




































INDIAN JOURNAL OF FINANCE AND BANKING 9(1) (2022), 203-212 

 

203 

 

 

                   FINANCE AND BANKING 

                                                                    IJFB VOL 9 NO 1 (2022) P-ISSN 2574-6081  E-ISSN 2574-609X 
                                                  

       Available online at https://www.cribfb.com 

                                                                                                                                           Journal homepage: https://www.cribfb.com/journal/index.php/ijfb 

                                                                                                                                                                                                   Published by CRIBFB, USA 

THE IMPACT OF CAPITAL STRUCTURE ON ISLAMIC BANKS 

PROFITABILITY: EVIDENCE FROM GCC COUNTRIES   
 

 Larabi Moustapha (a)1  Roucham Benziane (b) 
 

(a) Associate Professor, Faculty of Economics and Management, Bechar University, Algeria; E-mail: larabi.moustafa@univ-bechar.dz 
(b) Associate Professor, Faculty of Economics and Management, Bechar University, Algeria; E-mail: roucham.benziane@univ-bechar.dz 
 

 
A R T I C L E I N F O 

 
 

Article History: 
 

Received: 23 January 2022  

Accepted: 24 March 2022 

Online Publication: 27 March 2022 

 
Keywords: 

 

Capital Structure, Profitability  

Islamic Banks, GCC Countries  

Panel Data 

 
JEL Classification Codes: 

 

G32, L25, G21, C23, C33  

   

 

 
A B S T R A C T 

 
This paper aims to reveal the relationship between capital structure variables and the Profitability of 

Islamic banks. The examination has been performed using panel data for a sample of 05 Islamic banks 

operating in the Gulf Cooperation Council GCC countries (2010-2020). Capital Structure is measured 

by Deposit to Total Assets (DTA) and Equity to Total Assets (ETA) ratio. In contrast, return measures 

Profitability on Assets (ROA), Return on Equity (ROE), and Net Profit Margin (NPM). Data collected 

were analyzed by using E-Views10 software. The research results indicate that the ETA ratio has a 

positive and significant relationship with ROA. Whereas, The Deposit to Total Assets (DTA ratio) has 
no significant relationship with Return on asset (ROA). There is an insignificant relationship between 

(ETA ratio, DTA ratio) and the ROE ratio. Moreover, there is a significant solid effect between the 

ETA ratio and Net Profit Margin (NPM). At the same time, there is no significant relationship between 

the DTA ratio and Net Profit Margin (NPM). Therefore, the study can guide The GCC Islamic bank 

executives, The Shariah Supervisory Board, and the decision-makers in the GCC area to rely on 

specific capital structures for Islamic banks to improve their Profitability. 

 
 

© 2022 by the authors. Licensee CRIBFB, USA. This article is an open access article  distributed 
under the terms and conditions of the Creative Commons Attribution (CC BY) license 
(http://creativecommons.org/licenses/by/4.0/).  

                                                     

 

INTRODUCTION 

A business's ability to get the highest Profitability is fundamental for any organization, regardless of industry, which 

enhances the wealth of the company's owners or shareholders. As a result, the current market value of the firm's existing 

shares is used to calculate the wealth of its owners. As a result of this aim, the firm's management should make reasonable 

financing decisions about the optimal capital structure, which would reduce its cost of capital; The Islamic banking industry 

is one of them.  

Islamic banks have a different capital structure; they adhere to Sharia law in their operations. The payment and 

receipt of Riba are among the many acts that Shariah forbids (interest); the banks use Shariah-compliant mechanisms or 

contracts that are not used by their conventional counterparts to raise and distribute funds more effectively. The Shariah law 

also mandates that Islamic banks share earnings and losses with their investors. 

Few academics and researchers around Islamic Banking believe that capital structure and Profitability are linked 

positively (Al-Farisi & Hendrawan, 2011; Hafeez et al., 2018; Meero, 2015; Noreen, 2019). Yet, the Gulf Cooperation 

Council (GCC) countries are regions where the Islamic banking industry expanded. 

Thus the main objective of this study is to check the impact of capital structure on the Profitability of Islamic listed 

banks in the Gulf Cooperation Council (GCC). 

 

Objectives 

 To investigate "Capital Structure's "and Profitability's "research growth and progress. 

 Reviewing the subject fields through various paper styles analysis was conducted on Start-up. 

