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Interest Rate, Profitability, and Risk Taking: An Analysis in Islamic Banking in Iran
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Fakhreddin Fakhrehosseini *1   , Meysam Kaviani2 |
1- Associate Professor, Department of Management and Accounting, Ka.c, Islamic Azad University, Karaj, Iran , f_fkm21@yahoo.com
2- Assistant Professor, Department of Management and Accounting, Ka.c, Islamic Azad University, Karaj, Iran |
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Abstract: (2 Views) |
This study examines the effects of interest rates on the profitability and risk-taking behavior of banks within the framework of Iran’s Islamic banking system over the period 2005–2023 (1384–1402 in the Iranian calendar). Specifically, the impact of interest rates on profitability indicators—including Return on Assets (ROA), Return on Equity (ROE), and Net Interest Income (NII)—as well as on risk-taking indicators, including the ratio of loan loss provisions to total assets and the capital adequacy ratio, is analyzed.
In terms of objective, this research is applied, and methodologically it is a quantitative correlational study. The required data were collected from archival sources, including the financial statements of banks listed on the Tehran Stock Exchange and statistics published by the Central Bank of the Islamic Republic of Iran. Panel data techniques and multivariate regression models were employed for data analysis, and the models were estimated using the Generalized Least Squares (GLS) method. In addition, necessary econometric tests, including stationarity tests of the variables, were conducted to ensure the validity of the results.
The empirical findings indicate that interest rates have a negative and statistically significant effect on banks’ Return on Assets and Net Interest Income, while their effect on Return on Equity is not statistically significant. Regarding risk-taking, interest rates have a positive and significant effect on loan loss provisions, suggesting that increases in interest rates are associated with heightened default risk of granted facilities, thereby compelling banks to increase their loan loss provisions to cover credit risks. In contrast, the results show that interest rates do not have a significant effect on the capital adequacy ratio.
Overall, the findings suggest that despite the non-usurious nature of Islamic banking, interest rates continue to play a significant role in reducing profitability and increasing risk-taking in Iranian Islamic banks. The results of this study can serve as a basis for monetary policymakers and bank managers in improving risk management, enhancing profitability performance, and strengthening the efficiency of the Islamic banking system. |
Article number: 15 |
| Keywords: Interest rate, profitability, risk-taking |
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Full-Text [PDF 628 kb]
(1 Downloads)
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Article type: Research |
Subject:
Special
Received: 2026/02/14 | Accepted: 2026/04/29 | Published: 2026/08/23
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