The Impact Of Islamic Financing Products On Islamic Banks Profitability: Case Of Al Rayan Bank (Qatar)

- This study aims to determine the effect of Islamic financing products on the Islamic bank's profitability of Al Rayan Islamic Bank. This research uses quarterly data from Al Rayan Bank for 2011Q1-2023Q1. The variables used in this study are independent, Musharaka , Murabaha , Istisnaa and Ijarah financing. Meanwhile, the dependent variable of the Islamic bank's profitability is measured by Return on Equity (ROE). The study employed the Autoregressive Distributed Lag (ARDL) Model to analyse the variables' short-and long-term relationships. The data collected were analysed using EViews10 software. ARDL bounds test findings suggest a cointegration relationship between bank profitability and Islamic financing product variables in the long run. The results of the long-run analysis reveal that Musharaka financing has a positive and significant effect on ROE at the 5% level. However, Murabaha financing has a negative and significant effect on ROE. At the same time, the Istisnaa and Ijarah variables have no significant effect on ROE. The short-run dynamics demonstrate a negative and significant effect of Murabaha and Ijarah financing on the Islamic bank's profitability. In addition, the lagged value of Murabaha LMUR (-1) has a positive and significant effect on the profitability index of the Islamic bank. Simultaneously, there is no relationship between Musharaka and Istisnaa and their effect on the profitability of Islamic banks in the short term.


INTRODUCTION
It is known that profit maximisation is the objective of the highest priority for all investment institutions created by private individuals.Consequently, all private sector financing institutions have one fundamental objective: to maximise profit.
The role of the banking system is to provide financing and facilitate the flow of financial resources between surplus units (savers) and deficit units (borrowers).Note that traditional banks and Islamic Banks are equal in this task.However, the latter differs from traditional banks in the legal controls and the socio-religious guidelines that forbid and prohibit all impermissible transactions like charging and paying Riba (usury-interest) and gambling, short selling, speculation and sale of debts.
According to Vegirawati, Susetyo, Meutia and Fuadah (2019), Islamic banks adhere to Shariah principles in their business activities, prohibiting the interest or usury system and avoiding unethical practices in the economy.
There are two main types of products in Islamic banking: the first is based on the principle of Profit-Loss Sharing (PLS), such as Musharaka (participation) and Mudaraba.Meanwhile, the second is based on sale and debt products, such as Murabaha, along with Ijarah (leasing) and EL salam sale.One of the main objectives of Islamic banks as economic institutions conducting operational activities is to seek profitability.The greater the volume of financing transactions in Islamic banks, the greater the profit margins they will receive, affecting their financial performance.
The Islamic banking industry in Qatar includes four Islamic banks: Qatar Islamic Bank (QIB), Qatar International Islamic Bank (QIIB), Barwa Bank and Al Rayan Bank.These banks are crucial in the banking sector and the country's economy.
In this study, Al Rayan Islamic Bank was selected as a case study since it is the only Qatari bank that provides data on the financing volume for various Islamic banking products in its financial statements during the study period.Therefore, the main objective of this research is to examine the effect of Islamic banking products (financing formulas) on the profitability of Al Rayan Islamic Bank.

BACKGROUND Al Rayan Bank Overview
Al Rayan Bank is a Qatar-based Islamic bank providing Qatar's financial, banking, investment and brokerage services.The bank was established in 2006.Al Rayan Bank is one of the largest Islamic banks in Qatar.Its structure comprises three main divisions: Retail Banking, Private Banking and Wholesale Banking.
In 2022, Al Rayan Bank achieved total assets of QAR 167.5 billion, customer deposits of QAR 97 billion, and financing Assets of 117.8 billion (Masraf Al Rayan, 2022).In terms of financial performance, Al Rayan Bank achieved a net profit of QAR 1,344 million in 2022.Earnings Per Share (EPS) for 2022 is QAR 0.14 (Masraf Al Rayan, 2022).