 To locate regional and structural contributions to Start-up research from around the world 

                                                      
1Corresponding author: ORCID ID: 0000-0002-2873-8125 

© 2022 by the authors. Hosting by CRIBFB. Peer review under responsibility of CRIBFB, USA.  
https://doi.org/10.46281/ijfb.v9i1.1669 

 

Moustapha, L., & Benziane, R. (2022). THE IMPACT OF CAPITAL STRUCTURE ON ISLAMIC BANKS PROFITABILITY: EVIDENCE FROM 
GCC COUNTRIES. Indian Journal of Finance and Banking, 9(1), 203-212. https://doi.org/10.46281/ijfb.v9i1.1669 

http://creativecommons.org/licenses/by/4.0/)
http://creativecommons.org/licenses/by/4.0/)
https://doi.org/10.46281/ijfb.v9i1.1669
https://orcid.org/0000-0002-2873-8125
https://orcid.org/0000-0001-5389-9839


Moustapha & Benziane, Indian Journal of Finance and Banking 9(1) (2022), 203-212 

  

204 
 

Importance of the Problem 

Due to the increasing economic weight of Islamic Banking as an alternative financial which gained a lot of attention from 

academics, research centers, and the government; the importance increases from this study about capital structure and 

Profitability on many levels, including: 

 Students and researchers of current scientific phenomena can brush up on their skills by contemporary science 

phenomena. 

 We have added new stats to our understanding of capital structure and Profitability in the GCC area Islamic banks. 

 Evaluation of Islamic Banks of the GCC area performance. 

 We are making the results of this investigation available to the public. 

 

BACKGROUND 
The capital structure reflects the mix of Equity and debt in the banks. The optimal mix of Equity and debt for a business 

optimizes the firm's value while minimizing total capital costs, but this relies on the determinants. 

Several studies have examined Islamic banks' capital structure and its determinants. The capital structure of banks 

is strongly linked to a wide range of variables, such as the bank size, tangibility and liquidity, dividend policy, the ratio of 

market-to-book, and Profitability. 

Below, we shed light on these factors in the Islamic finance context based on capital structure theories. Then, we 

will focus on Profitability, which is the issue of our study. 

 

Theories of Capital Structure in an Islamic View 

We will use the theoretical framework of trade-off theory, the agency cost theory, the asymmetry of information, and the 

pecking order theory, sequentially examining how the above approaches can be used to explain the financial structure of 

Islamic Banks. Contemporary financial theories note that conflicts of interest between stakeholders, bankruptcy costs, taxes, 

asymmetries of information and safety nets, transactions costs, and prudential regulation determine the level of capital in 

banks. However, this literature has focused, essentially, on Conventional Banks. 

 

Static Trade-off Theory: Tax Savings versus Bankruptcy Expenses in an Islamic Setting 

When Modigliani and Miller (1963) revised their earlier work, they included tax benefits as a factor in determining a firm's 

capital structure. (Hailu, 2015). Static trade-off theory posits that the ideal financial structure results from a trade-off between 

tax savings from interest rate deductibility and predicted bankruptcy costs (Myers, 1984). By utilizing as much debt capital 

as feasible, (Modigliani & Miller, 1963) like to raise Profitability while also increasing company value. However, according 

to studies by Ricca, Jucá, and Junior (2021) and Berger, Herring, and Szego (1995), as debt grows, so does the likelihood 

of insolvency, raising the estimated expenses of running into financial trouble. Reveal the trade-off between tax benefits 

and bankruptcy costs specifies the optimal capital ratio of banks (Berger et al., 1995; Ricca et al., 2021). 

Liabilities claim holders benefit from Islamic Banks' lower bankruptcy costs because of the increased percentage 

of tangible assets held by these institutions. As a result, Islamic banks' estimated insolvency costs should be lower than 

traditional banks. In addition, the collateralization of the credit portfolio decreases the bank's exposure to counterparty risk 

since it offers a security mechanism that allows Islamic Banks to limit their risk exposure owing to the involvement of 

investors in the actual economy as required by Islamic financing. According to trade-off theory, Islamic Banks should have 

a lower equity ratio (equity/asset) because of the reduced bankruptcy costs associated with Islamic Banks (Toumi et al., 

2012). 

 

Asymmetry of Information and Pecking Order Theory in an Islamic Context 

In contrast to the idea of static trade-offs, another hypothesis describes the capital structure of financial firms: the pecking 

order theory (Myers, 1984; Myers & Majluf, 1984). Companies prioritize their funding sources, preferring internally 

generated funds under this idea due to asymmetric information between insiders (managers or dominant shareholders and 

outside investors). Straight debt, convertible debt, and external Equity are preferred when internal resources are limited. The 

principles of Islamic finance lead in theory to the symmetry of information and complete transparency between the Islamic 

Bank and its stakeholders. In effect, an essential aspect of Islamic finance is that it requires transparency in transactions: 

 Since Islam prohibits El Gharar. 

 Maysir is banned, meaning that excessive risk-taking is not permitted (Islamic Banks closes the access to Speculation 

and the use of derivatives). 

