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i
THE DETERMINANTS OF FOREIGN ISLAMIC
BANKS PROFITABILITY IN MALAYSIA FROM 2008
TO 2013
SENIA AK SCHWEITZER BETTIE
(2012990595)
BACHELOR OF BUSINESS ADMINISTRATION
(HONS) FINANCE
FACULTY OF BUSINESS ADMINISTRATION
JUNE 2015
ii
DECLARATION OF ORIGINAL WORK
BACHELOR OF BUSINESS ADMINISTRATION
(HONS.) FINANCE
FACULTY OF BUSINESS MANAGEMENT
“DECLARATION OF ORIGINAL WORK”
I, Senia Anak Schweitzer Bettie, (I/C Number: 910521-13-6310)
Hereby, declare that:
This work has not previously been accepted in substance for any degree, locally
or overseas, and is not being concurrently submitted for this degree or any other
degrees.
This project-paper is the result of my independent work and investigation,
except where otherwise stated.
All verbatim extracts have been distinguished by quotation marks and sources of
my information have been specifically acknowledged.
Signature: ______________________ Date: _______________________
iii
LETTER OF SUBMISSION
17th July, 2015
Madam Norzaihan Binti Hashim
Head of Programme,
Bachelor of Business Administration (Hons.) Finance
Universiti Teknologi MARA
Jalan Meranek
94300 Kota Samarahan
Sarawak.
Dear Madam,
SUBMISSION OF FINAL PROJECT PAPER REPORT (FIN 668)
Here, I would like to enclosure the final project paper with the title “The Determinants of
Foreign Islamic Banks Profitability in Malaysia From 2008 to 2013” for your perusal and
consideration.
With the submission of this report, I hope it will meet the requirement as a part to
complete Bachelor Degree in Business Administration (Hons.) Finance.
Thank you.
Yours Sincerely,
SENIA ANAK SCHWEITZER BETTIE
MATRIX NO: 2012990595
iv
ACKNOWDEGEMENT
Firstly, I praising and worshiping of God for allowing me to complete this paper. A lot
of praise for God to spirit me up as well as inspiring me to figure out all problem that I faced
before.
In the first place, I would like to express my deepest sense of sincere gratitude to
both of my advisor, Mr. Ambi Kun and Madam Erimalida Yazi for the valuable assistance
and advises. Moreover, they have never failed to go through my research paper and make
correction as needed. Their excellent patience and guidance have provided me an
excellent atmosphere for doing my dissertation. I am truly appreciated the time and effort
from both of them.
In addition, all thanks to Madam Norzaihan binti Hashim, the Head of Bachelor of
Business Administration programme, for her encouragement and support. To Universiti
Teknologi Mara, fellow lecturers and staffs, thank you for all of the help and knowledge
that I have gained. All of you have really encouraged me towards the completion of this
study.
Last but not least, I would like to express my thankful to my family especially my
parents, Mr. Schweitzer Bettie Anak Tedong and Madam Siti Anak Ungong for motivating
and pushing me. Without their love and support, none of this dissertation would have
been possible.
Sincerely,
Senia Anak Schweitzer Bettie
v
TABLE OF CONTENTS
TITLE PAGES
Acknowledgment .......................................................................................................... iv
Table Of Contents ......................................................................................................... v
List Of Figure ............................................................................................................... viii
List Of Table ................................................................................................................. viii
List Of Equations .......................................................................................................... Viii
List Of Abbreviations ................................................................................................... ix
Abstract ......................................................................................................................... x
CHAPTER .................................................................................................................... 1
INTRODUCTION ........................................................................................................ 1
1.0 Background Of Study ...................................................................................... 2
1.1 Problem Statement ................................................................................. 3
1.2 Research Objective .................................................................................. 4
1.3 Research Question ................................................................................... 4
1.4 Scope Of Study ........................................................................................ 5
1.5 Conclusion ............................................................................................... 5
CHAPTER 2 .......................................................................................................... 6
LITERATURE REVIEW ......................................................................................... 6
2.0 Introduction ............................................................................................. 6
2.1 Review Of Literature ............................................................................... 6
2.2 Foreign Islamic Bank .............................................................................. 7
2.3 Related Literature Review of Return on Asset ........................................ 7
2.4 Related Literature Review of Risk-Weighted Capital Ratio ..................... 8
2.5 Related Literature Review of Overhead Cost ......................................... 9
vi
2.6 Related Literature Review of Gross Domestic Product ...........................10
2.7 Related Literature Review of Inflation Rate ............................................11
2.8 Hypothesis ................................................................................................. 12
2.9 Conclusion ................................................................................................. 13
CHAPTER 3 ............................................................................................................. 14
DATA METHODOLOGY ........................................................................................... 14
3.0 Introduction ................................................................................................. 14
3.1 Theoretical Framework ............................................................................... 15
