject
Background of the Subject
The purpose of this study is to examine how the internal factors of the Islamic Banking affected their performance before, during and after the financial crisis in the GCC in comparison to the conventional banking in the same area.
This study aims to answer the following questions:
How did the financial crisis affect the profitability of Islamic Banks in comparison to Conventional Banks?
What are the internal factors (bank specific characteristics) that influence the profitability of Islamic banking for every year from 2006 – 2009?
Did these factors have the same impact on the profitability of Islamic Banking before, during and after the financial crisis?
Did these internal factors influence the profitability of Islamic Banking in the same manner as of the Conventional Banking?
Need for the Study
Significance of the Study
Assumptions of the Study
Limitations of the Study
Although we cannot neglect the importance of the external factors on the profitability of Islamic Banking, they were not included in this study. To understand the reason behind this decision, we need to go through the different types of external factors and how they are classified:
Country Regulation Rules
Bank Regulation Rules
These factors were not included for the following reasons:
Since we are examining the performance of 92 banks (27 Islamic Banks and 65 Conventional Banks) in 6 countries, the number of countries used in the study is not significant enough to study the impact of GDP and inflation accurately on Bank profitability especially when examining each year separately
Country Regulation Rules as per the IMF Database, although it differs slightly for the selected countries, did not change over the period from 2006 to 2009. This means that for each bank, these factors remained constant.
Data about Bank Regulation Rules could not be obtained for GCC banks
Delimitation of the Study
This study was delaminated to the Islamic and Conventional Banks in the GCC whose data could be obtained in the Bankscope database.
Chapter 2: Literature Review
Overview of Islamic Banking
Islamic Baking has established as an alternative to conventional interest-based banking. The first stirring of the Islamic Banking movement began in 1963 by Dr. Ahmed Alnajar in a small town in Egypt, called Mit Ghamar. Dr. Alnajar completed his education in Germany and found that it had many saving banks operating on interest. He took the idea from a savings bank in Germany and created his own small Islamic bank that was interest free.
After Dr. Alnajar’s small bank proved successful, the establishment of other Islamic banks followed. In 1971, the Nasser Social Bank was founded in Egypt with the objective of lending out money as a charity on the basis of a profit and loss sharing system and helping people in need. And in 1975, the idea of Islamic banking spread to other Islamic regions such Dubai Islamic bank in United Arab Emirates and The Islamic Development (IDB) Bank in Jeddah, Saudi Arabia (Wilson, 1990).
Even though Islamic Banking has only been around for thirty years and is still in an evolving stage, Islamic Banking is the fastest growing segment of the credit markets in the Muslim countries. In 2009, Assets held by Islamic Banking banks rose by 28.6 percent to $822bn from $639bn in 2008, according to The Banker’s “Top 500 Islamic Financial Institutions” survey while conventional banks posted annual asset growth of just 6.8 percent.
Furthermore, GCC states accounted for $353.2bn or 42.9 percent of the global aggregate, while Iran remained the largest single market for Shariah-compliant assets, accounting for 35.6 percent of the total.
Source: Asian Banker Research, 2009
Finally, Islamic banking operations are not limited to Islamic countries but are spreading throughout the world. One reason is the "growing trend toward transcending national boundaries, and unifying Muslims into a political and economic entity that could have a significant impact on the pattern of world trade" (Abdel-Magid, 1981).
Islamic Banking Rules and Principles
Islamic banking rules are according to the Islamic Shariah derived from the Quran and prophet Mohamed’s sayings. The three main practices that are clearly prohibited in the Quran and the prophet’s sayings are, Riba (Interest), Gharar (Uncertainty), and Maysir (Betting).
Prohibition of Riba or any predetermined or fixed rate in financial institutions is the most important factor in the Islamic principles pertaining to banking. As stated in the Quran “Allah forbids riba”. Riba means an increase and under Shariah the term refers to the premium that must be paid by the borrower to the lender along with the principle amount as a condition for the loan (Omar and Abdel, 1996).
Gharar occurs when the purchaser does not know what has been bought and the seller does not know what has been sold. In other words, trading should be clear by stating in a contract the existing actual object(s) to be sold, with a price and time to eliminate confusion and uncertainty between the buyers and the sellers.