 The requirement for traceability means the tangibility of assets in contracts 

 Respect for these principles should lead every stakeholder to recognize its moral responsibility vis-a`-vis of all other 

stakeholders. Moreover, the risk level should be lower for Islamic Banks than for Conventional Banks. 

 

Cost Agency under the Islamic Setting 
According to (Jensen & Meckling, 1976) landmark study on agency costs, the separation of (shareholders, managers, and 

debt holders) in banks produces conflicts of interest between shareholders and managers. It also affects the capital structure 

of businesses. In the shareholders-managers dispute, agency costs arise from shareholders' incapacity to control managers' 

conduct (Grossman & Hart, 1982; Jensen & Meckling, 1976). The Islamic setting is one example of a unique legal and 

ethical system that prohibits managers from excessive perquisite consumption and other opportunistic behavior. 

Shariah's principles prohibit excessive risk-taking and taking risks at the expense of the others parties. In the Islamic 



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205 
 

context, two traditional agency relationships remain the shareholder-manager relationship and shareholders-liability claim 

holder relationship. The impossibility limits the possibilities of wealth transfers from shareholders to claim-holders for 

shareholders to engage in hazardous projects. 

The Mudaraba contract transforms the traditional relationship between the bank and its depositors into a partnership 

entrepreneur-investor. PSIA in IBs mobilized the basis of the contract within the principle of profit sharing. The second one 

is between managers and the SAC. Two other essential agency relationships emerge in the Islamic context. The risk that the 

manager maximizes his interest (income, power, prestige etc.) at the expense of holders of PSIA should be below. 

The mechanism of profit-sharing in investment accounts is also at the benefit of shareholders. To avoid massive 

withdrawal of funds due to poor performance on investment deposits, shareholders exert more control over managers. In 

addition, most IBs communicate on their SAC to affirm their compliance with the principles of Islam. 

 

Profitability of Banks 
In numerous previous studies, a bank's Profitability is measured by Return on assets (ROA) or Return on Equity (ROE) or 

Net Profit Margin (NPM) (Hafeez et al., 2018; Hailu, 2015; Petria et al., 2015; Setyawati et al., 2017). In this study, ROA, 

ROE, and NPM are the dependent variables. 

For a bank's management, ROA is important since it shows how well the bank can utilize its resources and 

investments to create profit (Bashir, 2001; Hassan, 2010). 

Depending on the bank's management decisions and circumstances that cannot be controlled, such as economic 

development and government laws, ROA can vary widely among banks. 

Because regulators think that ROA is a metric adequate for calculating a bank's efficiency and is an indication that 

a large equity multiplier is not affected, ROA is the most flattering statistic for assessing the Profitability of banks (Rivard 

& Thomas, 1997). To evaluate a company's Profitability from its assets, ROA is a suitable metric. 

Every dollar sale's net profit (EAT) is calculated using the Net Profit Margin.  

The net profit margin (NPM) is the percentage of each dollar of sales that remains after all costs and expenses have 

been deducted, including interest, taxes, and preferred stock dividends. (Mulyadi et al., 2020). 

While (Alexandri, 2008) defines Net Profit Margin as "the ratio used to show a company's ability to generate net 

profits after tax deductions." According to (Sutrisno, 2009), NPM is: "The ability of the company to generate profits 

concerning sales achieved." If you want to calculate NPM, divide your net income (before taxes) by your net sales. Having 

the ability to cover non-operational and income tax expenses, as well as a more extraordinary ability to earn a net profit, is 

indicated by this ratio. 

Furthermore, return on Equity (ROE) indicating how the effectiveness of the bank's management in the use of 

shareholder funds. ROE of banks affected by ROA and the level of financial leverage of banks (equity/assets). For financial 

intermediaries, ROA has values that tend to be lower than the ROE, so most banks use more financial leverage to increase 

ROE to be more competitive (Sufian, 2007). 

 

LITERATURE REVIEW 
Capital structure’s impact of on Profitability of the Islamic or conventional bank's has no incontestable evidence or academic 

consensus; some studies reported that capital structure has significant determinants, apart from the Profitability of banks 

(Al-Hunnayan, 2020; Goh et al., 2018; Güner, 2016; Jamilah Tawfeeq Al-Najdawi, 2019; Hirdinis, 2019). 

In addition, other literature reported the influence of several different factors on banks' Profitability aside from 

capital structure. (Dietrich & Wanzenried, 2011; Haris et al., 2019; Jaara et al., 2021; Saona, 2016; Shawtari, 2018; 

Staikouras & Wood, 2004; Sufian & Habibullah, 2009; Sun et al., 2017; Yao et al., 2018). 

Nonetheless, the relationship between capital structure and bank profitability has been extensively examined.  

