The Impact of Financial Risks on Profitability of Malaysian Commercial Banks: 1996-2005
This paper examines the relationship between financial
risks and profitability of the conventional and Islamic banks in
Malaysia for the period between 1996 and 2005. The measures of
profitability that have been used in the study are the return on equity
(ROE) and return on assets (ROA) while the financial risks are credit
risk, interest rate risk and liquidity risks. This study employs panel
data regression analysis of Generalised Least Squares of fixed effects
and random effects models. It was found that credit risk has a
significant impact on ROA and ROE for the conventional as well as
the Islamic banks. The relationship between interest rate risk and ROE
were found to be weakly significant for the conventional banks and
insignificant for the Islamic banks. The effect of interest rate risk on
ROA is significant for the conventional banks. Liquidity risk was
found to have an insignificant impact on both profitability measures.
[1] Bird, A., & Skinner, T. H., Enterprise risk management not for you?
Wrong. American Banker, 170(67), 2005, pp. 10
[2] Basel Committee on Banking Supervision, International convergence of
capital measurement and capital standards: a revised framework. Bank for
International Settlements, 1988.
[3] Basel Committee on Banking Supervision, Amendment to Basel Capital
Accord 0f 1988. Bank for International Settlements. 1996.
[4] Basel Committee on Banking Supervision, Consultative documents:
principles for the management and supervision of interest rate risk. Bank
for International Settlements, 2001.
[5] Bank Negara Malaysia, Capital adequacy standard for Islamic Banks.
Kuala Lumpur: Islamic Banking and Takaful Department, Bank Negara
Malaysia., [Discussion Paper], 2007.
[6] Obiyatullah, I. B., Dual banking systems and interest rate risk for Islamic
Banks. Journal of Accounting, Commerce and Finance-Islamic
Perspective, 2004, March.
[7] Berger, A. N., & DeYoung, R., Problem loans and cost efficiency in
commercial banks. Journal of Banking and Finance, 21(6), 849-870. 1997
[8] Angbazo, L., Commercial bank net interest margins, default risk, interest
rate risk, and off-balance sheet banking. Journal of Banking and Finance,
21(1997), 55-87.
[9] Kosmidou, K., Tanna Sailesh, & Pasiouras., Determinant of profitability
of domestic UK commercial banks: panel evidence from the period
1995-2002. Money Macro and Finance (MMF) Research Group
Conference, 2005.
[10] Athanasoglou, P. P., Brissimis, S. N., & Delis, M.. Bank-specific,
industry-specific and macroeconomic determinants of bank profitability.
Journal of International and Financial Institutions and Markets,
(forthcoming), (2005)
[11] Ben Naceur, S., The determinants of the Tunisian banking industry
profitability: panel evidence. Presented at the ERF Tenth Annual
Conference, 2003, Marrakesh, Morocco.
[12] Goddard, J., Molyneux, P., & Wilson, J. O., The profitability of european
banks: a cross-sectional and dynamic panel analysis. The Manchester
School, 72(3), June 2004, pp.363-381.
[13] Dermirguc Kunt, A., & Huizinga, H., Determinants of commercial bank
interest margins and profitability: some international evidence. World
Bank Economic Review, 13(2), pp. 379-408, 1999
[14] Athanasoglou, p. P., Delis, M. D., & Staikouras, C., Determinants of Bank
Profitability in the South Eastern European Region. Bank of Greece
Working Paper No 47 September 2006.
[15] Abdus Samad, & Hassan, M. K., The performance of Malaysian Islamic
bank during 1984-1997: an exploratory study. International Journal of
Islamic Financial Services, 1(3) Oct-Dec 1999.
[16] Abdus Samad, Comparative efficiency of the Islamic bank vis-à-vis
conventional banks in Malaysia. IIUM Journal of Economics &
Management, 1999, 7(1), pp. 1-25.
[17] Saiful Azhar, R., & Mohd Affandi, A. B., Performance of Islamic and
mainstream Banks in Malaysia. International Journal of Social
Economics, 30(12), pp.1249-1265, 2003.
[18] Shaari, A. H., & Fadhilah, A., Performance evaluation of Islamic banking
scheme in Malaysia. Banker's Journal Malaysia, 118(Second Quarter
2001), 19-23.
