Investor Protection and Financial Performance of Islamic Banks: An Econometric Analysis

The last decade witnessed dramatic growth of the Islamic banking and finance sector, which had largely been credited to its adoption of the profit and loss sharing principles. However, in practice, the Islamic banks mostly reply on debt-like financing methods such as mark-up and leasing finance instead. Consequently, the equity investors are exposed to default risks. This study empirically examines the impact of equity investor protection on financial performance of Islamic banks based on an unbalanced panel data collected from 91 Islamic banks and financial institutions worldwide across 1991-2010. Econometric techniques are adopted to specify the models. The instrument variable model (IV) using General Method of Moments (GMM) is selected as the most appropriate model by passing a number of tests by model corrections, covering instrument relevance, instrument exogeneity, multicollinearity, heteroskedasticity, autocorrelation, under-identification, weak-identification and over-identific