Moderating Role of Exchange Rate on Profitability of Islamic Banks in Pakistan: A Switching Behavior

Abstract

The study probes the moderating role of the exchange rate on the profitability of Islamic Banks in Pakistan. The results of the study point out that bank size, asset quality and inflation have a positive and significant impact on profitability while asset composition and GDP and exchange rate have no impact on return on equity. Moreover, moderating variables of exchange rate and asset quality and exchange rate and asset composition do not affect profitability. It is vital to note that moderating effect of the exchange rate with bank size has a positive impact on ROE. The study infers that shifting behaviour of customers from conventional to Islamic banks.