Maisir is considered in Islam as one form of injustice in the appropriation of others’ wealth. The act of gambling, sometimes referred to betting on the occurrence of a future event, is prohibited and no reward accrues for the employment of spending of wealth that an individual may gain through means of gambling. Under this prohibition, any contract entered into, should be free from uncertainty, risk and speculation. Contracting parties should have perfect knowledge of the counter values intended to be exchanged as a result of their transactions.
Therefore, and according to Ahmed and Hassan (2007), the principles of Islamic banking and finance enshrined from al-Qur’an and Prophet Mohamed‘s Sayings can be summed up as follows:
Any predetermined payment over and above the actual amount of principal is prohibited.
The lender must share in the profits or losses arising out of the enterprise for which the money was lent.
Making money from money is not acceptable in Islam.
Gharar (deception) and Maisir (gambling) are also prohibited.
Investments should only support practices or products that are not forbidden or even discouraged by Islam.
Islamic Banking Products
Islamic Banking products have to be done according to Islamic rules and principles, based on profit and loss sharing as well as avoiding interest. According to BNM statistics 2007, Al Bai Bithaman Ajil financing is the most common in Islamic Banking. There are a lot of Islamic Banking products; however there are some famous Islamic products that will be discussed in this section.
Al Bai Bithaman Ajil /BBA
This involves the credit sale of goods on a deferred payment basis. In BAA, the Islamic bank will purchase certain assets on a deferred payment basis and then sell the goods back to the customer at an agreed price including some margin or profit. The customer will make payment by installments over an agreed period. A fixed rate BBA is a powerful hedging tool against interest rates (Rosly, 1999).
Murabahah is a contract of sale. The Islamic Bank acts as a middle man and purchases the goods requested by the customer. The bank will later sell the goods to the customer in a sale and purchase agreement, whereby the lender re-sales to the borrower at a higher price agreed on by both parties. These are more for short term financing
According to Kettel (2006), Mudharabah is a basic principle of profit and loss, where instead of lending money at a fixed rate return, the banker forms a partnership with the borrower, thereby sharing in a venture’s profit and loss. Mudharabah is an agreement between the lender and entrepreneur, whereby the lender agrees to finance the project on a profit sharing basis according to a predetermined ratio agreed by both parties concerned. If there are any losses the lender will bear all the losses.
Musharakah means partnership whereby the Islamic institution provides the capital needed by the customer with the understanding that they both share the profit and loss according to a formula agreed before the business transaction is transacted. In Musharakah all partners are entitled to participate in the management of the investment but it is not compulsory. Musharakah can help in providing financing for large investments in modern economic activities
Ijarah means meaning to give something on a rental basis. In Ijarah, the bank acquires ownership based on the promise and leases back to the client for a given period. The customer pays the rental but the ownership still remains with the bank or lender. As the ownership remains with the lessor (bank), it continues to give the service for which it was rented. Under this contract, the lessor has the right to re-negotiate the quantum of the lease payment at every agreed interval to ensure rental remains in line with the market rates (Hume, 2004).
Wadiah is a trust contract and the bank provides gift (hibah) and various types of benefits to the customer. This is exactly like a normal conventional savings account.
Istisna allows one party buys the goods and the other party undertakes to manufacture them according to agreed specifications. Normally, Istisna is used to finance construction and manufacturing projects.
Salam is defined as the forward purchase of specified goods with full forward payment. This contract is normally used for financing agricultural production. According to Hassan (2004), Salam based future contracts for agricultural commodities, supported by Islamic Banks, can help to overcome the agricultural financial problems
Table 2.1 lists the products of conventional banking and their correspondent products in Islamic Banking.