Islamic Banking Products
Six main contracts are primarily used in Islamic banking:

Musharaka financing
Musharaka financing is a collaboration of investing funds or goods between two or more partners to run certain businesses by Shariah with the distribution of profits between the partners based on an agreed ratio.Meanwhile, the losses will be divided according to how much capital each party contributes.

Mudaraba financing
The contract of Mudaraba is a cooperation between two parties in which the first (Rab al maal) provides the capital.At the same time, the other is the worker (El Mudarib), who is capable of managing a project (Syahri & Harjito, 2020).The profit obtained is divided according to the predetermined agreement, whilst the loss is borne by the capital provider (Rab al maal) as long as the loss is not a result of negligence on Mudarib's part.If the loss is caused by negligence of the Mudarib, the latter must be responsible for the loss (Tjoteng et al, 2022).From the explanation above, there is a difference in terms of business management, capital distribution, and profit-sharing between Musharaka's and Mudaraba's financing.In Mudaraba, the Islamic bank contributes all the capital.At the same time, the other party (the partner) is the manager who runs the project, and profits are divided according to the pre-determined agreement.On the other hand, in Musharaka financing, the Islamic bank and the bank customer will contribute capital and cooperate in managing the business together.The profits and losses are divided according to the PLS Principle.

Murabaha financing
Murabaha is a kind of sale in which the seller discloses the purchase price to the buyer and then adds a profit margin on the purchase price and sells it to the buyer.The profit margin can be a lump sum amount or a percentage of the total cost (Atal et.al, 2020).
Murabaha is a "cost plus markup" sale contract often used as working capital to finance goods required (Morsid & Abdullah, 2014).There are two types of Murabaha sale.If there is no early promise to buy from a customer, then it is called an ordinary Murabaha (a simple Murabaha).However, if the customer promises the Islamic bank that he will buy the commodity after the bank owns it, then it is called Murabaha to purchase (a banking Murabaha).According to Khan (2011), Murabaha is the most popular method of financing compared to other Islamic financial products.
EL salam financing EL salam sale is a forward agreement where spot payment from the buyer in exchange for delivery occurs at a future date from the seller.It is necessary for EL salam sale that the buyer pays the price in full at the time of initiating the contract.The price, quantity, date and place of delivery should be precisely specified in the contract (Hussain, et al, 2015).

Istisnaa financing
In an Istisnaa sale, the seller (producer or manufacturer) undertakes to manufacture or construct assets, with an obligation from the seller to deliver them to the buyer (customer) upon completion.There are two main differences between Istisnaa's and EL salam's contracts.
 In the Istisnaa contract, we can sell only manufactured goods.Meanwhile, in EL salam sale, we can sell standardised goods;  Unlike EL salam sale, Istisnaa allows for spot, deferred or instalment payments.
We can apply the Istisnaa contract in infrastructure projects, for example, the construction of factories, roads, schools, power plants, hospitals and buildings.

Ijarah financing
Ijarah financing in an Islamic bank is a contract meant to transfer the usufruct of an asset from an Islamic bank to the customer for an agreed period, at an agreed consideration called Ujrah (rent).
There are two types of Ijarah in Islamic banks: operational lease and financial lease (Ijarah Muntahia Bittamleek).In the Ijarah Muntahia Bittamleek, the ownership of the leased asset can be transferred to the lessee through a separate unconditional contract in one of the following ways (Vejzagic, 2014):  gift (hiba contract);  token consideration or other amount as specified in the lease;  transfer prior to the end of a lease for a price equivalent to the remaining Ijarah instalments;  a gradual transfer of the legal title.

