Which is more important in terms of Profitability of Islamic banks: Bank Specific factors or Macroeconomic factors? An Empirical Study on Malaysian Islamic Banks
Studies of Islamic banks’ profitability are an important tool towards improving performance, evaluating bank operations and determining management plan to help in increasing the chance for the banks to survive in competitive markets. The present study seeks to fill a demanding gap in the literature by providing new empirical evidence on the factors that influence the profitability of the Islamic banking sector in Malaysia. The research thus conducts a comparative analysis of the determinants of the profitability of Islamic banks operating in Malaysia. The Pooled Ordinary Least Square method is employed using annual data from the period 2007 to 2013 on 11 Islamic banks in Malaysia. In order to evaluate the financial performance of these Islamic banks the profitability are measured using the Return on Assets (ROA) indicator. The empirical findings of study reveals that endogenous factors such as the efficiency ratios (overhead costs) is negatively and statistically significant to the profitability of the Islamic bank’s performance, while equity financing is positive and statistically significant to the profitability of Islamic banks. The Credit risks and Liquidity risks factors are insignificant on the performance of the Islamic banks. On the other hand, exogenous factors such as inflation have a positive and statistically significant impact on the return on assets whereas savings on gross national income has a statistically significant and negative impact on the performance of Islamic banks.
Ahmad, N. H. and S. N. Ahmad (2004). "Key factors influencing credit risk of Islamic bank: A Malaysian case." The Journal of Muamalat and Islamic Finance Research 1(1): 65-80.
Al-Jarrah, I and Molyneux,P.(2003),"Efficiency in Arabian banking", paper presented at the International conference on Financial Development in Arab countries, Abu Dhabi
Bashir, A.-H. M. (2003). "Determinants of profitability in Islamic banks: Some evidence from the Middle East." Islamic Economic Studies 11(1): 31-57.
Ben Naceur, S. and M. Goaied (2008). "The determinants of commercial bank interest margin and profitability: evidence from Tunisia." Frontiers in Finance and Economics 5(1): 106-130.
Berger, A. N. (1995). "The relationship between capital and earnings in banking." Journal of Money, Credit and Banking: 432-456.
Bernheim, B. D. and J. B. Shoven (1991). Introduction to" National Saving and Economic Performance". National saving and economic performance, University of Chicago Press: 1-14.
Demirgüç-Kunt, A. and H. Huizinga (1999). "Determinants of commercial bank interest margins and profitability: some international evidence." The World Bank Economic Review 13(2): 379-408.
Goddard, J., et al. (2004). "The profitability of european banks: a cross‐sectional and dynamic panel analysis." The Manchester School 72(3): 363-381.
Guru, B. K., et al. (2002). "Determinants of commercial bank profitability in Malaysia." Journal of Money, Credit, and Banking 17: 69-82.
Haron, S. (1996). "Competition and other external determinants of the profitability of Islamic banks." Islamic Economic Studies 4(1): 49-64.
Haron, S. (2004). "Determinants of Islamic bank profitability." Global Journal of Finance and Economics 1(1): 11-33.
Izhar, H. and M. Asutay (2007). "Estimating the profitability of Islamic banking: evidence from bank Muamalat Indonesia." Review of Islamic Economics 11(2): 17.
Karim, B. K., et al. (2010). "Bank-Specific, Industry-specific and Macroeconomic Determinants of African Islamic Banks' Profitability." International Journal of Business and Management Science 3(1): 39.
Kosmidou, K. (2008). "The determinants of banks' profits in Greece during the period of EU financial integration." Managerial Finance 34(3): 146-159.
Miller, S. M. and A. G. Noulas (1997). "Portfolio mix and large-bank profitability in the USA." Applied Economics 29(4): 505-512.
Pasiouras, F. and K. Kosmidou (2007). "Factors influencing the profitability of domestic and foreign commercial banks in the European Union." Research in International Business and Finance 21(2): 222-237.
Perry, P. (1992). "Do banks gain or lose from inflation." Journal of Retail Banking 14(2): 25-30.
Rivard, R. J. and C. R. Thomas (1997). "The effect of interstate banking on large bank holding company profitability and risk." Journal of Economics and Business 49(1): 61-76.
Staikouras, C. and G. Wood (2003). The determinants of bank profitability in Europe. European Applied Business Research Conference, Venice.
Short, B. K. (1979). "The relation between commercial bank profit rates and banking concentration in Canada, Western Europe, and Japan." Journal of Banking & Finance 3(3): 209-219.
Srairi, S. A. (2009). "Factors influencing the profitability of conventional and Islamic commercial banks in GCC countries." Review of Islamic Economics 13(1): 5-30.
Sufian, F. and M. S. Habibullah (2009). "Bank specific and macroeconomic determinants of bank profitability: empirical evidence from the China banking sector." Frontiers of Economics in China 4(2): 274-291.
TENG, K. Y. (2012). The determinants of Islamic banks profitability in Malaysia, UNIVERSITI TUNKU ABDUL RAHMAN.
EJIF content is licensed under a Creative Commons Attribution 4.0 International License.
Authors keep the copyrights for their work and give the journal the work's first publication copyright, which is at the same time licensed under a Creative Commons License – Attribution, which in turn allows other parties to share the work with an acknowledgement of the work's authorship and initial publication in this journal.