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Determinants of Financial Leverage in Islamic Banks

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Abstract

This study aims to explore the determinants of financial leverage in the Islamic banking industry of Pakistan. It also aims at exploring the effects of macroeconomic conditions and policy variables on the financing decisions of Islamic banking industry. The study uses unbalanced panel data covering the period from 2006 to 2012. The results from fixed effect model indicate that bank-specific variables, namely bank size, tangibility, and growth are positively related to banks’ financial leverage, whereas profitability, liquidity, and capital adequacy ratio are negatively related to the financial leverage of banks. On the other hand, real interest rate and inflation are negatively related to the financial leverage of Islamic banking industry, while industrial production index has a positive impact upon the financial leverage of the Islamic banking industry of Pakistan.

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Notes

  1. 1.

    IPI is an economic indicator which measures changes in output for the manufacturing, mining, and utilities on monthly basis. Although these sectors represent only a small portion of GDP, they are highly sensitive to interest rates and consumer demand. IPI is an important tool for forecasting future GDP and economic performance. The SBP also uses IPI to measure inflation because high levels of IPI would lead to uncontrolled levels of consumption and rapid inflation (http://www.tradingeconomics.com/pakistan/industrial-production).

  2. 2.

    Greene, William H. (2008). Econometric Analysis (6th ed.). Upper Saddle River, NJ: New York University, Prentice Hall.

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Author information

Authors and Affiliations

  1. Basic Sciences and Humanities Department, University of Engineering and Technology, Taxila, Pakistan

    M. A. Rehman Shah

  2. International Institute of Islamic Economics, International Islamic University, Islamabad, Pakistan

    A. Rashid

  3. School of Islamic Banking & Finance, International Islamic University, Islamabad, Pakistan

    M. Khaleequzzaman

Authors
  1. M. A. Rehman Shah
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  2. A. Rashid
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  3. M. Khaleequzzaman
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Corresponding author

Correspondence to M. A. Rehman Shah .

Editor information

Editors and Affiliations

  1. Islamic Research and Training Institute, Islamic Development Bank, Jeddah, Saudi Arabia

    Muhamed Zulkhibri

  2. Islamic Research and Training Institute, Islamic Development Bank, Jeddah, Saudi Arabia

    Turkhan Ali Abdul Manap

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Rehman Shah, M.A., Rashid, A., Khaleequzzaman, M. (2019). Determinants of Financial Leverage in Islamic Banks. In: Zulkhibri, M., Abdul Manap, T. (eds) Islamic Finance, Risk-Sharing and Macroeconomic Stability. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-05225-6_7

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  • DOI: https://doi.org/10.1007/978-3-030-05225-6_7

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  • Print ISBN: 978-3-030-05224-9

  • Online ISBN: 978-3-030-05225-6

  • eBook Packages: Economics and FinanceEconomics and Finance (R0)

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