The effect of capital management on profitability in Islamic banks

Abstract

This study examines the effect of working capital management (WCM) on the profitability of Islamic banks in Jordan in the post-COVID-19 era (2021–2025). The study employs a quantitative explanatory research approach to empirically examine the effect of significant financial variables on return on equity (ROE). Also, the analysis focused on four financial factors, namely the debt ratio, size of the bank, working capital turnover, and liquidity ratio, using multiple linear regression analysis to determine their impact on ROE, a core indicator of profits available to shareholders and financial vigour. The findings indicate that bank size showed a statistically significant positive association with profitability, while working capital to total asset turnover and working capital to total asset ratio lacked a statistically significant influence on ROE. Both were found to have positive coefficients, yet their insignificance illustrates the limited applicability of short-term financial efficiency indicators in defining Shariah-compliant institutions’ profitability. From both policy-making and bank-management perspectives, the classical financial ratios should be considered, as well as the peculiarities of Islamic finance that affect banks’ performance.