[19] How, J. C., Melina, A. K., & Verhoeven, P., Islamic financing and bank
risks: the case of Malaysia. Thunderbird International Business Review,
47(1), pp.75-94, 2005.
[20] Fathiyah, H., Capital structure and performance of Islamic banks and ibs
commercial banks in Malaysia. Paper presented at the National Seminar
on Islamic Banking and Finance. KUIM, 29-30 August 2006.
[21] Shahida, S., Abdul Ghafar, I., & Sanep, A., A panel data analysis of fee
income activities in Islamic Banks. Retrieved 24 December 2005, from
Working papers in Islamic Economics and Finance:
http://pkukmweb.ukm.my/~ekonis/wp04-0506.pdf.
[22] Seref Turen., Performance and risk analysis of the Islamic Banks: The
case of Bahrain Islamic Bank. Journal of Islamic Economics, 7, pp.3 -13,
1995.
[23] Bashir, A. H., Determinants of profitability and rate of return margins in
Islamic banks: some evidence from the Middle East. Presented at the
ERF's Seventh Annual Conference, October 26-29 2000 Amman, Jordan.
[24] Abdus Samad, Performance of Interest Free Islamic Banks vis-à-vis
Interest Based Conventional Banks in Bahrain. IIUM Journal of
Economics & Management, 2004, 12(2), pp. 115-129.
[25] Hassan, M. K., & Bashir, A. H., Determinants of Islamic banking
profitability. Presented at the International Seminar on Islamic Wealth
Creation, University of Durham, United Kingdom, 7-9 July 2003.
[26] Sam Hakim, & Neamie, S., Performance & credit risk in banking: a
comparative study of Egypt and Lebanon. ERF Working Paper Series,
Working Paper 0137, 2001.
[27] Nor Hayati, A., & Shahrul Nizam, A., Key factors influencing credit risk
of Islamic Bank: A Malaysian Case. The Journal of Muamalat and Islamic
Finance Research, 1(1), pp. 65-80, 2004.
[28] Awdeh, A., Domestic banks' and foreign banks' profitability: differences
and their determinants. Retrieved 20 September 2005, from
http://www.cass.city.ac.uk/conferences/emg_finance/papers/Awdeh.pdf
[29] Doliente, J. S., Determinants of bank interest margins in South East Asia.
Applied Financial Economics Letters, 1, pp.53-57, 2005.
[30] Wong, C. S., Bank Islam Malaysia: Performance Evaluation, 1983-1993.
In S. Harran (Ed.), Leading Issues in Islamic Banking and Finance (pp.
83-101), 1995. Kuala Lumpur: Pelanduk Publications.
[31] Giarla, M. J., The Profitable Side of Risk Management. In F. J. Fabozzi &
A. Konishi (Eds.), The Handbook of Asset/Liability Management (pp.
5-29). USA: Irwin, 1996.
[32] Green, W., Econometric Analysis. Englewood Cliff, New Jersey: Prentice
Hall, Inc., 2000.
[33] Wooldridge, J. M., Econometric Analysis of Cross Section and Panel
Data. United States of America: Massachusetts Institute of Technology,
2002.
[34] Baltagi, B. H. Econometric Analysis of Panel Data. UK: John Wiley &
Sons Ltd., 2001.
[35] Gujarati, D. N., Basic Econometrics (Fourth Edition). Mc Graw Hill. Inc.,
2003
[36] Dermirguc Kunt, A., & Huizinga, H., Financial structure and bank
profitability. World Bank working paper no. 2430, 2000.
[37] Chirwa, E., Determinants of commercial banks' profitability in Malawi: a
cointegration approach. Applied Financial Economics, 13, pp. 565-571.
2003.
[38] Sinkey, J. F., Jr., Commercial Bank Financial Management: In the
Financial-Services Industry. New Jersey: Pearson Education
International, 2002.
[39] Saunders, A., & Schumacher, L. (2000). The Determinants of Bank
Interest Rate Margins: An International Study. Journal of International
Money and Finance, 19, 813-832.
[40] Kwan, S., & Eisenbeis, R. A., Bank risk, capitalization, and operating
efficiency. Journal of Financial Services Research, 12(2/3), 117-131
(1997).