Profitability of Banks
Profitability is considered an indicator to measure the financial performance of a company.It is also considered one of the tools used to assess management performance in earning profit from the bank's operation (Tjoteng et al., 2022).The financing of the bank's operational activity is effective in earning profit by reflecting on the profitability ratio.High profitability indicates a positive and good financial performance of the bank.In contrast, if it is low, this indicates that the bank's financial performance is not optimal, and this could affect the bank's image in society, which will reduce people's confidence in it (Tjoteng et al., 2022).Typically, the profit rate of a bank is determined by the profit, yield, or return on a given sum of money.
According to many previous studies, banks' profitability is measured by Return on Equity (ROE), Return on Assets (ROA), Net Profit Margin (NPM) or EPS (Masnah & Hendrawati, 2020;Ismawati et al., 2021).In this study, the authors used only one indicator, namely the ROE ratio, as a dependent variable to measure the profitability of Islamic banks.Some works of literature indicate that ROE better describes the bank's profitability.Kennedy (2019) defines ROE as "the ratio used to measure the ability of a company's capital to generate profits for all shareholders." According to Sukmawati and Garsela (2016), ROE is an important financial ratio for equity investors, and it is a powerful measure of how well the management of a company creates value for its shareholders.Note that the ROE of banks is influenced by the level of financial leverage and ROA of banks (equity/assets) (Sufian, 2007).We use the ROE ratio to indicate the efficiency of the bank's management in the use of equity.The formula for calculating the ROE is as follows: LITERATURE REVIEW Masnah and Hendrawati (2020) mentioned in their research that Musharaka financing positively and significantly affects the profitability level of Indonesian Islamic Banks, while Murabaha financing has a negative and significant influence on profitability.The same is the result of the research of Tjoteng et al. (2022), which stated that simultaneously, Musharaka financing has a positive and significant effect on profitability, and Murabaha financing has a negative and significant effect on profitability.Conversely, research conducted by Sari and Maharani (2022) and Ismawati et al., (2021) suggested that Musharaka financing has a negative and significant effect on profitability and Murabahah financing has a positive and significant effect on profitability, while Ijarah financing has no significant effect on profitability.
On the other hand, Afrizal et al., (2023), Jaurino and Wulandari (2017) and Manaseer and Alslehat (2016), in their research, discovered that Murabaha financing has a positive and significant effect on profitability, while Musharaka financing does not affect on the profitability.According to the research findings of Rumaishaa and Zamzami (2022), Istisnaa financing did not affect profitability.Table 1 summarises the previous studies.

Critical and Research Gap
All the previous literature we referred to relates to the research question and its objectives.However, most previous studies dealt with Indonesian Islamic banks and did not deal with the experience of Islamic banks in Qatar.Consequently, this formed a spatial and empirical research gap that we tried to fill.

METHODOLOGY Design Research
Upon the literature review, we build the following research model as depicted in Figure 1.The authors adopt the following hypotheses for the Research model: H1: There is a significant impact of Musharaka on the Profitability of Al Rayan Islamic Bank; H2: There is a significant impact of Murabaha on the Profitability of Al Rayan Islamic Bank; H3: There is a significant impact of Istisnaa on the Profitability of Al Rayan Islamic Bank; H4: There is a significant impact of on the Profitability of Al Rayan Islamic Bank.

Data Collection and Processing Instruments for Data Collection
This study utilises a series of quarterly observations from Al Rayan Islamic Bank's income statements and balance sheets beginning from the 1st quarter of 2011 until the 1st quarter of 2023.

Survey Population and Rationale
The study population consists of Islamic banks operating in Qatar country.The study sample includes Al Rayan Bank (Masraf Al Rayan, 2022).Al Rayan Bank was incorporated as a Qatari Shareholding Company on 4 January 2006 with a fully paid-up capital of USD 2.6 bn.Note that Al Rayan Bank is engaged in banking and financing activities through its 17 branches in conformity with the principles of Islamic Shariah Laws (Masraf Al Rayan, 2023).

