Do CAMEL Indicators Contribute Towards Profitability of Islamic Banks?

Abstract

This paper evaluates the effect of bank-specific variables in terms of Capital Adequacy (C), Asset quality (A), Management (M), Earnings (E) and Liquidity (L) commonly known as CAMEL approach, across bank profitability of Islamic banks from six Islamic countries namely; Brunei Darussalam, Indonesia, Kuwait, Oman, Pakistan and UAE over a period of 4 years (2014-2017) based on a quarterly data. The data on CAMEL variables has been collected on aggregate basis for Islamic banks from six of the Islamic countries. The study makes use of a panel data regression analysis. Results of the study state that the profitability of Islamic banks is positively influenced by the ‘MEL’ part of the CAMEL rating system namely: Management, Earnings and Liquidity, along with bank size and inflation. The study is expected to be useful both for policy makers, as well as the executives of Islamic banks across the globe. It is expected to contribute as to which factors determine the effect of CAMEL indicators across profitability of banks globally. Keywords: CAMEL, Profitability, Panel Data Analysis, Islamic banks.