Several studies found a positive impact of Equity to asset ratio on Profitability (Staikouras & Wood, 2004) during 

1994–1998 In European banking sector using Static regression, (Yao et al., 2018)period of 2010–2016 targeted the Pakistani 

banking sector, The Generalized Method of Moments (GMM) carried out, the same method used by (Haris et al., 2019) 

during 2010–2016 in the Pakistani banking sector and (Mostak Ahamed, 2017) in Indian Banking (1998–2014), this result 

remained positive but insignificant in (Al-Homaidi et al., 2018; Almaqtari et al., 2019) and negative impact on ROE, NIM, 

and NIR (Lee et al., 2015). 

Existing many comparative studies between Islamic Banks and Conventional Banks (Al-Farisi & Hendrawan, 

2011; Jaara et al., 2021; Meero, 2015; Noreen, 2019) have reported a positive effect of capital Structure on Return On Equity 

(ROE) and a negative Return On Assets (ROA). 

 

Table 1. Synopsis of the Literature Review Islamic Banking Studying the Relationship Between Capital Structure and 

Bank Profitability 

 
References Area Period Methodology Findings 

(Jaara, 2020) GCC Islamic Banks 2000-2018 Bivariate analysis and 

panel regression 

89%, 85% of IB’s and CS profitability 

influenced by bank size, market value, CR, 
cash to assets, GDP, GDP 

growth, and inflation 

(Noreen, 2019) Banks of Pakistan 2006-2016 A comparative study ROA has a negative correlation with the 

capital structure of both conventional and 
Islamic banks, But ROE has a positive 

correlation. 



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206 
 

(Meero,2015) Gulf countries banks 2005-2014 A comparative study ROA has a significant negative 

relationship with financial leverage and a 
positive relationship with Equity to assets 

ratio 

(Al-Farisi and 

Hendrawan, 2011) 

Indonesian banks 2002-2008 A comparative study Bank's capital ratio has a negative effect on 
their profit efficiency. The negative impact 

happened to be higher for the Islamic bank 

(Hafeez et al., 2018) Asian country 2007-2016 Regression analysis There is a significant and a positive relation 

EM and DR with 
ROA while ER has a negative and 

significant relation with ROA 

(Al-Kayed et al., 

2014) 

Islamic Banking 
systems in 19 

countries 

2003-2008 Reverse Causality profitability replies positively to an growth 
in Equity 

Sources: Collected by the authors 

 

Critical and Research Gap 

We ensured that the covered literature relates to the research question and its objectives. We also covered the most relevant 

and essential theories of recognized experts in this field. Still, the literature most relevant to the representative sample of 

Islamic banks in the GCC was minimal, and the previous studies did not cover it sufficiently. This formed a spatial and 

empirical research gap that we tried to fill. 

 

METHOD: MATERIALS AND TOOLS 

Design Research 

Upon the literature review, we build the following research model (Figure 1) 

 
 
 
 
 
 
 
 

Figure 1. The proposed research model  

 

 

Figure 1. Conceptual Research Model 

 

This study uses explanatory variables such as Deposit to Total Assets, Equity to Total Assets. The dependent 

variables are Return on Assets, Return on Equity, Net Profit Margin; the variables descriptions are given in Table 2. 

 

Table 2. Description of Dependent and Independent Variables in the Model 

 

Sources: Elaborated by the authors 

 

State Hypotheses According to Research Design 

The authors adopt the following hypotheses for the study model: 

H1: There is a significant impact of Deposit to Total Assets ratio on Profitability of Islamic Banks in GCC countries 

H2: There is a significant impact of Equity to Total Assets ratio on Profitability of Islamic Banks in GCC countries 

Measurement criteria The name of 

influence 

factors 

Variable 

symbol 

N 

𝐑𝐎𝐀 =
𝐍𝐄𝐓 𝐈𝐍𝐂𝐎𝐌𝐄

𝐀𝐕𝐄𝐑𝐀𝐆𝐄 𝐓𝐎𝐓𝐀𝐋 𝐀𝐒𝐒𝐄𝐓
 

Return on 

Assets 

ROA Dependent variables 

(Profitability) 

𝑹𝑶𝑬 =
𝑵𝑬𝑻 𝑰𝑵𝑪𝑶𝑴𝑬

𝑺𝑯𝑨𝑹𝑬𝑯𝑶𝑳𝑫𝑬𝑹 𝑬𝑸𝑼𝑰𝑻𝒀
 

Return On 

Equity 

ROE 

𝑵𝑷𝑴 =
𝑵𝑬𝑻 𝑰𝑵𝑪𝑶𝑴𝑬

𝒓𝒆𝒗𝒆𝒏𝒖𝒆
 

Net Profit 

Margin 

NPM 

𝑫𝑻𝑨 =
𝑻𝑶𝑻𝑨𝑳 𝑫𝑬𝑷𝑶𝑺𝑰𝑻𝑺

𝑻𝑶𝑻𝑨𝑳 𝑨𝑺𝑺𝑬𝑻𝑺
 

Deposit to Total 

Assets 

DTA independent variables 

(Capital Structure) 

