IDEAS home Printed from https://ideas.repec.org/a/ukm/jlekon/v52y2018i2p163-173.html
   My bibliography  Save this article

Net Profit Margin Determinants of Islamic Subsidiaries of Conventional Banks in Malaysia

Author

Listed:
  • Salleh, Maisyarah

    (Pusat Pengajian Pembangunan Sosial dan Ekonomi Universiti Malaysia Terengganu 21030 Kuala Nerus Terengganu MALAYSIA)

  • Possumah, Bayu Taufiq

    (Pusat Pengajian Pembangunan Sosial dan Ekonomi Universiti Malaysia Terengganu 21030 Kuala Nerus Terengganu MALAYSIA)

  • Ahmat, Nizam

    (Pusat Pengajian Pembangunan Sosial dan Ekonomi Universiti Malaysia Terengganu 21030 Kuala Nerus Terengganu MALAYSIA)

Abstract

This study investigates the determinants of Net Profit Margin (NPM) in Malaysia’s Islamic banking system for the period of 2011-2015 by using static panel data analysis. In Malaysia, conventional banks through its Islamic subsidiary banks are dominating the Islamic banking system in terms of total assets, total loans and total deposits. Therefore this paper attempts to investigate the impact of these Islamic subsidiaries of conventional banks towards the NPM. In relation to that, the impact of the conventional parent banks’ Net Interest Margin (NIM) towards its Islamic subsidiary banks’ NPM is also investigated. For the first objective, the displayed results shows positive relationship indicating that the Islamic subsidiaries of conventional banks’ NPM is higher than the full-fledge Islamic banks’ NPM. While the empirical results on the banks’ specific variables suggest that size, risk aversion and operating cost are positively related to NPM. However, credit risk tends to reduce NPM. Besides that, this study also finds that market concentrations and GDP growth will influence NPM in negative ways whilst inflation and Islamic stock market developments will increase NPM. Liquidity however is found insignificant to NPM. As for the second objective, the Islamic subsidiaries of conventional banks’ NPM is observed as being independent from its conventional parent banks’ NIM.

Suggested Citation

  • Salleh, Maisyarah & Possumah, Bayu Taufiq & Ahmat, Nizam, 2018. "Net Profit Margin Determinants of Islamic Subsidiaries of Conventional Banks in Malaysia," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 52(2), pages 163-173.
    • Handle: RePEc:ukm:jlekon:v:52:y:2018:i:2:p:163-173
    DOI: http://dx.doi.org/10.17576/JEM-2018-5202-13
    as

