Effects of Islamic Modes of Financing on Profitability of Banking Institutions

Abstract

This study intended to examine the effect of Islamic financing modes on profitability of banking institutions in Mogadishu Somalia. In detail, the study examined the effects of Murabaha (cost-plus) and of Mudarabah (profit sharing) on profitability of banking institutions in Mogadishu Somalia. The study used a correlational research design, and data were collected through self-administered questionnaire from 56 respondents. The results indicated that Murabaha and Mudarabah have a statistically significant positive effect on profitability of banking institutions. The findings reveal that a significant increase and adherence to these Islamic modes of financing is expected to significantly improve and increase the profitability of banking institutions. The study concludes that both Murabaha and Mudarabah are vital for Islamic bank performance and profitability. It is recommended to the management of Islamic banks to start putting into consideration clients’ credit rating while determining the mark-up value and at the same time carry out regular and systematic visits to their partners to gain an insight into the operations of the joint venture businesses and also remind them to clear their obligations.