“The impact of political instability, macroeconomic and bank-specific factors on the profitability of Islamic banks: an empirical evidence”

This study investigates the impact of political instability, macroeconomic and bank-specific factors on the profitability of Islamic banks in the context of Yemen. The study used two common measures of profitability, namely, Return on Assets (ROA) and Return on Equity (ROE) as dependent variables. Seven key independent (internal and external) variables are also used. There are five fully-fledged Islamic banks (IBs) working in Yemen. The study selected only three out of five IBs due to the availability of data for the period ranging from 2010 to 2014. The descriptive and multiple regression analyses were done. The results of the study indicate that operating efficiency and financial risk have negative and significant relationships with ROA and ROE. The findings also show that capital adequacy has a negative and insignificant relationship with ROA and ROE. Furthermore, the study reveals that assets size (LogA), assets management, liquidity and deposits have a significant and positive impact on banks’ profitability. GDP, Inflation rate (IR) and Political instability have positive and significant impact on Yemeni banks’ profitability. Based on the best knowledge of the authors, this study is considered one of the first and pioneering studies that determine the factors affecting the profitability of Islamic banks of Yemen. Therefore, the study gives good insights for the policy makers, regulators and interested parties for enhancing the profitability of Islamic banks in Yemen.


INTRODUCTION
Financial performance plays an essential role in the economic development of the countries (Sapuan & Aoly, 2013). The banking sector in Yemen is one of the main instruments of the country's economic growth. Its role in financing other sectors is, without doubt, critically important. The banking system of Yemen is considered as the backbone of the economy, and it also plays a magnificent role in different economic activities in the country. Finance is like blood to any economy. It is essential for socio-economic development of a society.
Today, Islamic banks exist all over the world, and are looked upon as available unconventional system which has several things to propose. One of the most important Islamic banks' aims is developed to fulfill the needs of Muslims and non-Muslims as well. In financial areas, Islamic banking is known as one of the fastest growing systems, and as a result of that growth it has gained universal recognition (Islam et al., 2014). Islamic banks proved their advantages for economic growth and financial stability around the globe, especially in the Middle East countries (Tabash & Dhankar, 2014). Investment Management and Financial Innovations, Volume 14, Issue 4, 2017 Comparing the profitability of these two systems (conventional and Islamic) of banks creates a competitive space between them. Islamic banking has been operating in Yemen since 1995. There are 17 banks (Islamic and conventional) working in Yemen. Out of 17 banks, only 5 banks are operating on the principles of Islamic Shariah and other 12 banks are conventional (interest based) banks. The main objective of this study is to investigate the impact of political instability, macroeconomic and bank-specific variables on the Islamic banks' profitability in Yemen.
The study is structured as follows. Section one is an overview of Islamic banking in Yemen. Section two gives the literature review. Section three presents the methodology of the study. Hypotheses stated, findings and their discussion are shown in sections four and five. The last section concludes the article.

Problem statement
Islamic banking in Yemen achieved a good growth rates since the period of the establishment in 1996 till 2010. After this period, especially from 2011 onwards when the Arab spring uprising had started in some Arab countries (Yemen Republic was one of these countries), there is no political stability in these countries because of the continuing conflict. The problem of this study is the poor financial performance of Islamic banks during the period from 2011 till now; this poor performance is confirmed by the Islamic banks' financial statements during the period 2010-2014. The results of financial statements show that there are large instabilities in the Islamic banks' profitability in Yemen. The difference of profits among Islamic banks suggests that internal, external or both factors play an essential role in influencing the financial performance of Islamic banks in Yemen. These factors can help the policy makers to take some procedures that will enhance the profitability of Islamic banks in the long term.