3.2 Data Description ......................................................................................... 16
3.3 Target Population ........................................................................................ 17
3.4 Data Analysis .............................................................................................. 18
3.5 Model Specification ...................................................................................... 19
3.6 Diagnostic Test ............................................................................................. 20
3.6.1 Coefficient of Determinant (R²) .......................................................... 20
3.6.2 Coefficient Estimate (t-stats) ............................................................... 20
3.6.3 F-statistics ........................................................................................... 21
3.7 Conclusion .................................................................................................... 22
CHAPTER 4 ............................................................................................................... 23
FINDING AND ANALYSIS .......................................................................................... 23
4.0 Introduction .................................................................................................. 23
4.1 Descriptive Statistic ..................................................................................... 24
4.2 Correlation Coefficient Test .......................................................................... 25
4.3 Multiple Regression Analysis ..............................................................;........ 26
4.3.1 Coefficient of Determinant (R²) ......................................................... 27
4.3.2 Coefficient Estimate (t-stats) ............................................................. 27
4.3.3 Hypothesis Testing (F-statistics) ........................................................ 29
vii
4.4 Conclusion .................................................................................................... 30
CHAPTER 5 ................................................................................................................ 31
CONCLUSION AND RECOMMENDATION ................................................................ 31
5.0 Introduction .................................................................................................. 31
5.1 Conclusion ................................................................................................... 31
5.2 Recommendation ....................................................................................... 32
5.3 Limitation Of Study ..................................................................................... 33
REFERENCES .......................................................................................................... 34
APPENDICES ........................................................................................................... 38
viii
List of Figure
Figure 3.1 The Determinants of Foreign Islamic Banks Profitability ............................ 16
List of Tables
Table 3.2 List of licensed banking institutions for Foreign Islamic Banks in
Malaysia .................................................................................................... 18
Table 4.1 Descriptive Statistic of Foreign Islamic Banks............................................... 24
Table 4.2 Correlation Coefficient of Foreign Islamic Banks........................................... 25
Table 4.3 Panel Least Square Method for Foreign Islamic Banks.................................
26
List of Equations
Equation1 Regression Models, taken from Abdel Hamid M. Bashir
(2003) ........................................................................................................ 19
Equation2 Modified equation ....................................................................................... 20
Equation 3 The Relationships between all the variables .............................................. 26
ix
List of Abbreviations
ROA Return On Asset
GDP Gross Domestic Product
RWCR Risk-Weighted Capital Ratio
OHC Overhead Cost
IFR Inflation Rate
BNM Bank Negara Malaysia
x
ABSTRACT
THE DETERMINANTS OF FOREIGN ISLAMIC BANKS PROFITABILITY IN
MALAYSIA FROM 2008 TO 2014
By Senia Anak Schweitzer Bettie
This paper studied the determinants of Foreign Islamic Banks profitability in
Malaysia from 2008 to 2013. The empirical study is conducted to analyze the relationship
between risk-weighted capital ratio, overhead cost, gross domestic product and inflation
rate toward profitability. There are five Foreign Islamic Banks are selected and data were
collected from year 2008 to 2013. The financial ratios technique was applied to calculate
on these variables and Least Square Method was used to run the regression model. We
find that inflation rate, gross domestic product and risk-weighted capital ratio does not
significance to Foreign Islamic Bank profitability.For future studies, it is recommended that
more sample size and determinant factors can be included in determining the effect on
bank profitability.
xi
1
CHAPTER 1 : INTRODUCTION
1.0 BACKGROUD OF STUDY
Islamic banking refers to an arrangement of managing an account that follows
Islamic law otherwise called Shariah law. The underlying principles that oversee Islamic
banking are mutual risk and profit sharing between parties, the assurance of fairness for
all and that transactions are based on an underlying business activity. Islamic banking
has become enormously since it first emerged in the 1970's. There are more than three
hundred Islamic financial institutions worldwide over seventy five countries.
Malaysia's Islamic finance industry has been in presence for more than 30 years.
Today, there are more than a hundred financial institutions was claim to be operating
partially and fully on an interest-free basis in 34 countries. Islamic finance Industry is
assuming an imperative part in today's banking industry. In light of Bank Negara Malaysia
most recent statistics, there have 18 Islamic Banks Institutions and six full-fledged
Foreign Islamic Bank that authorized by Bank Negara Malaysia which are Al-Rajhi
Banking & Investment enterprise (Malaysia) Berhad, Kuwait Finance House (Malaysia)
Berhad, Asian Finance Bank Berhad, HSBC Amanah (Malaysia) Berhad, OCBC Al-Amin
Berhad and Standard Chartered Saadiq Berhad.
