Explaining intermediation costs of Islamic banks in OIC countries

This chapter empirically examines the financial intermediation costs as represented by net financing margins in the Organization of Islamic Cooperation Islamic banking sector during the period 2005 to 2011 by focusing on the roles played by various bank-specific, macroeconomic-specific and institutional-governance factors. The results indicate that risk aversion, bank size and inflation are robustly related to the margins. Some evidence supporting the significance of credit risk and gross domestic product growth in explaining the margin is also documented. Interestingly, the overhead costs, market concentration and institutional-governance factors have no significant impact on the intermediation costs of Islamic banks. Our results demonstrate important policy implications in narrowing the intermediation costs of Islamic banks, namely, enhancement of risk management instruments, scale efficiency, innovation in Islamic banking products and macroeconomic stability.