Objectives of the study
The main aim of this study is to analyze the impact of both external and internal factors on the Islamic banks' profitability in Yemen and to achieve the following sub-objectives: • To investigate the impact of the bank-specific variables on Islamic banks' profitability in Yemen.
• To examine the impact of the macroeconomic variables on Islamic banks' profitability in Yemen.
• To investigate the impact of the political factors (political stability) on Islamic banks' profitability in Yemen.
• To give recommendations and suggestions for policy makers to improve financial performance of Islamic banks of Yemen. Both studies found that Islamic banks are marked by more profitability, liquidity and capital structure than conventional banks. They also found that dependent variables of ROA and ROE have a significant relationship with some of independent variables of total equity to total asset. A study by Shah and Jan (2014) dealt with financial performance of private banks in Pakistan. They found that the operational efficiency and bank size are negatively related with ROA and positively related with assets management, while the bank size has a positive relationship with the asset management and interest income. Interest income is negatively correlated with operational efficiency. Ahangi et al. (2013) analyzed the effect of some internal and external factors on Islamic banks' profits in Malaysia. In addition, authors examined the results by using the financial crisis of 2008-2009 as a control variable. The study used regression analysis to examine the data for the period from 2008 to 2012. The results suggested that a high equity-to-asset ratio significantly increased the profitability of Islamic banking while negatively affecting the return on equities. An increase in the total expenses leads to high return on assets and return on equities. However, an increase in deposit-to-asset and loan-to-asset ratios does not significantly affect the Islamic banking profitability. Their results also indicate a positive and significant relationship between the concentration and the profitability. Moreover, an increase in the inflation rate negatively affected the profitability of Islamic banking. In another study of Malaysia, Wasiuzzaman and Nair Gunasegavan (2013) analyzed differences and similarities in bank characteristics of conventional and Islamic banks in Malaysia, especially when it comes to their bank specific indicators: profitability, capital adequacy, liquidity, asset quality and operational efficiency. They found that when it comes to return on assets, board size and bank size, conventional banks were higher compared to Islamic banks. The other indicators were higher for Islamic banks. Significant differences between the different types of the banks were found for all the variables, except for profitability and board independence. In the same year, Khalifa and Shafii (2013) evaluated the financial performance and identified affecting factors in the performance of non-oil manufacturing companies from 1999 to 2008. They found that the liquidity ratios were high, while the indicators of operational efficiency were insufficient. They also concluded that there are three variables that have negative significant relations with return on assets (ROA), namely current ratio, quick ratio and account receivable. While other variables have positive significant relationships with return on assets (ROA), namely inventory turnover, net working capital, general administrative expenses, company age and company size.

LITERATURE REVIEW
Smaoui and Salah (2012) were the first who examined the impact of both internal and external factors on the Islamic banks' profitability. They found that the profit of Islamic banking is more than the one in conventional banking. Furthermore, the interest, inflation rate and size have significant and positive impact on the profitability of both types of banks. Masood (2003) found that conventional banks have less capital asset ratio compared to that of Islamic banks. They found a negative link between the profitability and bank size, which indicates that larger banks are less profitable than smaller banks. He also mentioned that the performance of banks during an economic growth seems to improve because the non-performing loans decrease. On the other hand, inflation does not have any impact on Islamic banks profitability. The results also showed that good macroeconomic factors positively impact profitability of Islamic banks.

Study sample
The study sample consisted of three full-fledged Islamic banks during the period of 2010-2014. These banks are Islamic Bank of Yemen (IBY), Tadhamon International Islamic Bank (TIIB) and Saba Islamic Bank (SIB).

Data collection
The study is mainly based on secondary data. The data for this study are collected from the annual reports, financial statements (balance sheets and income statements), published by Islamic banks. Moreover, resources such as books and journals are used in this study. Macroeconomic data (GDP growth, inflation (IF) and political stability (PF)) are fetched from the Bank Scope/World Wide Bank database.

Data analysis method
The quantitative method is utilized in this study. All financial ratios, hypotheses test and statistical tests are done using E-views software version 7.0.

Model specification
In this study, a model is developed to identify the relationship between the profitability of Islamic banks in Yemen as dependent variables (ROA and ROE) and nine independent variables categorized into internal factors (bank size logarithm of total assets (LogA), liquidity (LQ), assets management (OPI), deposits (DT), operating efficiency (TOE), financial risk (LA)) and external factors ((GDP) and inflation rate (IR), political factors (PF)) as shown in Figure 1

Variables
The ROA and ROE variables are used as dependent ones. The bank-specific (independent) variables are categorized as internal management and macro-economic (external) determinants of the profitability of Islamic banks (Table 1).

HYPOTHESES OF THE STUDY
To achieve the objectives of this study, the following hypotheses are stated:    the largest standard deviation which is 7.368446. The mean of inflation rate (IR) is the highest mean which is 15.36800 and the standard deviation is 5.980763. The mean of political factor (PF) is 1.612277, while standard deviation is 0.390820. Moreover, the descriptive analysis shows negative values in profitability and G D P.