𝑬𝑻𝑨 =
𝑻𝑶𝑻𝑨𝑳 𝑬𝑸𝑼𝑰𝑻𝒀

𝑻𝑶𝑻𝑨𝑳 𝑨𝑺𝑺𝑬𝑻𝑺
 

Equity to Total 

Assets 

ETA 



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207 
 

Based on the hypotheses, this study has used the following model: 

 

Yit = β0 + β1Dit + eit 
                          

(1) 

Where Y = dependent variable, β0 is intercept, β1 = slope, D = explanatory variable, e means error term, i signifies the 

cross-sectional element of the study, "t" represents the time series element in this study. 

Equation 1: Return on asset 

ROAit =β0it+β1 DTAit+β2 ETA it+εit (2) 

Equation 2: Return on Equity 

 

ROEit =β0it +β1 DTA it + β2 ETA it + εit (3) 

Equation 3: Net Profit Margin 

NPM it = β0it + β1 DTA it + β2 ETA it +εit (4) 

Where: 

ROA: Return on asset          DTA: Deposit to Total Assets 

ROE: Return on equity         ETA: Equity to Total Assets 

NPM; Net Profit Margin 

 

Data Collection and Processing 

Instruments for Data Collection 

The data for the study is extracted from the audited annual statements of Islamic Banks for 2010 to 2020. The study 

variables were collected from the yearly financial reports of the study sample banks.  

 

Survey Population and Rationale 
The study population consists of all Islamic banks operating in the Gulf Cooperation Council GCC countries. The study 

sample covers 05 Islamic banks from 05 Gulf countries: Saudi Arabia, UAE, Qatar, Bahrain, and Kuwait. 

 

Table 3. The Sample of the Study 

 
N Country Name Banks Name 

1 Kingdom of Saudi Arabia. Al Rajhi Bank 

2 United Arab Emirates Abu Dhabi Islamic Bank 

3 Qatar Qatar International Islamic Bank 

4 Kuwait Boubyan Bank 

5 Bahrain Al Salam Bank 

                                                         Sources: Elaborated by the authors 

 

Statistical Procedure 

For analyses of the data, statistical tools were used to compare and test the effect of independent variables on dependent 

variables. The data were analyzed using E-Views 10 software for the period from 2010 to 2020; the data is processed through 

the following steps: 

 Step 1: Conduct a statistical description to understand the basic characteristics of the data collected. 

 Step 2: Analyse the correlation between study variables. 

 Step 3: Check the stationary of data by using the unit root test. As the data used in this study is panel data, W use the 

Levin, Lin, and Chu test to check the stationary level. 

 Step 4: The panel regression analysis used three dependent and two independent variables. The Hausman test was 

used to determine on a fixed or random effect model estimates (Hausman, 1978). 

 

Statistical Description 
The running (E-Views 10) software for data gives the following statistical results. 

 

Table 4. Statistical Characteristics of Research Variables 

 
   Mean  Median  Max  Min  Std. Dev. N 

ROE  0.106816  0.113600  0.224800  0.000300  0.055214 55 

ROA  0.015886  0.015200  0.036600  4.00E-05  0.008060 55 

NPM  0.380311  0.382700  0.594400  0.003600  0.141063 55 

ETA  0.153691  0.146200  0.235600  0.107700  0.028915 55 

DTA  0.795849  0.810600  0.850100  0.702100  0.042797 55 

Source: Authors' Calculations using E-Views 10 software 

 



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As presented in table 4, The Return on equity (ROE) measure revealed how effective the bank is in generating a 

profit from shareholders' Equity. The descriptive statistics show the arithmetic mean of Return On Equity ratio 

(ROE)estimated at (10.68%), with a maximum value of (22.48%) and a minimum value of (0.03%), with a standard 

deviation of around (5.52%). 

Similarly, ROA (Return on Assets) ratio shows the Profitability of using the assets. The high ratio indicates the 

efficient use of assets to generate more profit. The mean ROA (Return on Assets) of the sample banks in the study period 

was 1,58%, with a minimum score of 0.004% and a maximum score of 3,66%. The value of the Return on Assets ratio 

deviates from its mean with a standard deviation of 0.80%. 

The Net profit margin ratio (NPM) shows how much of each dollar in revenues becomes profit. The mean Net 

Profit Margin ratio of the sample banks in the study period was 38.03 %. It reveals that profit represents on average 

nearly38.03 % of the revenues of Islamic banks. The highest Net profit margin ratio for in a particular year was 59.44 %. In 

the same way, the minimum ratio of sample banks in a year was 0.36%. 

