The Determinants of Bank Profitability: How Malaysian Islamic Banks Response to the Financing Risk
DOI:
https://doi.org/10.14738/assrj.612.7471Keywords:
Profitability, financing risk and Malaysian Islamic banks, shariah,Abstract
The purpose of this article is to investigate the relationship between financing risk and profitability of Malaysian Islamic banks to find the impact of financing risk on bank profitably in achieving high level of stability. A regression analysis is built on an unbalanced panel data set comprising 175 observations of 17 top Malaysian Islamic banks over the period 1994-2015. To this end, the empirical data are collected from individual Islamic banks’ financial statements as submitted to the Central Bank of Malaysia for supervisory purposes. Complementary sources include the Global Market Information Database, the World Bank's Annual Report through the International Monetary Fund (IMF), Statistical, Economic and Social Research and Training Center for Islamic Countries (SESRTCIC) and Asian Development Bank (ADB). All the determinant variables included in the model have statistically significant impacts on Malaysian Islamic banks’ profitability. However, the effects are not uniform across profitability measures. Regression findings reveal that capital ratio, financing loss provision and liquidity ratio significantly affect the profitability of Islamic banks. Some variables of monetary policy variables such as interest rate and interbank rate have a significant role on the Islamic banks’ profitability. Interestingly, there is a difference of the two variables where interest rate shown negative sign while positive sign from interbank rate. Findings also suggest the economic conditions factors such as GDP growth and unemployment also affects the profitability of Islamic banks despite the sign is different.
References
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Uhomoibhi, A. T. (2009). Impact of corruption on bank profitability in Nigeria. Prosiding Symposium for Young Researchers (FIKUSZ ’09), (pp. 7-16).
Wan Zulkifli Wan Hassan, Ezad Azraai Jamsari, Azizi Umar, Zulkifli Mohamad, Jamsari Alias, Nazri Muslim and Md Yazid Ahmad. 2017. The Management of Zakat Distribution In The Practice of Fatwa in Terengganu, Malaysia, International Journal of Civil Engineering and Technology. 8(11): 834–851
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Wan Zulkifli Wan Hassan, Nabilah Abdullah, Nazri Muslim, Jamsari Alias, Azizi Umar, Rozmel Abdul Latiff, Nani Rahayu Sallihuddin, Zulkifli Mohamad, Aminuddin Basir and Nasaruddin Yunus. 2019. Linguistics Elements of Arabic Language Applied by Imam Shafi’i in Islamic Jurisprudence, International Journal of Civil Engineering and Technology.10(1): 1704–1711.
Wan Zulkifli b. Wan Hassan (2002), Doktrin Sadd al-Dharai’ dan Pemakainnya Dalam Membendung Ajaran Sesat: Suatu Kajian Di JAKIM, Disertasi Sarjana Syariah, Kuala Lumpur: Akademik Pengajian Islam, Unversiti Malaya.
White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48(4), 817-838.
Wooldridge, J.M. . (2002). Econometric Analysis of Cross Section and Panel Data. Cambridge: MIT Press.
Yong, O. (1993). Pasaran dan Institusi Kewangan di Malaysia. Kuala Lumpur: Dewan Bahasa dan Pustaka.
Yudistira, D. (2004). Efficiency in Islamic banking: An empirical analysis of 18 banks. Islamic Financial Architecture, 479.
Albertazzi, U., & Gambacorta, L. (2009). Bank profitability and the business cycle. Journal of Financial Stability, 5, 393-409.
Asian Development Bank. (1983-2016). Asian Development Bank (1983-2016). Asian Development Bank .
Asli, D.-K., & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: some international evidence. The World Bank Economic Review, 13(2), 379--408.
Bashir, A.-H. M. (1999). Risk and Profitability Measures in Islamic Banks: The Case of Sudanese Banks. Journal of Islamic Economic Studies, 1-24.
Ben Naceur, S. (2003). The Determinants of the Tunisian Banking Industry Profitability: Panel Evidence. Applied Financial Economics(11), 317-319.
Bobáková. (2003). Raising the profitability of commercial banks. Biatec, 21-25.
Bourke, P. (1989). Concentration and other determinants of bank profitability in Europe, North America and Australia. Journal of Banking & Finance, 65-79.
Breusch, T.S. & Pagan, A.R. (1980). The Lagrange multiplier test and its applications to model specification in econometric. Review of Economic Studies, 47(1), 239-253.