Wadiah Wad Dhamana / Qard Hasan
Wadiah Wad Dhamana / Mudaraba
General Investment deposit
Special Investment deposit
Retail / Consumer Banking
Housing & Property Finance
BBA / Ijara wa Iktina /Diminishing Musharaka
Ijara Thumma Al-Bai
BBA / Mudaraba / Musharaka
Working Capital Financing
Murabahah/ Bai Al-Einah/ Tawarruq
Bai Al-Einah/ Tawarruq
Corporate Banking/ Trade Finance
Mudaraba / Musharaka / BBA / Istisna / Ijara
Letter of Credit
Musharaka/ Wakala/ Murabaha
Diminishing Mudaraba/ Musharaka
Musharaka + Murabaha/ Istisna / Ijara
Short-term Cash Advance
Bai Al-Einah/ Tawarruq
Working Capital Finance
Murabaha/ Salam/ Istijrar
Letter of Credit
Letter of Guarantee
Kafala + Ujr
Export/ Import Finance
Musharaka/ Salam/ Murabaha
Work-in-Progress, Construction Finance
Underwriting, Advisory Services
Treasury / Money Market Investment Products
Sell & buy-back agreements
Mudaraba / Mushraka + BBA / Istisna / Ijara
Government Investment Issues
Qard Hasan/ Salam/ Mudaraba
Other Products & Services
Murabaha/ Wakala/ Joala
Funds Transfer (Domestic & Foreign)
Safe-Keeping & Collection (Negotiable Instruments)
Wakala/ Joala/ Bai al-Dayn
Administration of Property, Estates and Wills
Hiring of Strong Boxes
Demand Draft, Traveller’s Cheques
ATM Service, Standing Instruction, Telebanking
Source: Obaidullah, 2005
Financial Crisis and the Islamic Banking
The study of bank profitability is an important tool to evaluate bank operation by examining the different factors affecting bank profitability and using these factors for management planning and strategic analysis. In the last four decades, many studies have been conducted to study both bank profitability and the determinants of bank profitability either for particular country or for a panel of countries. These studies normally divide these factors into internal factors and external factors. Internal factors represent the bank-specific characteristics such as bank size, liquidity structure; liabilities…etc while external factors can be macroeconomic factors such as inflation and GDP growth or Country-specific regulations rules and practices.
In the area of banking profitability, many studies have been conducted to investigate the profitability of conventional banks while only few were conducted in the field of Islamic banking. In this chapter, we will review these studies for conventional banking first and then will focus on studies in the Islamic banking field. Then we will cover the conceptual framework of this research.
Different studies have been conducted in the field of conventional banking profitability. Short (1979), Bourke (1989), Molyneux and Thornton (1992), Goddard, Molyneux, and Wilson (2004), Peters et al. (2004) are some of the researchers in the field.
Short (1979) is one of the early scholars who studied the relationship between banking profit rates and concentration for sixty banks in Canada, Western Europe and Japan during the 1970’s and he included independent variables including government ownership and concentration by using H index to quantify concentration. Results showed that the government ownership impact on profitability varied throughout the countries studied but expressed an overall negative relationship. He also found evidence that indicated higher concentration rates lead to higher profit rates (Short, 1979).
Bourke (1989) also compared concentration to bank profitability but included other determinants. Bourke (1989) covered ninety banks in Australia, Europe, and North America between 1972 and 198 and examined different internal and external factors: internal factors such as staff expenses, capital ratio, liquidity ratio, and loans to deposit ratio; external factors such as regulation, size of economies of scale, competition, concentration, growth in market, interest rate, government ownership, and market power. His results show that increase in government ownership leads to lower profitability in banking. He also found that concentration, interest rates, and money supply are positively related to profitability along with capital and reserves of total assets as well as cash and bank deposits of total assets. Bourke adds that well capitalized banks enjoy cheaper access to sources of funds as they are less risky than less capitalized banks (Bourke, 1989).
Later, Molyneux and Thornton (1992) studied the determinants of European banks profitability. The paper examined eighteen counties in Europe between 1986 and 1989. This paper replicated Bourke’s (1989) work by using internal and external determinants of bank profitability. However, Molyneux and Thornton (1992) results showed that government ownership expresses a positive coefficient with return on capital (profitability) which contradicts with Bourke’s findings. Other results were similar to Bourke’s, showing that concentration, interest rate, and money supply were positively related to bank profitability (Molyneux and Thornton, 1992).
In one of the recent papers on bank profitability on European banks, Goddard, Molyneux, and Wilson (2004) shows similar findings to the paper by Molyneux and Thornton (1992). It investigates the determinants of profitability in six European countries and it covered 665 banks between 1992 and 1998. The study used cross-sectional and dynamic panel models. The variables used in the regression analysis were ROE, the logarithmic of total assets, Off Balance Sheet (OBS) dividends, Capital to Asset Ratio (CAR). The results from both models were similar: evidence reveals that there is a positive relationship between size (total assets) and profitability. Meanwhile, OBS appears to have a positive relationship with profitability for UK but neutral or negative for other European countries. Moreover, results also state that CAR has a positive relationship with profitability. Furthermore, the paper touched on ownership type by indicating that there is high competition in banking due to the fact that there is foreign bank involvement in domestic banks, and that profitability is not linked to ownership (Goddard, Molyneux, and Wilson, 2004).