[41] Ho, T. S., & Saunders, A., The determinants of bank interest margins:
theory and empirical evidence. Journal of Financial and Quantitative
Analysis, XVI (4), pp.581-600, November 1981.
[42] Khambata, D., & Bagdi, R. R., Off-balance sheet credit risk of the top 20
Japanese banks. Journal of International Banking Regulation, 5(1),
pp.57-71, 2003
[43] Gerlach, R., Wilson, P. and Zurbruegg, Raff, Structural Breaks and
Diversification: The Impact of the 1997 Asian Crisis on the integration of
Asia Pacific Real Estate Markets. Journal of International Money and
Finance Vol 25(2006) pp974-991
[44] Jayanthakumaran, K & Pahlavan, M, Structural Break in Trade and
Income per Capita in Asean-5 countries: An Application of Innovational
Outlier Model. Faculty of Commerce-Economics Working Papers WP
06-12 (2006). University of Wollongong. Retrieved October 2008.
[45] http://www.uow.edu.au/commerce/econ/wpapers.html
[46] Pratomo, Wahyu Ario and Abdul Ghafar Ismail, Islamic bank
performance and capital structure, MRPA Paper No. 6012, 2006.
[47] Levin, A., Lin, C.-F., & Chu, C.-S. J., Unit root tests in panel data:
asymptotic and finite -sample properties. Journal of Econometrics, 108,
pp. 1-24., 2002
[48] Hausman, J. A., Specification Tests in Econometrics. Econometrica,
46(6), pp.1251-1271, 1978.
[49] Bourke, P., Concentration and other determinants of bank profitability in
Europe, North America and Australia. Journal of Banking and Finance,
1989, 13, pp. 65-79.
[50] Molyneux, P., & Thornton J., Determinants of European bank
profitability: a note. Journal of Banking and Finance, 16, pp.1173-1178,
1992.
[1] Bird, A., & Skinner, T. H., Enterprise risk management not for you?
Wrong. American Banker, 170(67), 2005, pp. 10
[2] Basel Committee on Banking Supervision, International convergence of
capital measurement and capital standards: a revised framework. Bank for
International Settlements, 1988.
[3] Basel Committee on Banking Supervision, Amendment to Basel Capital
Accord 0f 1988. Bank for International Settlements. 1996.
[4] Basel Committee on Banking Supervision, Consultative documents:
principles for the management and supervision of interest rate risk. Bank
for International Settlements, 2001.
[5] Bank Negara Malaysia, Capital adequacy standard for Islamic Banks.
Kuala Lumpur: Islamic Banking and Takaful Department, Bank Negara
Malaysia., [Discussion Paper], 2007.
[6] Obiyatullah, I. B., Dual banking systems and interest rate risk for Islamic
Banks. Journal of Accounting, Commerce and Finance-Islamic
Perspective, 2004, March.
[7] Berger, A. N., & DeYoung, R., Problem loans and cost efficiency in
commercial banks. Journal of Banking and Finance, 21(6), 849-870. 1997
[8] Angbazo, L., Commercial bank net interest margins, default risk, interest
rate risk, and off-balance sheet banking. Journal of Banking and Finance,
21(1997), 55-87.
[9] Kosmidou, K., Tanna Sailesh, & Pasiouras., Determinant of profitability
of domestic UK commercial banks: panel evidence from the period
1995-2002. Money Macro and Finance (MMF) Research Group
Conference, 2005.
[10] Athanasoglou, P. P., Brissimis, S. N., & Delis, M.. Bank-specific,
industry-specific and macroeconomic determinants of bank profitability.
Journal of International and Financial Institutions and Markets,
(forthcoming), (2005)
[11] Ben Naceur, S., The determinants of the Tunisian banking industry
profitability: panel evidence. Presented at the ERF Tenth Annual
Conference, 2003, Marrakesh, Morocco.
[12] Goddard, J., Molyneux, P., & Wilson, J. O., The profitability of european
banks: a cross-sectional and dynamic panel analysis. The Manchester
School, 72(3), June 2004, pp.363-381.
