BEYOND PROFIT: DO ISLAMICITY TRULY MATTER IN ISLAMIC BANKING?

Abstract

Islamic banks operate under a dual mandate: they must remain financially sustainable while demonstrating substantive compliance with Sharia principles. Whether Islamicity-related performance translates into accounting profitability may depend on market maturity and institutional context. This study examines the relationship between five Islamicity Performance Index (IPI) indicators—Profit Sharing Ratio (PSR), Zakat Performance Ratio (ZPR), Equitable Distribution Ratio (EDR), Directors–Employees Welfare Ratio (DEWR), and Islamicity Income Ratio (IsIR)—and Return on Equity (ROE), comparing Islamic banks in Indonesia and the Gulf Cooperation Council (GCC). The manuscript reports a panel covering 13 banks (eight in Indonesia and five in the GCC) over 2017–2023. The existing baseline estimates use a random-effects model selected through Chow, Hausman, and Lagrange Multiplier tests. The bank-year dataset requires a final audit of percentage scaling, missing observations, and comparability before the estimates can be treated as final. In the reported baseline output, PSR is positively associated with ROE (coefficient = 8.765; p = .013). ZPR is negative but not statistically significant (−2.345; p = .417), while EDR (4.567; p = .147), DEWR (0.876; p = .126), and IsIR (6.234; p = .463) are not statistically significant. The model reports an adjusted R-squared of .189. The results distinguish a potentially value-generating financing practice from indicators whose benefits may operate through legitimacy, trust, and stakeholder welfare rather than immediate ROE. The study’s contribution is its joint examination of all five IPI indicators in a cross-jurisdictional setting. Because bank-level controls and regional interaction estimates have not been supplied, the findings should be interpreted as baseline rather than fully adjusted evidence.