This publication is part of the journal (2017-1)
For the last four decades, the Basel Committee on Banking Supervision has worked to establish an international standard for capital adequacy that measures the amount of coverage and protection provided by the banks’ equity for the depositors’ money. This is by establishing a relationship between the bank’s capital on the one hand and its assets and liabilities on the other hand. The Committee has continued to upgrade the standard in line with developments in the knowledge of risk management. Central banks throughout the world have compelled the banks under their supervision, including Islamic banks, to apply this standard. This research aims to study the effective relationship between capital adequacy and profitability ratios of Islamic banks through an empirical study. It uses a sample of the world’s largest Islamic banks in terms of profits (15 of 25 Islamic financial institutions according to the availability of the profit data) during the period 2011 - 2015. To investigate the effect of the independent variables on the dependent ones,
two simple linear regression models are used, employing the statistical program views. The results show a positive correlation; whenever an Islamic bank tried to raise the capital adequacy ratio the profitability indicators represented by ROE (return on equity) and ROA (return on assets) also increased However, the Basel standard was established for conventional banks, and the IFSB in Malaysia has developed a standard especially for calculating capital adequacy for Islamic banks by adapting the Basel standard to the nature of Islamic banks’ business. Therefore, the research recommends the application of this standard because it would further increase the profitability of Islamic banks.