On the Impact of Transparency and Performance on a Bank’s Deposit Growth - The Case of Islamic Banks in Pakistan

Abstract

The purpose of this study is to analyze the impact of Islamic banks’ performance (measured through CAMEL analysis) on customers’ funds in Pakistan. This is an exploratory study and will explore the moderating role of transparency in the relationship between Islamic banks’ performance and the customers’ funds. Healthy financial sector improves customers’ confidence and they further invest their funds in Islamic banks (Abusharbeh, 2016). Rationale utlization of the financial sector make profitability (ROA) optimum, which in turn increases depositor's trust in the Islamic banking system.

This study first time analyzes the moderating role of transparency in the relationship between Islamic banks’ performance and customers’ funds. The study analyzed listed Islamic Banks and conventional banks having Islamic branches. The study is supported by a sample of five banks having complete Islamic operations while eleven other commercial banks with Islamic branches/windows. The quantitative data is extracted from the database of central bank of Pakistan (SBP) for the past five years (2014-2018). Time series data has been used to perform regression analysis supported by HAC test. The study concludes that only four variables (capital adequacy, assets quality, management quality and liquidity) out of five have significant impact on the variable of interest i.e. depositors’ funds for Islamic banks in Pakistan through the moderating role of transparency. Whereas, the variable profitability (net earnings after tax) does not have significant relationship with the dependent variable through moderation of transparency. The study will be helpful for Islamic banks to formulize their policies in a way that their deposit base is increased. Further the central bank will also be benefited to impose certain regulatory requirements including CAR, reserve ratios and disclosure guidelines which are helpful for the customers. Additionally, the study will also be helpful for the customers to make rational decision while deploying their funds.