EXCHANGE-BASED FINANCING CONTRACTS AND FINANCIAL PERFORMANCE OF ISLAMIC BANKS

Abstract

This study aims to investigate the impact of exchange-based financing contracts on financial performance of Islamic banks in selected countries. Specifically, the study aims to examine the effects of murabaha, istisna’ salam and tawarruq contracts on return on asset of the banks. The study employed ex-post facto research design and population of the study consists of 27 countries whose financial data exists on Islamic Financial Service Board (IFSB) database.  A sample of 9 countries was purposively selected from the population. The selection of these 9 countries was informed of data availability. Quarterly data were collected from IFSB database from 2014Q1 to 2022Q4. Fixed Effects Regression technique was used to analyse the data. Results showed that Murabaha and Istisna’ had positive, significant effects while Salam had negative, significant impact on ROA. The study also found that Tawarruq had no significant influence on ROA of the banks. Based on these findings, the study concluded that exchange-based financing exerted significant impact on financial performance of Islamic banks.  The study recommended the development and adoption of exchange-based financial services as a form of financial innovation which tends to boost financial performance of Islamic banks.  Aggressive marketing and awareness creation are also recommended for Istisna, Salam and Tawarruq to enable them to corroborate murahaba financing in enhancing financial performance of the banks.