[13] Dermirguc Kunt, A., & Huizinga, H., Determinants of commercial bank
interest margins and profitability: some international evidence. World
Bank Economic Review, 13(2), pp. 379-408, 1999
[14] Athanasoglou, p. P., Delis, M. D., & Staikouras, C., Determinants of Bank
Profitability in the South Eastern European Region. Bank of Greece
Working Paper No 47 September 2006.
[15] Abdus Samad, & Hassan, M. K., The performance of Malaysian Islamic
bank during 1984-1997: an exploratory study. International Journal of
Islamic Financial Services, 1(3) Oct-Dec 1999.
[16] Abdus Samad, Comparative efficiency of the Islamic bank vis-à-vis
conventional banks in Malaysia. IIUM Journal of Economics &
Management, 1999, 7(1), pp. 1-25.
[17] Saiful Azhar, R., & Mohd Affandi, A. B., Performance of Islamic and
mainstream Banks in Malaysia. International Journal of Social
Economics, 30(12), pp.1249-1265, 2003.
[18] Shaari, A. H., & Fadhilah, A., Performance evaluation of Islamic banking
scheme in Malaysia. Banker's Journal Malaysia, 118(Second Quarter
2001), 19-23.
[19] How, J. C., Melina, A. K., & Verhoeven, P., Islamic financing and bank
risks: the case of Malaysia. Thunderbird International Business Review,
47(1), pp.75-94, 2005.
[20] Fathiyah, H., Capital structure and performance of Islamic banks and ibs
commercial banks in Malaysia. Paper presented at the National Seminar
on Islamic Banking and Finance. KUIM, 29-30 August 2006.
[21] Shahida, S., Abdul Ghafar, I., & Sanep, A., A panel data analysis of fee
income activities in Islamic Banks. Retrieved 24 December 2005, from
Working papers in Islamic Economics and Finance:
http://pkukmweb.ukm.my/~ekonis/wp04-0506.pdf.
[22] Seref Turen., Performance and risk analysis of the Islamic Banks: The
case of Bahrain Islamic Bank. Journal of Islamic Economics, 7, pp.3 -13,
1995.
[23] Bashir, A. H., Determinants of profitability and rate of return margins in
Islamic banks: some evidence from the Middle East. Presented at the
ERF's Seventh Annual Conference, October 26-29 2000 Amman, Jordan.
[24] Abdus Samad, Performance of Interest Free Islamic Banks vis-à-vis
Interest Based Conventional Banks in Bahrain. IIUM Journal of
Economics & Management, 2004, 12(2), pp. 115-129.
[25] Hassan, M. K., & Bashir, A. H., Determinants of Islamic banking
profitability. Presented at the International Seminar on Islamic Wealth
Creation, University of Durham, United Kingdom, 7-9 July 2003.
[26] Sam Hakim, & Neamie, S., Performance & credit risk in banking: a
comparative study of Egypt and Lebanon. ERF Working Paper Series,
Working Paper 0137, 2001.
[27] Nor Hayati, A., & Shahrul Nizam, A., Key factors influencing credit risk
of Islamic Bank: A Malaysian Case. The Journal of Muamalat and Islamic
Finance Research, 1(1), pp. 65-80, 2004.
[28] Awdeh, A., Domestic banks' and foreign banks' profitability: differences
and their determinants. Retrieved 20 September 2005, from
http://www.cass.city.ac.uk/conferences/emg_finance/papers/Awdeh.pdf
[29] Doliente, J. S., Determinants of bank interest margins in South East Asia.
Applied Financial Economics Letters, 1, pp.53-57, 2005.
[30] Wong, C. S., Bank Islam Malaysia: Performance Evaluation, 1983-1993.
In S. Harran (Ed.), Leading Issues in Islamic Banking and Finance (pp.
83-101), 1995. Kuala Lumpur: Pelanduk Publications.
[31] Giarla, M. J., The Profitable Side of Risk Management. In F. J. Fabozzi &
A. Konishi (Eds.), The Handbook of Asset/Liability Management (pp.
5-29). USA: Irwin, 1996.
[32] Green, W., Econometric Analysis. Englewood Cliff, New Jersey: Prentice
Hall, Inc., 2000.
[33] Wooldridge, J. M., Econometric Analysis of Cross Section and Panel
Data. United States of America: Massachusetts Institute of Technology,
2002.