The equity to Total Assets (ETA) ratio used as a capital structure measure to examine the impact of Equity on the 

Profitability of Islamic banks. The mean of (ETA) ratio of the sample banks in the study period was 15.36%. It reveals that 

total Equity represents nearly 15.36% of assets of Islamic banks. The highest Equity to Total Assets ratio for a bank in a 

particular year was 23.56 %, and in the same way, the minimum ratio for a bank in a year was 10.77%. The (ETA) ratio is 

very low. This indicates that Islamic banks rely on financing from external sources, especially customer deposits, to finance 

their assets. The value of the equity to total assets ratio deviates from its mean by a standard deviation of 2.89%. 

Furthermore, the deposit to asset ratio (DTA) is used as a second measure of capital structure. This ratio shows the 

contribution percentage of customers' deposits to total assets. The high rate indicates the increased ability to finance its 

assets. The mean deposit to asset ratio of the sampled banks in the study period was 79.58%. It shows that deposit represents 

nearly 79.58% of Islamic banks' capital in the sample study. The highest deposit to asset ratio for Islamic banks in a particular 

year was 85.01%, and the minimum ratio for banks in a year was 70.21%. The value of the deposit to asset ratio deviates 

from its mean with a standard deviation of 4.27%. 

 

Correlation Analysis 

Table 5. Below shows the correlation matrix of capital structure variables and Profitability variables:  

Table 5. Result of Correlation Analysis 

 
DTA ETA NPM ROE ROA Correlation 

    1.000000 ROA 

   1.000000 
 

0.945461 
0.0000* 

ROE 

  1.000000 

 

0.844022 

0.0000* 

0.769697 

0.0000* 

NPM 

 1.000000 
 

0.127181 
0.3548 

-0.021879 
0.8740 

-0.30548 
0.0233* 

ETA 

1.000000 

 

-0.606764 

0.0000* 

0.106516 

0.4389 

0.207352 

0.1288 

0.366406 

0.0059 

DTA 

Note.* Significant at 5% level 

Source: Authors' Calculations using E-Views 10 software 

 

The correlation method checks the relationship between two variables; carrying out a correlation test determines whether 

collinearity exists among the explanatory variables used in the work because it can distort the accurate picture of the 

relationship between the dependent and explanatory variables. 

Table (5) shows the results of the Correlation Analysis test between the study variables. 

 There is a weak negative correlation between Equity to total assets ratio ETA with ROA (-0.30) with a significance 

level of 5% and a weak negative correlation with ROE (-0.02), and a weak positive correlation (0.12) with NPM. 

 There is a weak positive correlation between the ratio of deposits to total assets DTA with ROA (0.36), ROE(0.20), 

NPM (0.10). 

 

Panel Unit Root Test 
To check whether data series are stationary at level, we applied the summary unit root test given by Levin et al. (2002). ). 

The results are presented in Table 6 

 

Table 6. Results of Unit Root Tests 

 
Variable t-statistic Probability Process 

ROA -2.92856 0.0017* Stationary 

ROE -2.37925 0.0087* Stationary 

NPM -3.27115 0.0005* Stationary 

ETA 4.34255 0.0000* Stationary 

DTA 3.08787 0.0010* Stationary 

             Note.* Significant at 5% level 
Source: Authors' Calculations using E-Views 10 software 



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209 
 

The results of unit root tests IN Table 5 show that the null hypotheses of the unit root existence (non- Stationarity) 

are rejected. Therefore, these variables have no unit root. 

All explanatory variables are stationary at their levels at the 1% significance. Thus, all the dependent and 

independent variables are stationary. Which means the data set is perfect for running econometric models, and the results 

will be reliable. 

 

Regression Analysis 
The estimated regression of the relationship of capital structure and Profitability of Islamic banks is reported in Tables 7,8,9 

for fixed effect (third column) and random effect (fourth column). In addition, the Hausman test can be performed to test 

which of these two models is most appropriate. 

 

Table 7. The Impact of Capital Structure on ROA 

 
 Method 

D V Explanatory variables Fixed Effects  Random Effects  

 

 

ROA 
 

 

 

ETA 0.101888 

(0.0002) * 

0.100266 

(0.0002) * 

DTA 0.013139- 

(0.5565) 

0.009619- 

(0.6629) 

C 0.010684 

(0.5824) 

0.008132 

(0.6798) 

   

Adjusted R-squared 0.773948 0.252325 

F-statistic 31.81381 10.11195 

Prob(F-statistic)  0.000000 0.000195 

Hausman Test Chi-Sq. Statistic   1.582408 

Prob Chi-Square   0.4533 

Note.* Significant at 5% level 

Source: Authors' Calculations using E-Views 10 software 

 

