Modelling Profit Margin of Islamic Banking from a Theoretical Perspective: A Research Note

HRMARS - This paper presents a comprehensive theoretical exploration of the Net Profit Margin (NPM) concept through the lenses of institutional economics theory, agency theory, contract theory, and dealership theory. An analytical approach was employed to derive the theory of NPM and supported with reasons and justifications to divulge the merits of the theory concerned. The findings suggest that the profit margin formation in Islamic banks is holistic and multidimensional, extending beyond dealership theory to include institutional, contractual, and agency perspectives that collectively influence profit generation. Although this work is conceptual in nature, it highlights the need for future empirical investigations and recommends distinguishing NPM at the product level. Practically, the study provides valuable guidance for Islamic banks in diversifying their profit margin strategies and offers new insights into the theoretical development of profit margins. The originality of this study lies in its integrated model, which establishes a clear theoretical connection between multiple economic and managerial perspectives in explaining Net Profit Margin (NPM) behaviour in Islamic banks.