[34] Baltagi, B. H. Econometric Analysis of Panel Data. UK: John Wiley &
Sons Ltd., 2001.
[35] Gujarati, D. N., Basic Econometrics (Fourth Edition). Mc Graw Hill. Inc.,
2003
[36] Dermirguc Kunt, A., & Huizinga, H., Financial structure and bank
profitability. World Bank working paper no. 2430, 2000.
[37] Chirwa, E., Determinants of commercial banks' profitability in Malawi: a
cointegration approach. Applied Financial Economics, 13, pp. 565-571.
2003.
[38] Sinkey, J. F., Jr., Commercial Bank Financial Management: In the
Financial-Services Industry. New Jersey: Pearson Education
International, 2002.
[39] Saunders, A., & Schumacher, L. (2000). The Determinants of Bank
Interest Rate Margins: An International Study. Journal of International
Money and Finance, 19, 813-832.
[40] Kwan, S., & Eisenbeis, R. A., Bank risk, capitalization, and operating
efficiency. Journal of Financial Services Research, 12(2/3), 117-131
(1997).
[41] Ho, T. S., & Saunders, A., The determinants of bank interest margins:
theory and empirical evidence. Journal of Financial and Quantitative
Analysis, XVI (4), pp.581-600, November 1981.
[42] Khambata, D., & Bagdi, R. R., Off-balance sheet credit risk of the top 20
Japanese banks. Journal of International Banking Regulation, 5(1),
pp.57-71, 2003
[43] Gerlach, R., Wilson, P. and Zurbruegg, Raff, Structural Breaks and
Diversification: The Impact of the 1997 Asian Crisis on the integration of
Asia Pacific Real Estate Markets. Journal of International Money and
Finance Vol 25(2006) pp974-991
[44] Jayanthakumaran, K & Pahlavan, M, Structural Break in Trade and
Income per Capita in Asean-5 countries: An Application of Innovational
Outlier Model. Faculty of Commerce-Economics Working Papers WP
06-12 (2006). University of Wollongong. Retrieved October 2008.
[45] http://www.uow.edu.au/commerce/econ/wpapers.html
[46] Pratomo, Wahyu Ario and Abdul Ghafar Ismail, Islamic bank
performance and capital structure, MRPA Paper No. 6012, 2006.
[47] Levin, A., Lin, C.-F., & Chu, C.-S. J., Unit root tests in panel data:
asymptotic and finite -sample properties. Journal of Econometrics, 108,
pp. 1-24., 2002
[48] Hausman, J. A., Specification Tests in Econometrics. Econometrica,
46(6), pp.1251-1271, 1978.
[49] Bourke, P., Concentration and other determinants of bank profitability in
Europe, North America and Australia. Journal of Banking and Finance,
1989, 13, pp. 65-79.
[50] Molyneux, P., & Thornton J., Determinants of European bank
profitability: a note. Journal of Banking and Finance, 16, pp.1173-1178,
1992.
@article{"International Journal of Business, Human and Social Sciences:54542", author = "Fauziah Hanim Tafri and Zarinah Hamid and Ahamed Kameel Mydin Meera and Mohd Azmi Omar", title = "The Impact of Financial Risks on Profitability of Malaysian Commercial Banks: 1996-2005", abstract = "This paper examines the relationship between financial
risks and profitability of the conventional and Islamic banks in
Malaysia for the period between 1996 and 2005. The measures of
profitability that have been used in the study are the return on equity
(ROE) and return on assets (ROA) while the financial risks are credit
risk, interest rate risk and liquidity risks. This study employs panel
data regression analysis of Generalised Least Squares of fixed effects
and random effects models. It was found that credit risk has a
significant impact on ROA and ROE for the conventional as well as
the Islamic banks. The relationship between interest rate risk and ROE
were found to be weakly significant for the conventional banks and
insignificant for the Islamic banks. The effect of interest rate risk on
ROA is significant for the conventional banks. Liquidity risk was
found to have an insignificant impact on both profitability measures.", keywords = "Credit risk, interest rate risk, liquidity risk, market risk, profitability.", volume = "3", number = "6", pages = "827-15", }