Table 8. The Impact of Capital Structure on ROE 

 
 Method 

D V explanatory variables Fixed Effects  Random Effects  

 

 

ROE 
 

 

 

ETA 0.120643 

(0.4682) 

0.110272 

(0.5060) 

DTA -0.026134 (0.8595) -0.005651  

(0.9691) 

C 0.109073 

 (0.3974) 

0.094366  

(0.4698) 

   

 Adjusted R-squared 0.788968 -0.027815 

F-statistic 34.64750 0.269329 

Prob(F-statistic)  0.000000 0.764951 

Hausman Test Chi-Sq. Statistic   1.338494 

Prob Chi-Square   0.5121 

Source: Authors' Calculations using E-Views 10 software 

 

Table 9. The Impact of Capital Structure on NPM  

 
 Method 

D V explanatory variables Fixed Effects  Random Effects  

 
 

NPM 

 

 

ETA 1.908313 (0.0003)* 1.891037  
(0.0003)* 

DTA -0.005519 (0.9899) 0.044771  
(0.9175) 

C 0.091412 (0.8104) .054044  

(0.8883) 

   

Adjusted R-squared 0.715626 0.219884 

F-statistic 23.6485 8.610236 

Prob(F-statistic)  0.000000 0.000589 

Hausman Test Chi-Sq. Statistic   0.594157 

Prob Chi-Square   0.743 

Note.* Significant at 5% level 
Source: Authors' Calculations using E-Views 10 software 

 

 



Moustapha & Benziane, Indian Journal of Finance and Banking 9(1) (2022), 203-212 

  

210 
 

Hausman test was used to test the cause-effect relation between the dependent and explanatory variables in a model. 

The two most often techniques used for panel regression estimation are random and fixed effect.  

Hausman (1978) suggested that there should be no correlation between both individual effects and explanatory 

variables under the null hypothesis, with a random effect expected to be more efficient than fixed effects (Hausman, 1978) 

Suppose the value of Chi-Sq Statistic is significant. In that matter, we reject the null hypothesis and accept the 

alternative hypothesis. The fixed effect should be used, but if the value is Insignificant, We accept the null hypothesis, and 

the random effect should be used. 

The results of the Hausman test in the Tables 7, 8, 9 show that the random-effects model is the most appropriate 

for this study. 

 

RESULTS AND DISCUSSION 

Table 7 shows the results of testing the relationship between capital structure measured by (ETA ratio), (DTA ratio) and 

Profitability which is measured by Return on asset (ROA) For Islamic banks. The regression coefficient for Equity to 

Total Assets Ratio amounted to 0.100266, at a significance level of 0.00, meaning that the ETA ratio at Islamic banks, at 

a level of significance of α≤0.05, has a weak positive effect on the Profitability measured by Return on asset (ROA). The 

results show that the Deposit to Total Assets (DTA ratio) has no significant relationship with Return on asset (ROA). The 

value of adjusted R squared is slightly low (R2
=0.252325); this explains that the ETA ratio and DTA ratio can't explain 

the Profitability of the Islamic banks measured by (ROA). 

This result was in line with the Meero (2015), which concluded that Equity to Total Assets Ratio ETA has a positive 

effect on ROA, and Deposit to Total Assets (DTA) ratio has no significant relationship with (ROA) in Gulf country Islamic 

banks. in addition, This result is in line with conclusions made by the following studies: Lee et al. (2015a), Pasiouras and 

Kosmidou (2007), Staikouras and Wood (2003), Bourke (1989), Altunbas et al. (2007), Trujillo-Ponce (2013), Jouida et al. 

(2017), Ben Salah Mahdi and Abbes (2018, ). All of whom concluded that the Equity to Total Assets Ratio positively affects 

(ROA). 

However, this result differs from that of the Hafeez et al. (2018) study, which concluded that the Equity to Total 

Assets Ratio has a negative effect on (ROA). And Deposit to Total Assets (DTA ratio) positively affects Return on asset 

(ROA). It also differs from the Noreen (2019) study, which also concluded that the Equity to Total Assets Ratio has a 

negative effect on (ROA) in Islamic banks of Pakistan. 

Table 8 presents the result of testing the relation between capital structure (ETA, DTA) and the Profitability 

calculated by the Return on Equity Ratio (ROE). As shown in this table, the regression coefficient for ETA ratio amounted 

to 0.1102 at a significance level of 0.5060. And the regression coefficient for DTA ratio amounted to -0.0056, at a 

significance level of 0.9691, which means that ETA ratio and DTA ratio of Islamic banks do not have a statistically 

significant effect on ROE, at a level of significance of α≤0.05.  

This result was in line with Meero (2015), which concluded that Deposit to Total Assets (DTA ratio) has no 

significant relationship with (ROE). 