Multicollinearity test
The result of correlations indicates a weak positive correlation between dependent variables (ROA) and (ROE) and independent variables (TOE, OPI, LQ, LogA, LA, DT, CA, GDP, IR and PF).
It is also clear from correlation test that there are a very strong negative correlations between the independent variables of assets size (Log A) and financial risk (LA) and deposits/total assets (DT) which are -94% and -92%, respectively. While the relationship between independent variable (LA) and another independent variable (DT) is 88% percent.

Multiple regression analysis
Both Table 4 and Table 5 show the results of regression analysis between dependent and independent variables. The R-square is 73.9% and 70.6% for the first and second model, respectively. It is clear that independent variables explain 73.9% of variations in the dependent variable (ROA), while for ROE, the independent variables explain 70.6% of the variations of ROE and the remaining variations are explained by other factors not included in the study.
The results also show that the variables of operating efficiency (TOE) and financial risk (LA) are negatively related with return on assets (ROA) and return on equity (ROE). While the other variables are positively related with both dependent variables, ROA and ROE, except for capital adequacy (CA) which is negatively associated with return on assets (ROA) and positively with return on equity (ROE). The P-value of the bankspecific variables in both models are as follows: operating efficiency, assets management, liquidity, financial risk and capital adequacy are less than   Note: significance at *0, **5, ***10 percent levels.
1%, while bank (asset) size (LOGA) is 2.6% in the first model and less than 1% in the second model. The P-value of capital adequacy is less than 1% in the first model and 8.3% in the second model. The P-value of deposits is 64% in the first model and 25% in the second model that means no significant impact of deposits on the profitability of Islamic banks in Yemen and this is consistent with Ahangi (2013).
The previous results indicate that there is a strong significant relationship between profitability and bank-specific variables except for deposits. Thus, we can accept first, second, third, fourth, fifth, and seven hypotheses, and reject the sixth hypothesis which indicates that there is no link between Deposits and profitability of Islamic banks of Yemen.
The results of this study are consistent with the some findings of prior studies like Smaoui and Salah (2013), and Haron (1996) who revealed that bank size has a significant and positive impact on the profitability of Islamic banks. This is also supported by other researchers like Ramlan   Note: significance at *0, **5, ***10 percent levels. Note: significance at *0 , **5, ***10 percent levels.
that bank size and capital adequacy are the main factors that are responsible for increasing profitability of Islamic banks. They also found that macroeconomic variables, except for inflation, are able to improve Islamic banks' stability.
The P-values of the macroeconomic variables (GDP and IR) in both models are less than 1% which means that there exists a high significant relationship between profitability and macroeconomic variables. Thus, we can accept eighth and ninth hypothesis.
Political factor (PF) in Yemen shows that p-value equals 0.0 which means that political stability has a significant impact on the profitability of Islamic banks in Yemen during the study period of 2010-2014 due to the political situation. Thus, we accepted our tenth hypothesis about profitability and political factor (political stability and absence of violence).

CONCLUSION
This study examines the impact of political stability, macro-economic and some of the bank-specific variables on the profitability of Yemeni Islamic banks. For the purpose of the study a sample of three banks was chosen from the population of five Islamic banks in Yemen. Return on asset (ROA) and returns on equity (ROE) were taken as dependent variables, while independent variables were divided into two categories: bank-specific variables (internal), namely bank size, asset management, operational efficiency, liquidity, deposits, financial risk and capital adequacy, and macro-economic variables (GDP and inflation rate) and political factors (PF) as external.
The analysis was performed in three stages. First, the descriptive statistics showed that the external factors (macroeconomic (GDP and IR) and political factors have a higher mean, median, and standard deviation, while the internal factors (bank-specific variables) have a lower mean, median, and standard deviation. Second, correlation analysis was done to check multicollinearity. The third stage was a multiple regression analysis to evaluate the effect of the independent variables on bank profitability. The results of the study indicate that operating efficiency and financial risk have negative and significant relationships with ROA and ROE. The study also found that capital adequacy has a negative and statistically insignificant relationship with ROA and ROE. The study showed that the assets size (LogA), assets management, liquidity, and deposits have a significant and positive impact on bank's profitability. All the external factors (GDP, inflation rate (IR) and political instability) have positive and significant influence on bank's profitability.