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Activity diversification and performance of Islamic banks in Malaysia

Author

Listed:
  • Sandrine Kablan

    () (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12)

  • Ouidad Yousfi

    () (MRM - Montpellier Research in Management - UM1 - Université Montpellier 1 - UM3 - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM - Université de Montpellier)

  • Mohamed Ali Chatti

    () (Fiesta - Fiesta - ISG de Tunis)

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.

Suggested Citation

  • Sandrine Kablan & Ouidad Yousfi & Mohamed Ali Chatti, 2017. "Activity diversification and performance of Islamic banks in Malaysia," Working Papers hal-01527699, HAL.
  • Handle: RePEc:hal:wpaper:hal-01527699
    Note: View the original document on HAL open archive server: https://hal-upec-upem.archives-ouvertes.fr/hal-01527699
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    References listed on IDEAS

    as
    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. 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.
    3. 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, August.
    4. Kevin Stiroh, 2004. "Do Community Banks Benefit from Diversification?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 25(2), pages 135-160, April.
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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