The dynamic relationship Between investment account fluctuations and profitability: Empirical evidence from Saudi Islamic Banks

Abstract

This study investigates the dynamic relationship between fluctuations in investment accounts (IA) and profitability of Islamic banks operating in Saudi Arabia (SA). It aims to determine how changes in IA balances, deposit returns, and interest margins affect key financial performance indicators - specifically Return on Assets (ROA) and Return on Equity (ROE) - during the period 2014–2023. This study adopts a descriptive analytical framework using panel data econometrics. The data were collected from four major Islamic banks in Saudi Arabia. Multiple regression analyses, including pooled, fixed-effects, and random-effects models, were employed. Model selection was guided by the Lagrange Multiplier and Hausman test. Control variables such as total bank assets, central bank interest rates, and inflation were included to enhance model reliability. The empirical results indicate a statistically significant positive relationship between (IA) dynamics and bank profitability. Changes in (IA) and interest margins significantly impact ROA, whereas deposit returns exert a stronger influence on ROE. The regression models explain 53.3% and 70.0% of the variance in ROA and ROE, respectively. Macroeconomic factors, particularly inflation, also influence profitability. This study underscores the need for Islamic banks to strategically manage (IA) by improving return structures, enhancing transparency, and introducing diversified Sharia-compliant financial products. Effective (IA) management is crucial to sustaining profitability and competitiveness in the Islamic banking sector.