Islamic Bank Determinants Analysis

Abstract

This study to examine determinants affects the profitability of Malaysia Islamic Banks by utilizing a SPSS of 6 Islamic Banks in Malaysia over the period 2006 until 2014. A variety of internal and external banking characteristics were used to predict profitability and efficiency. The bank-specific determinants (internal factors) include financial risk, credit risk, and liquidity. The external factors include gross domestic product (GDP) and inflation. The result revealed that financial risk, liquidity and GDP are significant in determining the profitability with positive relationship. However, consistent with previous finding, during the period under study, it suggest that gross domestic product (GDP) help to explain the variations

In Malaysia, first Islamic bank was introduce is Bank Islam Malaysia Berhad (BIMB) in July 1983 before the government allowed other conventional banks to offer Islamic banking service using their existing infrastructure and branches in 1993.

Currently, the international and domestic environments in which Islamic Banks operate are going to become even more challenging. Hence, due to this situation, it is important for Islamic banking institutions to strengthen their business performance in order to face with the strong competition from domestic and foreign banks. Thus, the performance of these banks can be measured through profitability which is influenced by various factors.

Therefore, this research is conducted to study the factors which determine profitability of islamic banking institutions in Malaysia, where special focus is given on bank-specific characteristic and macroeconomic characteristics. The study will assist Islamic Banks in Malaysia to improve their profitability and in turn, the competitiveness and efficiency of Islamic banking system to enable it to be developed in line or even better compared to conventional

The internal variables included are capital ratio, liquidity and financial risk. Meanwhile, external variables included Gross Domestic Product (GDP) and inflation rate of Malaysia.

From the above results, it has been found that the profitability of Islamic banks is unpredictable. Three variables show significant towards profitability of Islamic banks but two variables turns to be insignificant with profitability.

RECOMMENDATION

For future research, the study should be more broad meaning that there are number of researchers have done on the studies of determinants that affect Islamic banks’ profitability but the variable used mostly similar with the previous researcher. Therefore, the future research is suggested to cover for the determinants that were not studied yet.

This study can be extended to cover the fields of performance measurement such as effectiveness, economy, prudence and soundness of Islamic banks in Malaysia. Moreover, this study also can be extended by investigating the magnitude of strength of internal and external variables on Islamic banks profitability, but by comparing with conventional