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Inflation In Islamic Banking Essay

907 Words4 Pages

Inflation commonly reflected by an increase in the general price level of good and service in a particular economy. As high inflation happen in the economy, the real purchasing power of consumer tend to diminish; while in the banking sectors, the real rate of return of bank asset tend to trim down compare to liabilities.
The inflation level of the country is one of the important determinants of banks‟ profitability as it affects the real rate of return of bank’s assets. Zeitun (2012) assumed that inflation could be an important macroeconomic factor that affects the banks‟ profitability in which the impact of inflation is depending on how quickly is the increase in operating expense as compares to the inflation rate. Perry (1992) suggested that …show more content…

According to Bashir (2003), inflation exerts positive impact on bank performance if only a large portion of the Islamic banks‟ profits are generated from direct investment and other trading activities (Murabahah). Karim et al. (2010) study the bank-specific, industry-specific and macroeconomic determinants of African Islamic Bank’s Profitability over the period of 1999 to 2009 and expected a strong relationship between inflation and the profitability of Islamic banks. Izhar and Asutay (2007) which study the profitability of Islamic banking from Bank Muamalat Indonesia from 1996 to 2001 showed that inflation is related with higher interest margins and higher profitability. As inflation occurs, more transactions will be involved and more branch networks will be extended, therefore enable the bank to generate higher income (Izhar & Asutay, 2007). Furthermore, Ramadan (2011) studies the bank-specific determinants of Islamic Banks profitability in Jordanian Market over the period of 2000 to 2010 and reported a similar result with those of Bashir (2003) and Wasiuzzaman and Tarmizi (2010), indicates that the higher the rates of

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