RESULT Stationarity tests
The unit root test was performed at level and first difference.The results of unit root tests in Table 3 indicate that, according to the Augmented Dickey-Fuller (ADF) test, all variables series have unit root problems at a level.In contrast, after making the first differences, the series became stationarity (integrated of order one I ( 1

ARDL Approach to Cointegration
In order to test the long-run relationship between the variables under study, we adopted the Autoregressive Distributed Lag (ARDL) approach to cointegration analysis, which was developed by Pesaran (1997).
The ARDL test is distinguished from other cointegration tests (such as Engle & Granger, 1987;and Johansen, 1988) in that it can be applied whether that time series is integrated of order one I(1) or I(0).Here, the Johansen cointegration test requires that all-time series be of equal order of integration.Hence, the ARDL procedure is more valid and reliable for small samples (Menegaki, 2019;Bhatta et al., 2020).
Prior to the estimation of the ARDL model, the determination of the best number of lags for all variables is necessary.As displayed in Figure 2, the results of the Akaike Information Criterion (AIC) indicate that the best model is ARDL (1.0.2.0.1), and it can be written as follows: where -Δ: is the first difference operator; -Ɛ : is the white noise residuals; -(1, 2… 5): represents the long-run parameters; -(β1, β2… β9): represents the short-run dynamic of the model.

The ARDL Bound Test
Table 4 presents the results from the ARDL Bound Test used to check the presence of a long-run relationship between Islamic banking products and profitability (LROE).The computed Fstatistics value (F-statistic = 9.470961) is greater than the appropriate upper bound of the critical value at all significance levels (1%, 2.5%, 5%, 10%).Thus, the null hypothesis of no cointegration is rejected, meaning cointegration exists.This indicates a long-run equilibrium relationship between the dependent variable (LROE) and the independent variables (Islamic financing formulas).

ARDL Error Correction Model
The Error Correction Model (ECM) results are more reliable as a test of the cointegration relationship (Bhatta et al., 2020).As presented in Table 5, the results from the ECM suggest that the coefficient of the Error Correction Term (ECT) (CointEq(-1) = -1.539987) is negative and statistically significant at a 1% level, supporting the presence of cointegration.This indicates a rapid speed of the adjustment back to the long-run equilibrium after a short-run shock.

Model estimation
After confirming that the research variables are cointegrated, we can now estimate the model.

Long-run model
We estimated the long-run relationship between the variables, and the results are illustrated in the table below.6 summarises the results of the long-run relationship between Islamic financing formulas and profitability, which is measured by the ROE ratio.The long run coefficient of Musharaka financing (Mush) amounted to 0.317005, and prob.0.0013 < 0.05, meaning that there is a positive and significant effect at (1%) of (Mush) on Islamic bank profitability and if there is an increase in Musharaka financing by 1%, it will lead to an increase of ROE by 0.31%.This finding is similar to previous studies (Tjoteng et al., 2022;Masnah & Hendrawati, 2020), which proved the positive impact of Musharaka financing on the profitability of Indonesian Islamic banks.
On the other hand, the Murabaha financing coefficient exhibits a value of -3.691185 and prob.0.0002 < 0.005.Therefore, it can be concluded that the Murabaha (Mura) has a negative and significant effect on ROE.This means that an increase in Murabaha financing by 1% will lead to a decrease in Islamic banks' profitability by 3.69% in the long term.This finding is similar to previous studies (Ismawati et al., 2021;Tjoteng et al., 2022;Masnah & Hendrawati, 2020) which proved the negative impact of Murabaha financing on the profitability of Indonesian Islamic banks.
The Istisnaa financing variable indicates a coefficient value of 0.346686 and prob.0.2520 > 0.005.Hence, it can be concluded that the Istisnaa does not have a statistically significant effect on Islamic banks' profitability.This result reflects previous studies (Rumaishaa & Zamzami, 2022).This may be due to the public's lack of knowledge of the Istisnaa financing method.
The Ijarah financing variable exhibits a coefficient value of 0.201897 and prob.0.3123 > 0.005.Consequently, it can be concluded that the Ijarah financing does not have a statistically significant effect on ROE.This result reflects previous studies (Sari & Maharani, 2022).