Brooks . (2008). Introductory Econometrics for Finance. New York, United Stated: Cambridge University Press.
Calza, A., Gartner, C., & Sousa, J. (2003). Modelling the demand for loans to the private sector in the euro area”, , Vol. 35, No. 1, h. Applied Economics, 107–117.
Chirwa, E.W. & Mlachila, M. (2004). Financial reforms and interest rate spreads in the commercial banking system in Malawi. IMF Staff Papers 51, pp. 96-22., 96-22.
Fathin, F. Said., & Ghafar, A. I. (2007). How Does The Change in Monetary Policy Affect Lending Behaviour of Islamic Banking in Malaysia. Journal of Economic Development,, 12(3), 163-77.
Fekri A, S. (2015). Efficiency assesment of banking sector in Yemen using data development window analysis: A comparative analysis of Islamic nad conventional banks. Benchmarking: An International Journal, 22(6), 1115-1140.
GMID. (1994-2015). Global Market Information Database (GMID). http://www.portal.euromonitor.com.
Golin, J. A. (2001). The Bank Credit Analysist HAndbook: A Guide for Analysts, Bankers and Investor. John Wiley & Sons.
H. Boyd, J., & E. Runkle, D. (1993). Size and performance of banking firms: testing the predictions of theory. Journal of Monetary Economy, 31, 47–67.
Hameed M. B & Kabir, H. (2003). Determinants Of Profitability In Islamic Banks: Some Evidence From The Middle East. Islamic Economic Studies, 11(1), 1-27.
Hassoune. A., (2008). Islamic banks’ profitability in an interest rate cycle. International journal of Islamic financial services, 4, 1-13.
Hausman J.A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251-1271.
Islamic Interbank Money Market. (1994-2015). Islamic Interbank Money Market. Central Bank of Malaysia. Kuala Lumpur: Central Bank of Malaysia. Retrieved from http://iimm.bnm.gov.my/
Kennedy. (1992). A Guide to Econometrics. Oxford: Blackwell.
Kennedy. (2008). A Guide to Econometrics (6th ed.). Mass, United Kingdom: Blackwell Pub, Malden.
Kosmidou, K. (2008). The determinants of banks’ profit in Greece during the period of EU financial integration. Managerial Finance, 34(3), 146-159.
Mathuva, D. (2011). Capital Adequacy, Cost Income Ratio and the Performance of Commercial Banks: The Kenyan Scenario. The International of Applied Economics and Finance, 3(2), 35-47.
Miller, S. and Noulas, A. (1996). The technical efficiency of large bank production. Journal of banking and finance, 20(3), 495-509.
Misman, F. N. (2011, September 26-27). Financing structures, bank specific variables and credit risk: Malaysian Islamic bank. 1-12. Bangkok, Thailand.
Mohammad Taqiuddin; , Joni Tamkin Borhan; Ahmad Azam. (2008). Pengaruh Persekitaran Makroekonomi Terhadap Keberuntungan Bank-Bank Islam Penuh (full-fledged) di Malaysia. Kuala Lumpur, Malaysia.
Molyneux, P., & Thornton, J. (1992). Determinants of European Bank Profitability: A Note. Journal of Banking and Finance, 16(6), 1173-1178.
Nazri Muslim, Nik Yusri Musa dan Ahmad Hidayat Buang. 2011. Hubungan Etnik Di Malaysia Dari Perspektif Islam. Kajian Malaysia. 29 (1): 1–28.
Nerlove. (2002). Essays in Panel Data Econometrics. Cambridge University Press: Cambridge University Press.
Noulas, S. M., M. Miller, S., & Athanasios , G. (1997). Portfolio Mix And Large Bank Profitability In The USA. Applied Economics, 29(4), 505-512.
Pasiouras, F., & Kosmidou, K. (2007). Factors influencing the profitability of domestic and foreign commercial banks in the European Union. Research in International Business and Finance, 21, 222-237.
R. Fraser, D., E. Gup, B., & W. Kalor, J. (2001). Commercial Banking: The Management of Risk. United Kingdom: South-Western College Publishing.
Rajesh, K. S., & Chaudhary, S. (2009). Profitability Determinants of Banks in India. International Journal of Global Business, 2(1), 163-180.
