Forecasts of Future Profitability based on Disaggregated Earnings: A Comparative Analysis of Islamic and Conventional Banks

Banks are the financial institutions accepting deposits from the people and lending to the needy people, areas and regions for various purposes. Banking industry can be divided into two types of banks— Islamic and conventional banks. The operations of conventional banks are based on interest (sood/riba) and therefore interest constitutes the main source of earnings of these banks. While on the other hand, Islamic banks are interest-free financial institutions in which interest is strictly prohibited. They work on the principle of profit and loss sharing instead of interest therefore do not guarantee any fixed rate of return on deposits. Earnings of the banks is actually the aggregation of different components and analysts make their analysis on the basis of these earnings. The objective of the paper is to find out that whether aggregated or disaggregated earnings is more informative to predict future earnings in these two types of banks. The study confirms that disaggregated earnings is more informative for Islamic banks and less informative for conventional banks during the period from 2007 to