Oil Prices and Determinants of Islamic and Conventional Banks’ Profitability in Saudi Arabia

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Abstract

Efforts have been made by the Saudi Arabian government for economic reform to bring about an economy driven by the private sector rather than a full reliance on oil sector. This study seeks to comparatively analyze the profitability determinants between conventional and Islamic banking sectors and the influence of oil price changes on their profitability for the 2008-2014 period. The sample size comprises of twelve domestic banks that are commercial in nature – four Islamic banks and eight conventional banks. The empirical findings suggest that macroeconomic indicators such as inflation and gross domestic product (GDP) growth have no significant impact on profitability. As for oil price changes, the results show a significant impact on the profitability of the conventional banks but not for the Islamic banks. Through this observation, it can be reasoned that Islamic banks are not significantly dependent on the oil sector, which perhaps indicates their inclination towards achieving Saudi Arabia’s economic reform objective of building true wealth through non-oil related investments.

Keywords: Oil price, profitability, Islamic bank, Saudi Arabia

Citation:

Abduh, M. and Baharoon, A. (2016). Oil Prices and Determinants of Islamic and Conventional Banks’ Profitability in Saudi Arabia. Journal of Islamic Economics, Banking and Finance, Vol. 12 No. 2, pp. 72-92.

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