Determinants of banks’ margins: case of islamic and conventional banks: evidence from Malaysia based on GMM approach

This paper analyses Islamic and conventional banks’ margins in Malaysia using panel data estimation technique. The results tend to suggest that there exist substantial differences between Islamic and conventional banks in terms of factors determining banks’ margins. Specifically, this study finds that for Islamic banks, important margin determinants are found to be operating costs, credit risk, efficiency, implicit payments, income from fees and commission, and non-interest income. While for conventional banks important factors are operating costs, risk component, market share, efficiency, size of operation, implicit payments, funding costs, and other earning assets. This means there are more factors influencing margin in conventional banks compared to those in Islamic banks. Our results indicate that three most important factors are operating costs, credit risk and efficiency for both banks. This suggests that improving credit risk management and efficiency would be the proper strategy to enhance banks’ margins. Although non-traditional bank income activities have increased in recent years, its economic impact on margin is found to be quite minimal.