Nonetheless, financial turnover has created the majority of the financial institutions
breakdown and most of the banking sectors have been influenced because of the
economy downturn. During these year, there are more investigator began to do their
exploration to focus the components influencing the profitability of Islamic banks in many
countries. The determinants incorporate inside and outside components. Inside elements
of profitability which are within the control of bank management can be extensively
arranged into two classifications financial statements variables and non-financial
statements variables. The illustrations of internal elements are Risk weighted Capital
Ratio and overhead cost. Meanwhile,external elements are those variables that are
2
thought to be outside the ability to control of the management of the bank. The samples of
outside variables are GDP and Inflation Rate. Hassan and Bashir (2003) examined the
impact of controlled and uncontrolled variables on Islamic Bank profitability. They
consider on component, for example, capital, overhead, total national output and
conventional interest rate were decidedly identified with profitability.
Islamic banking in Malaysia was begun in 1983. The World's 100 biggest Islamic
banks have set a yearly resources development rate of 26.7% (BNM, 2011). The greater
part of the conventional banks in Malaysia have included in Islamic Industry also. They
have a subsidiaries bank that running the Islamic shariah idea to work the Islamic item or
financing. There are now five wholesome Islamic banks, local and foreign, and eleven
Islamic subsidiary banks owned by conventional banks, local and foreign.
This study is demonstrated that how the determinant influence profitability and
better seeing about significance of determinants of profitability. There are couple of
studies about Islamic keeping money, they found there are numerous variables impact
the profitability of Islamic bank. Presently the researchers focuses the study into Foreign
Islamic Banks or International Islamic Banks that works in Malaysia as of now.
3
1.1 PROBLEM STATEMENT
Islamic banking industry has been leaps and bounds. This examination is to improve
the performance of Islamic banks distinguishing the pointer by utilizing profit for resources
(ROA) as an estimation to profitability and make sense of what is impacted Islamic Banks
to develop quickly in Malaysia. Worldwide Islamic Banks in Malaysia has a high potential
in Malaysia even the current of the Foreign Islamic Bank is still new in Malaysia (BNM
report).
In light of sources by Bank Negara Malaysia, Foreign Islamic Bank exist in Malaysia
in year 2005. Kuwait Finance House is the first International Islamic Bank that built up by
Bank Negara. It took after by other Foreign Islamic Bank, for example, Al-Rajhi Bank,
Asian Finance House and PT. Bank Syariah Muamalat Indonesia, Tbk. By utilizing the
information of net salary Al-Rajhi Banking & Investment partnership (Malaysia) Berhad,
Kuwait Finance House (Malaysia) Berhad, Asian Finance Bank Berhad, HSBC Amanah
(Malaysia) Berhad, OCBC Al-Amin Berhad and Standard Chartered Saadiq Berhad, we
can see that the International Islamic Bank having great execution is Islamic Banking
industry in Malaysia.
There are numerous researchers examine on the significance of inside (bank
characteristics) and outer (macroeconomic) variables and how the impact the bank's
productivity. Regardless, a substantial part of the studies that is coordinated on the
traditional bank instead of Islamic banks. This has pushed to lead this study on Islamic
Banking Industry especially Foreign Islamic Banks or International Islamic Banks.
4
1.2 RESEARCH OBJECTIVES
General Objective
The objective of this study is to determine the factors affect the profitability of the
International Islamic Banks in Malaysia.
Specific Objectives
The specific objectives of this study comprise:
i. To determine the relationship between internal factor those are Overhead Cost and
Risk- weighted Capital Ratio to Islamic Banking Profitability.
ii. To analyze relationship between external factors those are Inflation Rate and Gross
Domestic Product to Islamic Banking profitability.
iii. To examine the most significant factor that contributes to Islamic Banking Profitability.
1.3 RESEARCH QUESTION
i. What is the relationship between internal factor which are Overhead Cost and Risk
Weighted Capital Ratio to Islamic banking profitability?
ii. What is the relationship between external factor which are Inflation Rate and Gross
Domestic Product to Islamic banking profitability?
iii. What are the factors that are affect the profitability of Islamic banks in Malaysia.
5
1.4 SCOPE OF STUDY
A study has been conducted is research about Foreign Islamic Banks that operates
in Malaysia that consists of Al-Rajhi Banking & Investment corporation (Malaysia) Berhad,
Kuwait Finance House (Malaysia) Berhad, Asian Finance Bank Berhad, HSBC Amanah
(Malaysia) Berhad, OCBC Al-Amin Berhad and Standard Chartered Saadiq Berhad. The
data that have been analyzed is year 2008, 2009, 2010, 2011, 2012 and 2013.
This study focus on the factors that affect the profitability of Foreign Islamic Banks
that operates in Malaysia. The determinants include internal and external factors.
