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The Impact of Financing Contracts on the Profitability of Islamic Banks

Author

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  • Stapah @ Salleh, Maisyarah

    (Faculty of Business, Economics and Social Development University of Malaysia Terengganu 21030 Kuala Nerus, Terengganu MALAYSIA.)

  • Possumah, Bayu Taufiq

    (Faculty of Business, Economics and Social Development University of Malaysia Terengganu 21030 Kuala Nerus, Terengganu MALAYSIA.)

  • Ahmat, Nizam

    (Faculty of Business, Economics and Social Development University of Malaysia Terengganu 21030 Kuala Nerus, Terengganu MALAYSIA.)

Abstract

This paper investigates the impact of financing contracts on Net Profit Margin (NPM) of the Islamic banks. Focussing on two financing contracts of Bai’ Bithaman Ajil (BBA) and Al-Ijarah Thumma Al-Bai’ (AITAB), the paper employs static panel data of Malaysian banks over 2008 to 2018. Controlling for bank and market-specific factors, the results indicated that AITAB exerted significant impact on the NPM. The paper further found that risk aversion, operating cost, liquidity and asset quality improves the NPM. In addition, the results show that the market structure influence the level of NPM. The Islamic banks may control these variables in setting for their preferred NPM level. Finally, the banks may need to carefully examine the types of financing contracts offered as they have different characteristics and may affect NPM.

Suggested Citation

  • Stapah @ Salleh, Maisyarah & Possumah, Bayu Taufiq & Ahmat, Nizam, 2021. "The Impact of Financing Contracts on the Profitability of Islamic Banks," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 55(3), pages 149-164.
    • Handle: RePEc:ukm:jlekon:v:55:y:2021:i:3:p:149-164
    DOI: http://dx.doi.org/10.17576/JEM-2021-5503-11
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    More about this item

    Keywords

    Islamic bank; Net profit margin; Profitability; al-ijarah thumma al-bai’; bai’ bithaman ajil;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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