However, This result differs from that of the Al-Farisi and Hendrawan (2011) study, which concluded that The 

Ratio of Total Equity / Total Asset (ETA) has a negative and significant effect on both Islamic and Conventional Banks' 

Profitability counted by Return on Equity Ratio (ROE). It also differs from Noreen (2019), which concluded that ROE 

positively correlates with ETA and DTA. This result is consistent with the opinion that additional capital could degrade a 

bank's profit performance. 

Table 9 presents the result of testing the relationship between capital structure (ETA, DTA) and THE Profitability 

measured by Net Profit Margin (NPM). The regression coefficient for Equity to Total Assets Ratio amounted to 1.891037, 

at a significance level of 0.00, meaning that ETA ratio at Islamic banks, at a level of significance of α≤0.05, has a strong 

positive effect on the Profitability measured by Net Profit Margin (NPM). This indicates an increase in total Equity of 

Islamic banks increases the Profitability of Islamic banks. The results suggest no significant relationship between the DTA 

ratio and Net Profit Margin (NPM). The result shows that the adjusted R-squared is slightly low (R2=0.219884). This 

explains that the ETA ratio and DTA ratio can't explain the Profitability of the Islamic banks measured by Net Profit Margin. 

This demonstrates that each of the independent variables combined (ETA ratio, DTA ratio) explain a 21.98% change in the 

(NPM) for Islamic banks, 

This result was in line with the Prasad G (2019), which concluded that Deposit to Total Assets (DTA ratio) has no 

significant relationship with (NPM). 

 

CONCLUSION 

This study investigated the impact of capital structure on the Profitability of operated Islamic Banks in GCC countries. 

It describes the relationship between Capital Structure measured by (DTA, ETA) and Profitability measured by (ROA, 

ROE, and NPM). This study shows that capital structure affects Islamic banks Profitability. 

The research results indicate the ETA ratio has a positive and significant relationship with ROA. Whereas, The 

Deposit to Total Assets (DTA ratio) has no significant relationship with Return on asset (ROA). There is an insignificant 

relationship between (ETA ratio, DTA ratio) and the ROE ratio. Moreover, there is a significant solid effect between ETA 

ratio and Net Profit Margin (NPM), while there is no significant relationship between the DTA ratio and Net Profit Margin 

(NPM). 

 

Implications of Study 

From a practical standpoint, this research bridges numerous gaps between theory and practice. This study contributes to 



Moustapha & Benziane, Indian Journal of Finance and Banking 9(1) (2022), 203-212 

  

211 
 

the capital structure’s theory in reconfirming the findings of the existing literature (both theoretical and empirical) on the 

impact of capital structure on Islamic banks' Profitability in the GCC, the findings can serve as a guidance for Islamic 

bank managers in GCC and supports the decision-makers to rely on capital structure, unique for Islamic banks, whether 

in the GCC. 

 

Recommendations 

For Future research:  

 In terms of the methodological materials and tools, it is recommended to conduct the research topic using 

interviews, and surveys addressed to managers, executives, and Shariah Supervisory Board (SSB) of Islamic 

banks in the GCC to determine a suitable capital structure supported by the results of the present paper. 

 Additionally, it is advised that the research approach be applied in other places where Islamic banking is 

practiced. And in the economies that have recently become involved in Islamic banking. 

 

Limitation and Scope 

The present study examines the relationship between capital structure and Profitability in Islamic Banks. The study covers 

05 Islamic banks from 05 Gulf countries: Saudi Arabia, UAE, Qatar, Bahrain, and Kuwait, but extensive (2010-2020). 

 

 
Author Contributions: Conceptualization, L.M. and R.B.; Data Curation, L.M. and R.B.; Methodology, L.M. and R.B.; Validation, L.M. and R.B.; 

Visualization, L.M. and R.B.; Formal Analysis, L.M. and R.B.; Investigation, L.M. and R.B.; Resources, L.M. and R.B.; Writing – Original Draft, L.M. 
and R.B; Writing – Review & Editing, L.M. and R.B.; Supervision, L.M. and R.B.; Software, L.M. and R.B.; Project Administration, L.M. and R.B.; 

Funding Acquisition, L.M. and R.B. Authors have read and agreed to the published version of the manuscript. 

Institutional Review Board Statement: Ethical review and approval were waived for this study, due to that the research does not deal with vulnerable 
groups or sensitive issues. 

Funding: The authors received no direct funding for this research. 

Informed Consent Statement: Informed consent was obtained from all subjects involved in the study. 
Data Availability Statement: The data presented in this study are available on request from the corresponding author. The data are not publicly available 

due to restrictions. 

Conflicts of Interest: The authors declare no conflict of interest.                                                                                                                                                                                                                                    

 

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