Determinants of Islamic Banks profitability in Malaysia
In light of liberalization and the major challenges that are faced by the Malaysian Islamic banking sector, where Islamic banks operate concurrently with conventional banks, the profitability of Malaysian Islamic banks has gradually become an important research topic. Studying the profitability of t...
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| Summary: | In light of liberalization and the major challenges that are faced by the Malaysian Islamic banking sector, where Islamic banks operate concurrently with conventional banks, the profitability of Malaysian Islamic banks has gradually become an important research topic. Studying the profitability of these banks will enhance their survivability in competitive markets. This study has four objectives, namely, to identify the determinants of the profitability of Malaysian Islamic banks, to examine the effect of the 2008 global financial crisis on such profitability, to differentiate the determinants of the profitability of the domestic Islamic banks with those of foreign Islamic banks, and to investigate if the efficiency of Malaysian Islamic banks is determined by a set of profitability variables. By using quarterly data from 2007 to 2010 that are collected from 17 Malaysian Islamic banks, this study examines how the bank-specific, financial structure and macroeconomic variables affect the profitability of Islamic banks. Panel data multiple regression analysis is conducted to examine the determinants. The Tobit regression model is used to analyze the factors that influence the efficiency of these banks. It is found that overhead, financing, deposits, efficiency, inflation, gross domestic product growth, and bank size are all empirically proven to affect the profitability of Malaysian Islamic banks. Domestic Islamic banks are also shown to be more profitable and efficient than their foreign counterparts, and significant differences are found in the determinants of their profitability. Financing, deposits, bank age, and bank size are also identified as important factors in the profitability and efficiency of banks. The profitability of Islamic banks is negatively affected by the global financial crisis, whereas their efficiency is not affected at all. This study can strengthen risk management in Islamic banks, and help them formulate necessary policies that can promote the protection and development in the industry. |
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