    Download full text from publisher

    File URL: http://www.ukm.my/jem/wp-content/uploads/2021/06/jeko_522-13.pdf
    Download Restriction: no
    File URL: https://libkey.io/http://dx.doi.org/10.17576/JEM-2018-5202-13?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Demirguc, Asli & Huizinga, Harry, 1999. "Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence," The World Bank Economic Review, World Bank, vol. 13(2), pages 379-408, May.
    2. Mr. Calixte Ahokpossi, 2013. "Determinants of Bank Interest Margins in Sub-Saharan Africa," IMF Working Papers 2013/034, International Monetary Fund.
    3. Kadri Männasoo, 2013. "Determinants of Bank Interest Spreads in Estonia," Eastern European Economics, Taylor & Francis Journals, vol. 51(1), pages 36-60, January.
    4. Poi Hun Sun & M. Kabir Hassan & Taufiq Hassan & Shamsher Mohamed Ramadilli, 2014. "The assets and liabilities gap management of conventional and Islamic banks in the organization of Islamic cooperation (OIC) countries," Applied Financial Economics, Taylor & Francis Journals, vol. 24(5), pages 333-346, March.
    5. Franklin Amuakwa-Mensah & George Marbuah, 2015. "The Determinants of Net Interest Margin in the Ghanaian Banking Industry," Journal of African Business, Taylor & Francis Journals, vol. 16(3), pages 272-288, September.
    6. Fungáčová, Zuzana & Poghosyan, Tigran, 2011. "Determinants of bank interest margins in Russia: Does bank ownership matter?," Economic Systems, Elsevier, vol. 35(4), pages 481-495.
    7. Poghosyan, Tigran, 2013. "Financial intermediation costs in low income countries: The role of regulatory, institutional, and macroeconomic factors," Economic Systems, Elsevier, vol. 37(1), pages 92-110.
    8. Neelesh Gounder & Parmendra Sharma, 2012. "Determinants of bank net interest margins in Fiji, a small island developing state," Applied Financial Economics, Taylor & Francis Journals, vol. 22(19), pages 1647-1654, October.
    9. Islam, Md. Shahidul & Nishiyama, Shin-Ichi, 2016. "The determinants of bank net interest margins: A panel evidence from South Asian countries," Research in International Business and Finance, Elsevier, vol. 37(C), pages 501-514.
    10. Mehdi Mili & Jean-Michel Sahut & Eryj Trimeche, 2015. "The Role of Islamic Banks in the Transmission of Liquidity Shocks Across Countries," Journal of Economic Issues, Taylor & Francis Journals, vol. 49(1), pages 197-225, January.
    11. Hossain, Monzur, 2012. "Financial reforms and persistently high bank interest spreads in Bangladesh: Pitfalls in institutional development?," Journal of Asian Economics, Elsevier, vol. 23(4), pages 395-408.
    12. Maudos, Joaquin & Fernandez de Guevara, Juan, 2004. "Factors explaining the interest margin in the banking sectors of the European Union," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2259-2281, September.
    13. Anthony Aboagye & S.K. Akoena & T.O. Antwi‐Asare & A.F. Gockel, 2008. "Explaining Interest Rate Spreads in Ghana," African Development Review, African Development Bank, vol. 20(3), pages 378-399.
    14. Erwin G. Hutapea & Rahmatina A. Kasri, 2010. "Bank margin determination: a comparison between Islamic and conventional banks in Indonesia," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 3(1), pages 65-82, April.
    15. Hawtrey, Kim & Liang, Hanyu, 2008. "Bank interest margins in OECD countries," The North American Journal of Economics and Finance, Elsevier, vol. 19(3), pages 249-260, December.
    16. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 581-600, November.
    17. Pasiouras, Fotios & Kosmidou, Kyriaki, 2007. "Factors influencing the profitability of domestic and foreign commercial banks in the European Union," Research in International Business and Finance, Elsevier, vol. 21(2), pages 222-237, June.
    18. Carbo Valverde, Santiago & Rodriguez Fernandez, Francisco, 2007. "The determinants of bank margins in European banking," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2043-2063, July.
    19. Raja Almarzoqi & Sami Ben Naceur, 2015. "Determinants of Bank Interest Margins in the Caucasus and Central Asia," IMF Working Papers 2015/087, International Monetary Fund.
    20. Brock, Philip L. & Rojas Suarez, Liliana, 2000. "Understanding the behavior of bank spreads in Latin America," Journal of Development Economics, Elsevier, vol. 63(1), pages 113-134, October.
    21. Beck, Thorsten & Hesse, Heiko, 2009. "Why are interest spreads so high in Uganda?," Journal of Development Economics, Elsevier, vol. 88(2), pages 192-204, March.
    22. K. Ben Khediri & H. Ben-Khedhiri, 2011. "Determinants of bank net interest margin in Tunisia: a panel data model," Applied Economics Letters, Taylor & Francis Journals, vol. 18(13), pages 1267-1271.
    23. Sam Mensah & Joshua Yindenaba Abor, 2014. "Agency Conflict and Bank Interest Spreads in Ghana," African Development Review, African Development Bank, vol. 26(4), pages 549-560, December.
    24. Erwin G. Hutapea & Rahmatina A. Kasri, 2010. "Bank margin determination: a comparison between Islamic and conventional banks in Indonesia," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 3(1), pages 65-82, April.