Short-run model
We estimated the ECM to know the short-run relationship between variables, and the results are in the following table.The results of the short-run relationship indicate a negative and significant effect of the Murabaha financing (LMUR) on the profitability of the Islamic bank.The coefficient of LMUR indicates that an increase in Murabaha financing by 1% will lead to a decrease in Islamic bank profitability by 6.43%.This finding is similar to previous studies (Ismawati et al., 2021;Tjoteng et al., 2022;Masnah & Hendrawati, 2020).
The coefficients of the first lag of Murabaha financing (LMUR(-1)) indicate that there is a positive and significant effect of the Murabaha financing on the profitability of the Islamic bank, and the increase in Murabaha financing by 1% will lead to an increase in the Islamic bank profitability by 3.29%.This finding is similar to previous studies (Manaseer & Alslehat, 2016;Sari & Maharani, 2022;Afrizal et al., 2023;Rumaishaa & Zamzami, 2022).

Diagnostic test results
To investigate if the estimated model above is reliable, we applied some diagnostic tests, and the results are provided in the table below.The table indicates the results of the diagnostic tests of the model.We note that all probabilities exceed 0.05.Thus, we accept the null hypotheses (H0) in all tests at a 5% level of significance, and we conclude that:  LM (Lagrange multiplier) test confirmed that there is no correlation in the model;  Jarque-Berra test reveals that the residuals are normally distributed;  ARCH test suggests that the model is not heteroscedastic.
To test the stability of the long-run coefficients, the Cumulative sum (Cusum) test was employed.The results are illustrated in the following figure.Since the curve is located inside the critical bounds of 5% significance, therefore, it can be realised that the ARDL model is stable.

CONCLUSION
This study investigated the effect of Islamic banking products (financing formulas) on the Profitability of Al Rayan Islamic Bank.It describes the relationship between (Musharaka, Murabaha, Istisnaa and Ijarah financing) and profitability measured by (ROE).The results of the long-run analysis reveal that Musharaka financing has a positive and significant effect on ROE at the 5% level.Murabaha financing has a negative and significant effect on ROE.Meanwhile, the Istisnaa and Ijarah variables have no significant effect on ROE.The short-run dynamics demonstrate a negative and significant effect of Murabaha and Ijarah financing on the Islamic bank's profitability, while the lagged value of Murabaha LMUR(-1) has a positive and significant effect on the profitability index of the Islamic bank.Simultaneously, there is no relationship between Musharaka and Istisnaa and their effect on the profitability of Islamic banks in the short term.

Implications of research
From a practical standpoint, this study contributes to reconfirming the findings of the theoretical and empirical literature on the effect of Islamic banking products (financing formulas) on the profitability of Islamic banks.The results of this study can serve as a guide for Al Rayan Bank's managers about the profitability of Islamic financing products.

Suggestions
Based on the above conclusions, a suggestion can be made to Al Rayan Islamic Bank in particular, and Islamic banks in general, that it is necessary to rely more on the Musharaka financing as well as Ijarah and Istisnaa in financing to enhance their profitability and financial performance.

Figure 1 :
Figure 1: The proposed research model ), either with a Constant or With Constant & Trend or Without Constant & Trend).

Figure 2 :
Figure 2: Results of the Akaike Information Criterion (AIC)

Figure 3 :
Figure 3: The Results of Cumulative sum (Cusum) test

Table 1 :
Summary of the literature review

Table 2 :
Description of dependent and explanatory variables in the model

Table 3 :
Augmented Dickey-Fuller unit-root test results

Table 4 :
ARDL bound test results

Table 5 :
ARDL error correction model results

Table 6 :
The long-run results

Table 7 :
Short-run results

Table 8 :
Diagnostic test results