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Activity diversification and performance of Islamic banks in Malaysia

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  • CHATTI, Mohamed Ali
  • KABLAN, Sandrine
  • YOUSFI, Ouidad

Abstract

The current paper analyzes the performance and the choice of portfolio in Islamic banks. We consider a sample of 8 Malaysian universal Islamic banks between 2004 and 2008. We use the Herfindahl-Hirschman Index (HHI) as an indicator of the degree of diversification. The performance of the banks is measured by the return on assets ratio (ROA) and the Risk Adjusted Return On Capital ratio (RAROC). Finally, we use the Modern Portfolio Theory (MPT) of Markowitz to define the efficient frontier and the optimal portfolio.The results show that the corporate and investment activity increases significantly returns on assets. However, retail and commercial activity improves the results and performance of these banks. We find evidence that the level of diversification is not too high and recommend that they become concentrated on just one type of these activities. Finally, the MPT supports the idea that Islamic banks are not efficient.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28348.

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Date of creation: 23 Jan 2010
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Handle: RePEc:pra:mprapa:28348

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Related research

Keywords: Diversification; performance; Islamic banks; Herfindhal Hirschmann Index; Modern Portfolio Theory.;

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  1. Edward Zaik & John Walter & Gabriela Retting & Christopher James, 1996. "Raroc At Bank Of America: From Theory To Practice," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(2), pages 83-93.
  2. Kevin Stiroh, 2004. "Do Community Banks Benefit from Diversification?," Journal of Financial Services Research, Springer, vol. 25(2), pages 135-160, April.
  3. Goddard, John & McKillop, Donal & Wilson, John O.S., 2008. "The diversification and financial performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1836-1849, September.
  4. Obiyathulla Ismath Bacha, 2008. "The Islamic inter bank money market and a dual banking system: the Malaysian experience," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing, vol. 1(3), pages 210-226, September.
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