The relationship of Capital structure and Financial Performance of listed Islamic Banks in Saudi Arabia and other GCC countries

Abstract

The aim of this research is to measure the relationship between Capital structure and Financial Performance of listed Islamic Banks in Saudi Arabia and other GCC countries. This is performed by using the annual accounting data of 30 Islamic banks in Saudi Arabia and other GCC countries for the period 2011-2020. SPSS software was used to analyse cross-sectional and time-series panel data. Debt-to-equity as a capital structure proxy was used to measure the relationship with profitability based on ROA and ROE. This study also uses the size of the bank, measured as Ln (total assets), as well as growth revenue YoY% to measure the relationship. The results indicate that (1) There is a negative relationship between D/E and bank performance; (2) There is a positive relationship between bank size and bank performance; (3) There is a positive relationship between bank growth and bank performance. Overall, the study recommended CEOs and finance managers of Islamic banks must believe the capital structure decisions that best fit their respective banks’ financing and type of investors needed. However, they must decide the appropriate to increase the bank's size and revenue (customer loyalty). As the result shows that Islamic banks have a significant positive relationship between bank's size, growth with bank's profitability.