The Impact of Microeconomic Factors on Banks' Stability and Profitability in the Middle East: Islamic Banks vs. Conventional Banks

Abstract

This study investigates the impact of macroeconomic factors, specifically interest rates and GDP growth, on the profitability of Islamic and conventional banks in the Middle East. Using ARIMA/X and VAR models, the study reveals that Islamic banks exhibit lower sensitivity to interest rate fluctuations due to their reliance on profit-and-loss sharing mechanisms, while conventional banks show no significant profitability changes in response to interest rate movements. However, conventional banks are more responsive to GDP growth, benefiting from periods of economic expansion, while Islamic banks demonstrate more stability but are less responsive to short-term economic fluctuations. These findings offer valuable insights for policymakers and regulators, highlighting the need for differentiated regulatory frameworks to ensure the resilience of both banking models in dynamic economic environments.