Peters et al. (2004) studied the characteristics of banks in post-war Lebanon for the years 1993 to 2000 and compared the results to a group of banks from five other countries in the Middle East including UAE, KSA, Kuwait, Bahrain and Oman for the years 1995 through 1999. They used Return on Equity (ROE) measure profitability and leverage and they employed regression models that relate bank profitability ratios to various explanatory variables. This study tests the relationships between bank profitability and size, asset portfolio composition, off-balance sheet items, ownership by a foreign bank, and the ratio of employment to assets. The results show a strong association between economic growth and bank profitability, whether measured by ROE or ROA. They found that Lebanese banks are profitable, but not as profitable as a control group of banks from five other countries located in the Middle East.
In the area of Islamic Banking, Bashir (2000) assessed the performance of Islamic banks in eight Middle Eastern countries. He analyzed important bank characteristics that affect the performance of Islamic banks by controlling economic and financial structure measures. The paper studied fourteen Islamic banks from Bahrain, Egypt, Jordan, Kuwait, Qatar, Sudan, Turkey, and United Arab Emirates between 1993 and 1998. To examining profitability, the paper used Non Interest Margin (NIM), Before Tax Profit (BTP), Return on Assets (ROA), and Return on Equity (ROE) as performance indicators. There were also internal and external variables: internal variables were bank size, leverage, loans, short-term funding, overhead, and ownership; external variables included macroeconomic environment, regulation, and financial market. In general, results from the study confirm previous findings and show that Islamic banks profitability is positively related to equity and loans. Consequently, if loans and equity are high, Islamic banks should be more profitable. If leverage is high and loan to assets is also large, Islamic banks will be more profitable. The results also indicate that favorable macro-economic conditions help profitability (Bashir, 2000).
Hassoune (2002) examined Islamic bank profitability in an interest rate cycle. In his paper, compared ROE and ROA Volatility for both Islamic and conventional banks in three GCC region, Kuwait, Saudi Arabia, and Qatar. He states that since Islamic banking is based on profit and loss sharing, managements have to generate sufficient returns for investors given that they are not willing accept no returns (Hassoune, 2002).
Bashir and Hassan (2004) studied the determinants of Islamic banking profitability covers 43 Islamic Banks between 1994 and 2001 in 21 countries. Their figures show Islamic banks to have a better capital asset ratio compared to commercial banks which means that Islamic banks are well capitalized. Also, their paper used internal and external banks characteristics to determine profitability as well as economic measures, financial structure variables, and country variables. They used, Net-non Interest Margin (NIM), which is non interest income to the bank such as, bank fees, service charges and foreign exchange to identify profitability. Other profitability indicators adopted were Before Tax Profit divided by total assets (BTP/TA), Return on Assets (ROA), and Return on Equity (ROE).
Results obtained by Bashir and Hassan (2004), were similar to the Bashir (2000) results, which found a positive relationship between capital and profitability but a negative relationship between loans and profitability. Bashir and Hassan also found total assets to have a negative relationship with profitability which amazingly means that smaller banks are more profitable. In addition, during an economic boom, banks profitability seems to improve because there are fewer nonperforming loans. Inflation, on the other hand, does not have any effect on Islamic bank profitability. Finally, results also indicate that overhead expenses for Islamic banks have a positive relation with profitability which means if expenses increase, profitability also increases (Bashir and Hassan, 2004).
Alkassim (2005) examined the determinants of profitability in the banking sector of the GCC countries and found that asset have a negative impact on profitability of conventional banks but have a positive impact on profitability of Islamic banks. They also observed that positive impact on profitability for conventional but have a negative impact for Islamic banking. Liu and Hung (2006) examined the relationship between service quality and long-term profitability of Taiwan’s banks and found a positive link between branch number and long-term profitability and also proved that average salaries are detrimental to banks’ profit.
Masood, Aktan and Chaudhary (2009) studied the co-integration and causal relationship between Return on Equity and Return on Assets for 12 banks in KSA for the period between 1999- 2007. For their research, the used time series model of ADF unit-root test, Johansen co-integration test, Granger causality test and graphical comparison model. They found that there are stable long run relationships between the two variables and that it is only a one-direction cause-effect relationship between ROE and ROA. The results show that ROE is a granger cause to ROA but ROA is not a granger cause to ROE that is ROE can affect ROA input but ROA does not affect the ROE in the Saudi Arabian Banking sector.
