Does corruption affect the profitability of Islamic banks?

The impact of corruption on the profitability of Islamic banks is ambiguous. This study aims to clarify this relationship by using a global sample of 240 banks from 41 countries over the period 2012-2023. The study employs both dynamic and static panel data models, using the Corruption Perception Index as the key corruption measure, and includes various control variables. Our findings indicate that changes in corruption levels significantly affect the profitability of Islamic banks. Increased corruption is associated with a decrease in banks’ ROAA and ROAE. This implies the necessity for policymakers to establish and enforce robust measures aimed at deterring Islamic banks from participating in corrupt practices. Additionally, we recommend that Islamic banks proactively develop a robust governance framework to prevent and combat corruption effectively. The findings remain consistent under various model specifications and highlight the importance of addressing corruption to enhance the financial performance of Islamic banks.