THE EFFECT OF FINANCIAL LEVERAGE ON THE ISLAMIC BANKS’ PERFORMANCE IN ASIAN COUNTRIES

The current research is designed for analyzing the impact of the financial leverage on performance of the Islamic Banks in the countries of Asian region. The research study comprises of the population of Islamic Banks from Asian region. The data of twenty five Islamic banks from Asian economies for the time period (2010 -2019) is used, and this data have been retrieved from the Thomson Reuters Data Stream. Researcher has used latest version of E-views for analyzing the data of current study. Data analyses are performed by applying the tests like Descriptive Statistics, Correlation Analysis, Common Effect Model, Fixed Effect Model, Likelihood Test, Random effect Model and Hausman Test. Current study used the fixed effect regression model. Findings of current study showed significant and positive impact of Leverage on Islamic Banks performance in Asian Region. In the light of results and findings it is analyzed that financial leverage has positive and significant association for ROA in the presence of control variables (Bank Size and Bank Efficiency). It is clear indication from findings that the high financial leverage increases the performance of Islamic banks in Asian countries. The result of the research study is not having supporting the Agency Cost Theory. According to Agency Cost Theory when there is increase in the equity of banks this will have negative outcomes for firm value. The results of current research work are providing strong evidence in support of the Signaling Theory. Signaling theory describes that if there is higher capital then the performance of the banks will be much better. The findings revealed that financial leverage is on the level in Islamic Banks that totally depends upon the flexibility ratio for the adjustment of the value of debt and their power of earning. coefficient of is significant at the level of (p<0.05) and band efficiency (BEF) coefficient value (β= -.006), significant at the required level of (p<0.05). The control variables values shows that significant relationship with dependent variable return on assets its mean study control the effect of financial leverage through bank size and bank efficiency improvement. According to these outcomes hypothesis 1a has been accepted statistically, because required results obtained from this table. Financial leverage has a positive influence on Islamic banking performance with measure of return on equity. In above model FL (financial leverage) found that statistically significant at the level of (p<0.05) with coefficient value (β= -1.11). These values shows that financial leverage significantly negative influence on return on equity. Similar findings in the study of Abubakar in which examined the negative impact of leverage on return on equity. The coefficient value of bank efficiency (BEF) coefficient value (β= -0.020), significant at the required level of (p<0.05) and bank size insignificant at the level of p>0.05. The control variable bank efficiency value shows that significant inverse relationship with dependent variable return on equity its mean study control the effect of financial leverage through bank efficiency improvement. According to these outcomes hypothesis 1b has been rejected statistically, because required results does not meet the threshold. According to the both fixed effect model findings 1 has been approved, because in both model financial leverage p value found that at the level of p<0.05. So with respective of the threshold values and outcome of this study accepted.