    25. Naceur, Sami Ben & Omran, Mohammed, 2011. "The effects of bank regulations, competition, and financial reforms on banks' performance," Emerging Markets Review, Elsevier, vol. 12(1), pages 1-20, March.
    26. Sun, Poi Hun & Mohamad, Shamsher & Ariff, M., 2017. "Determinants driving bank performance: A comparison of two types of banks in the OIC," Pacific-Basin Finance Journal, Elsevier, vol. 42(C), pages 193-203.
    27. Ijaz Hussain, 2014. "Banking industry concentration and net interest margins (NIMs) in Pakistan," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 15(2), pages 384-402, April.
    28. Mr. Holger Floerkemeier & Ms. Era Dabla-Norris, 2007. "Bank Efficiency and Market Structure: What Determines Banking Spreads in Armenia?," IMF Working Papers 2007/134, International Monetary Fund.
    29. McShane, R. W. & Sharpe, I. G., 1985. "A time series/cross section analysis of the determinants of Australian trading bank loan/deposit interest margins: 1962-1981," Journal of Banking & Finance, Elsevier, vol. 9(1), pages 115-136, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Raja Almarzoqi & Sami Ben Naceur, 2015. "Determinants of Bank Interest Margins in the Caucasus and Central Asia," IMF Working Papers 2015/087, International Monetary Fund.
    3. Mudeer A. Khattak & Buerhan Saiti & Shabeer Khan, 2023. "Does market power explain margins in dual banking? Evidence from panel quantile regression," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1826-1844, April.
    4. Özcan IŞIK & Murat BELKE, 2017. "An Empirical Analysis of the Determinants of Net Interest Margins of Turkish Listed Banks: Panel Data Evidence from Post-Crisis Era," Sosyoekonomi Journal, Sosyoekonomi Society, issue 25(34).
    5. Philip Molyneux & Alessio Reghezza & Ru Xie, 2018. "Bank Profits and Margins in a World of Negative Rates," Working Papers 18001, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    6. Yanikkaya, Halit & Gumus, Nihat & Pabuccu, Yasar Ugur, 2018. "How profitability differs between conventional and Islamic banks: A dynamic panel data approach," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 99-111.
    7. Molyneux, Philip & Reghezza, Alessio & Xie, Ru, 2019. "Bank margins and profits in a world of negative rates," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    8. Md. Shahidul Islam & Shin-Ichi Nishiyama, 2020. "The Determinants of Net Interest Margins of Commercial Banks: Panel Evidence from China, India and Japan," Discussion Papers 2014, Graduate School of Economics, Kobe University.
    9. Saona, Paolo, 2016. "Intra- and extra-bank determinants of Latin American Banks' profitability," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 197-214.
    10. Islam, Md. Shahidul & Nishiyama, Shin-Ichi, 2016. "The determinants of bank net interest margins: A panel evidence from South Asian countries," Research in International Business and Finance, Elsevier, vol. 37(C), pages 501-514.
    11. Murad Khan & Abdul Jalil, 2020. "Determinants of Interest Margin in Pakistan: A Panel Data Analysis," Economies, MDPI, vol. 8(2), pages 1-14, March.
    12. Mansor H. Ibrahim & Siong Hook Law, 2019. "Financial Intermediation Costs In A Dual Banking System: The Role Of Islamic Banking," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 22(4), pages 531-552, December.
    13. Pamuji Gesang Raharjo & Dedi Budiman Hakim & Adler Hayman Manurung & Tubagus N.A. Maulana, 2014. "The Determinant of Commercial Banks' Interest Margin in Indonesia: An Analysis of Fixed Effect Panel Regression," International Journal of Economics and Financial Issues, Econjournals, vol. 4(2), pages 295-308.
    14. Martins, António Miguel & Serra, Ana Paula & Stevenson, Simon, 2019. "Determinants of real estate bank profitability," Research in International Business and Finance, Elsevier, vol. 49(C), pages 282-300.
    15. Birchwood, Anthony & Brei, Michael & Noel, Dorian M., 2017. "Interest margins and bank regulation in Central America and the Caribbean," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 56-68.
    16. Mimouni, Karim & Smaoui, Houcem & Temimi, Akram & Al-Azzam, Moh'd, 2019. "The impact of Sukuk on the performance of conventional and Islamic banks," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 42-54.
    17. S. S. Barik & Nishita Raje, 2019. "Net Interest Margins of Banks in India," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 13(2), pages 192-207, May.
    18. Florian Leon, 2015. "What do we know about the role of bank competition in Africa?," CERDI Working papers halshs-01164864, HAL.
    19. Trinugroho, Irwan & Agusman, Agusman & Tarazi, Amine, 2014. "Why have bank interest margins been so high in Indonesia since the 1997/1998 financial crisis?," Research in International Business and Finance, Elsevier, vol. 32(C), pages 139-158.
    20. Pierluigi Bologna, 2017. "Banks’ maturity transformation: risk, reward, and policy," Temi di discussione (Economic working papers) 1159, Bank of Italy, Economic Research and International Relations Area.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ukm:jlekon:v:52:y:2018:i:2:p:163-173. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Muhammad Asri Abd Ghani (email available below). General contact details of provider: https://edirc.repec.org/data/feukmmy.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.