How should policymakers think about Islamic banks? Are they relics of a bygone era, propped up by subsidies and distorting financial-sector competition? Or, are they efficient and focused financial institutions that could, if unleashed, eventually dominate the retail financial landscape? A better understanding of these policy questions requires specific knowledge about the performance and the determinants of efficiency and profitability of Islamic banks. Indeed, the performance evaluation of Islamic banks is especially important today because of the globalization effect. The globalization phenomenon has put Islamic banks in fierce competition with traditional banks in well-developed financial markets. Further, some countries have completely transformed their banking system to the Islamic model. This paper intends to analyze how bank characteristics and the overall financial environment affect the performance of Islamic banks. Specifically, the purpose of the study is to closely examine the relationships between profitability and the banking characteristics, after controlling for economic and financial structure indicators. The intention is to decide which among the potential determinants of performance appear to be important. By so doing, the paper extends the literature in several ways. First, utilizing bank level data, the paper provides summary statistics pertaining to Islamic banks’ sizes and profitability. Second, the paper uses regression analysis to determine the underlying determinants of Islamic bank performance. To this end, a comprehensive set of internal characteristics is examined as determinants of bank’s net non-interest margin and profitability. These internal characteristics include bank size, leverage, loans, short term funding, overhead and ownership.