Theoretical framework is a basic conceptual structure organized around a theory. It defines the kinds of variables that are going to be used in the analysis. In this research, the theoretical framework consists of seven independent variables that represent four aspects of the Bank Characteristics. Theses aspects are the Bank Size (Total Assets), Capital Structure (Equity and Tangible Equity), Liquidity (Loans and Liquid Assets) and Liabilities (Deposits and Overheads). Bank profitability is the dependent variable and two measures of bank profitability are used in this study, namely return on average equity (ROAE) and return on average assets (ROAA).
Internal Factors (Bank-Specific)
Islamic Banking Profitability
H1: Bank Size
H2, H3: Capital Structure
H4, H5: Liquidities
H6, H7: Liabilities
Return on Average Assets (ROAA)
Return on Average Equity (ROAE)
In this section we develop the hypothesis to be examined in this research paper.
Development of Hypotheses
This paper attempts to test seven hypotheses. A hypothesis is a claim or assumption about the value of a population parameter. It consists either of a suggested explanation for a phenomenon or of a reasoned proposal suggesting a possible correlation between multiple phenomena. According to Becker (1995), hypothesis testing is the process of judging which of two contradictory statements is correct.
Hypothesis 1: Profitability has a positive and significant relationship with the total assets (ASSETS).
Total Assets of a company represents its valuables including both tangible assets such as equipments and properties along with its intangible assets such as goodwill and patent. For banks, total assets include loans which are the basis for bank operations either through interest or interest-free practices. Total assets is used as a tool to measure the bank size; banks with higher total assets indicate bigger banks. Molyneux and el (2004) included total assets in their study and found a positive significant relationship between total assets and profitability. Therefore, total assets are expected to have positive relation with profitability which means that bigger banks are expected to be more profitable. Total assets are converted logarithmic to be more consistent with the other ratios
Hypothesis 2: Profitability has a positive and significant relationship with equity to asset ratio (EQUITY).
Total equity over total assets measures bank’s capital structure and adequate. It indicated bank ability to withstand losses and handle risk exposure with shareholders. Hassan and Bashir (2004) examined the relationship between EQUITY and bank profitability and found positive relationship. Therefore, EQUITY is included in this study and it is expected to have a positive relation with performance because well capitalized banks are less risky and more profitable (Bourke, 1989)
Hypothesis 3: Profitability has a positive and significant relationship with Tangible Equity to total liabilities ratio (TNGEQTY).
Tangible Equity represents the subset of shareholder’s equity that is not common shares and not intangible asset. Tangible Equity became very popular after the financial crisis as a measure of bank viability since it indicates of how much ownership equity owners of common stock would receive in the event of a company’s liquidation. Beltratti and Stulz (2009) examined tangible equity to liabilities in their study to examine why some banks perform better during the financial crisis and found positive and insignificant relationship between TNEQTY and bank profitability. Therefore, TNEQTY is included in this study and it is expected to have positive relationship since banks with better capital structure - in since of more equity – seems to perform better.
Hypothesis 4: Profitability has a positive and significant relationship with the loans to assets ratio (LOANS).
Total loans over total assets a liquidity ratio used that indicates how much of bank assets are tied to loans. For banks, the higher LOANS ratio means less liquidity. Demirguc-Kunt and Huizinga, (1997) found positive relationship between LOANS and bank profitability. LOANS is included in this study and anticipated to have positive relationship with profitability. Furthermore, conventional banks rely on interest-based loans while Islamic banks rely on profit and loss sharing interest-free lending. Therefore, this ratio is also used to compare the performance of interest-based loans and interest-free lending.
Hypothesis 5: Profitability has a positive and significant relationship with the liquid assets to total assets ratio (LIQUID).
Liquid assets include currency, deposit accounts, and negotiable instruments that can be converted easily into cash. Liquid assets to total assets ratio is a liquidity ratio that measure how easily the banks’ assets can be converted into cash. Beltratti and Stulz (2009) found that LIQUID has positive and significant relation with profitability as banks with more liquid assets tend to perform better. Therefore, LIQUID is included in this study and expected to have positive relationship with profitability.
Hypothesis 6: Profitability has a reverse and significant relationship with the deposits to assets ratio (DEPOSITS).