Ramlall. (2009). Bank-specific, industry-specific and macroeconomic determinants of profitability in Taiwanese banking system: under panel data estimation. International Research Journal of Finance and Economics, 34, 1450-2887.
Samad, A. & Kabir.,H. (2000). The Performance of Malaysian Islamic bank During 1984-1997: An exploratory study. International Journal of Islamic Financial Services, 1-14.
SESRTCIC. (1994-2015). Statistical, Economic and Social Research & Training Centre for Islamic Countries, www.sesrtcic.org, 16hb Januari 2011. Statistical, Economic and Social Research & Training Centre for Islamic Countries,.
Short, B. K. (1979). The relation between commercial bank profit rates and banking concentration in Canada, Western Europe, and Japan. Journal of Banking & Finance, 209-219.
Sudin, H. (1996). Competition And Other External Determinants of The Profitability Of Islamic Banks. Islamic Economic Studies, 4(1), 49-64.
Sufian, F., & Habibullah, M. S. (2010). Does economic freedom fosters banks’ performance? Panel evidence from Malaysia. Journal of Contemporary Accounting \& Economics, 6, 77-91.
Taqiuddin, M.; Joni, T. B., and Azam, S. (2008). Pengaruh Persekitaran Makroekonomi Terhadap Keberuntungan Bank-Bank Islam Penuh (full-fledged) di Malaysia. Seminar Antarabangsa Penyelidikan Pengajian Pengajian Islam Peringkat Antarabangsa (pp. 1-16). Kuala Lumpur: Academy of Islamic Studies.
Thakor, A. V. (1987). Discussion. The Journal of Finance, 42(3), 661-663.
Tigran, P. and Heiko, H. (2009). Oil Prices and Bank Profitability: Evidence from Major Oil-Exporting Countries in the Middle East and North Africa. IMF Working Paper, 1-21.
Uhomoibhi, A. T. (2009). Impact of corruption on bank profitability in Nigeria. Prosiding Symposium for Young Researchers (FIKUSZ ’09), (pp. 7-16).
Wan Zulkifli Wan Hassan, Ezad Azraai Jamsari, Azizi Umar, Zulkifli Mohamad, Jamsari Alias, Nazri Muslim and Md Yazid Ahmad. 2017. The Management of Zakat Distribution In The Practice of Fatwa in Terengganu, Malaysia, International Journal of Civil Engineering and Technology. 8(11): 834–851
Wan Zulkifli Wan Hassan, Ezad Azraai Jamsari, Nazri Muslim, Jamsari Alias, Zulkifli Mohamad and Md Yazid Ahmad. 2018. The Dynamics of Zakat Distribution According to Shafi’i School of Law (Madhhab) in Fatwas of Terengganu State, International Journal of Civil Engineering and Technology. 9(1): 771–783.
Wan Zulkifli Wan Hassan, Nabilah Abdullah, Nazri Muslim, Jamsari Alias, Azizi Umar, Rozmel Abdul Latiff, Nani Rahayu Sallihuddin, Zulkifli Mohamad, Aminuddin Basir and Nasaruddin Yunus. 2019. Linguistics Elements of Arabic Language Applied by Imam Shafi’i in Islamic Jurisprudence, International Journal of Civil Engineering and Technology.10(1): 1704–1711.
Wan Zulkifli b. Wan Hassan (2002), Doktrin Sadd al-Dharai’ dan Pemakainnya Dalam Membendung Ajaran Sesat: Suatu Kajian Di JAKIM, Disertasi Sarjana Syariah, Kuala Lumpur: Akademik Pengajian Islam, Unversiti Malaya.
White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48(4), 817-838.
Wooldridge, J.M. . (2002). Econometric Analysis of Cross Section and Panel Data. Cambridge: MIT Press.
Yong, O. (1993). Pasaran dan Institusi Kewangan di Malaysia. Kuala Lumpur: Dewan Bahasa dan Pustaka.
Yudistira, D. (2004). Efficiency in Islamic banking: An empirical analysis of 18 banks. Islamic Financial Architecture, 479.
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2019-12-14
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Mohamad, M. T. ., Sulaiman@Mohamad, A. A. ., Khairul Hamimah, & Muslim, N. (2019). The Determinants of Bank Profitability: How Malaysian Islamic Banks Response to the Financing Risk. Advances in Social Sciences Research Journal, 6(12), 1–15. https://doi.org/10.14738/assrj.612.7471
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