Deposits to total ratio is another liquidity indicator but is considered a liability since they measure the impact of liabilities on profitability. Bashir and Hassan (2004) examined deposits in their study and found a negative relationship with profitability. Therefore, we expect that DEPOSITS to have negative relationship with profitability.
Hypothesis 7: Profitability has a positive and significant relationship with the overhead to assets ratio (OVERHEAD).
Overhead costs represent all bank expenses excluding interest expenses as they are considered as operations expenses. Overhead over total assets is a liability ratio that measures the operation efficiency of the bank. Alkassim (2005) included OVERHEAD in his research and found positive relationship to profitability. Therefore, OVERHEAD is included in this study and expected to have positive relationship to profitability.
Chapter 3: Methods
From 2006 to 2008
The data used in this analysis were extracted from Bankscope data for all Islamic and Conventional Banks in the GCC for the period from 2006 to 2009.
Using Bankscope has many advantages: it has information for over 30,000 banks, plus the accounting information is presented in a standardized format. Therefore, the accounting information of Islamic Banking is adjusted to be comparable with accounting information of conventional banks.
The data used for this study are from a pooled time-series cross-sectional data. The data are taken from various countries. Sample period for this study is from 2002 to 2007. Cross-sectional data provide information on variables for a given period of time. While time series data give information about variables over a number of periods of time.
The data for internal variables are obtained from BankScope database which is compiled by International Bank Credit Analysis Limited (IBCA). Using BankScope has two advantages. Firstly, it has information for 11,000 banks, accounting for about 90% of total assets in each country. Secondly, the accounting information at the bank level is presented in standardized formats, after adjustments for differences in accounting and reporting standards. The data for external variables are obtained from World Economic Outlook 2008 database, published by International Monetary Fund (IMF).
A total of 60 Islamic banks from 18 countries were chosen in this study. The selected banks are those which are classified as Islamic bank in BankScope database. The Islamic banks have available data for at least one year between 2002 and 2007. This yielded an unbalanced panel data consisting of 260 observations. However, after eliminating cases with missing data, only 155 observations of balanced panel data are left.
Independent Variable: Profitability Measures
There are many ratios that have been used by researchers to measure bank profitability but the two most often used ratios are the return on assets (ROA) and the return on equity (ROE) (Iqbal et al., 2005).
Return on Assets (ROA)
Return of Assets ROA of a bank is the net after-tax income divided by its total assets (Rose, 2002). The return on assets (ROA) is the most important single ratio in comparing the efficiency and operating performance of banks since it indicates the return generated from the assets financed by the bank. Average assets are being used in this study, in order to capture any differences that occurred in assets during the fiscal year.
Return on Equity (ROE)
ROE is the ratio of a bank’s net after-tax income divided by its total equity capital (Rose, 2002). The return on equity (ROE) indicates how effectively the management of the enterprise (bank) is able to turn shareholders‟ funds (i.e. equity) into net profit. It is the rate of return flowing to the bank‟s shareholders (Samad, 1999). The higher ROA and ROE reflect higher managerial efficiency of the bank and vice versa.
Independent Variables: Internal Factors
The table below summarizes the variables used in this study:
Return on Assets
Net Income / Total Assets
Return on Equity
Net Income / Equity
Log (Total Assets)
Equity / Total Assets
Tangible Equity / Total Liabilities
Loans / Total Assets
Liquid Assets / Total Assets
Deposits / Total Assets
Overhead Costs / Total Assets
In line will the previous literature, Multiple Regression Equation will be used to examine the determinants of profitability in the Islamic Banking and compare the results with those of the conventional banking:
Model 1 - ROA
ROA = α1 + β1 ASSET + β2 EQUITY + β3 TNGEQTY + β4 LOANS + β5 LIQUID +β6 DEPOSITS + β7 OVERHEAD + ε
Model 2 - ROE
ROE = α2 + β1 ASSET + β2 EQUITY + β3 TNGEQTY + β4 LOANS + β5 LIQUID +β6 DEPOSITS + β7 OVERHEAD + ε
ROA: Return on Assets
ROE Return on Equity
ASSETS: log (Total Assets)
EQUITY: Equity / Total Assets
TNGEQTY: Tangible Equity / Total Liabilities
LOANS: Loans / Total Assets
LIQUID: Liquid Assets / Total Assets
DEPOSITS: Deposits / Total Assets
OVERHEAD: Overhead Costs / Total Assets