However, for internal determinant, researcher only studied for the financial statement
variables which are overhead cost and risk-weighted capital ratio. Meanwhile, for external
researcher study on how inflation rate and gross domestic product affect Foreign Islamic
Banks profit.
1.5 CONCLUSION
This study is to investigate what os the factors that affects the profitability which is Return
of Asset (ROA) of Foreign Islamic Banks in Malaysia. The interior and outer determinant
of Foreign Islamic Bank's Profitability have been engaged in this paper and the outcome
discovered may vary from past studies as the components utilized may not be the same
and different elements might likewise influence the final result.
6
CHAPTER 2: LITERATURE REVIEW
2.0 INTRODUCTION
This study is to talk about the determinants impact Foreign Islamic Banks to develop
quickly in Malaysia. The study talk about the audit of the past studies about the inside and
outer element that will examine over in this exploration. It’s find the relationship between
the components and profitability being in mind the end goal to propose the applied
system. A theory is in light of the hypothetical will be grow in this setting after audit
2.1 REVIEW OF LITERATURE
These days, Islamic Banking has gets to be critical in the banking industry as
financial analyst understood that Islamic banking was more secure than ordinary saving
money furthermore conveys higher benefit to the organizations.The term of Islamic
Banking refers to a system of banking or banking activity that is consistent with Islamic
law which is shariah principles and guided by Islamic economics. In particular, Islamic law
prohibits Riba, the collection and payments of interest also commonly called Riba in
Islamic discourse. The first Foreign Islamic Bank in Malaysia is Kuwait Finance House
(Malaysia) Berhad that was granted a license under the Islamic Banking Act (Malaysia)
1983 on 8 May 2005. Many researches have been conducted to examine the factors that
affecting the profit of Foreign Islamic Banks.
Banks' benefit has been proposed to focus the bank's execution as benefit reflect
how a bank directed. On the other hand, the components that will focus bank exhibitions
have been partitioned into inner and outside variables that effect the general execution of
Foreign Islamic Banks. Internal factors include risk-weighted capital ratio and overhead
cost. These components are refers to the variables that can be overseen by the
organization of a bank. For the outer components, we have included total national output
7
(GDP) and Inflation Rate where these elements considered outside the ability to control of
a bank's administration which is the macroeconomics variables. The intention is to decide
which among the potential determinants of profitability appears to be important.
2.2 F0REIGN ISLAMIC BANK
Foreign Islamic Bank is also known as International Islamic Bank that defined as Islamic
Bank from other country that expands their business in Malaysia. Its has been licensed by
Bank Negara Malaysia.
2.3 RELATED LITERATURE REVIEW OF RETURN ON ASSET
Return on Asset is utilized to gauge the benefit of the bank. Many regulators believe
that return on asset is the most efficient measurement of bank effectiveness
(Abdel-Hameed M. Bashir, 2003). ROA calculated based on net income divided by total
assets. Generally, the higher the proportion is shows productive usage of benefits of the
firm and better administrative execution while lower proportion implies wasteful utilization
of advantages.
Numerous studies have utilized Return on Asset as needy variable in clarifying
banks' profitability. For occurrences, a research by Akther, Raza, Orangzab and Akram
(2011) and Moin (2008) utilized ROA as a measure of profitability in their investigations of
effectiveness and execution of banks in Pakistan. Alkasim (2005) utilized ROA as the
needy variable as his investigation of benefit of Islamic and Conventional saving money
in the GCC nations. He put an overwhelming emphasis on ROA as it exactly measures
resource execution in the managing an banking industry. Additionally, Bashir and Hassan
(2004) and Ben Naceur (2003) have connected ROA as an execution pointer and as an
8
indigent variable on the grounds that the author accepted that ROA will help to recognize
the adequacy of bank resources. According to Tarawneh (2006), ROA reflects the bank
management ability to generate profits.
2.4 RELATED LITERATURE REVIEW OF RISK-WEIGHTED CAPITAL RATIO
Risk weighted capital ratio or capital adequacy is the ratio which determine the
capacity of the banks in term of meeting the time liabilities and other risks such as credit
risk, operational risk and other external risk. Its measured by bank equity to total assets.
As indicated by Abreu and Mendes (2002), there is a positive relationship of capital
adequacy on bank's profitability. It is an important apparatus for evaluating security and
soundness of banks, a portion of the researchers clarify that when a keep money with
high capital proportion or more value capital is demonstrating the bank is more secure
and it is leverage to get higher benefit that was by and Chan (2009). They likewise
demonstrated that capital will emphatically influence benefit with their examination. This
outcome comparative with Abreu and Mendes (2002) which likewise discovered a
positive relationship between capital and productivity. In their studies, Abreu and Mendes
recommended that an all-around promoted bank confronts lower expected insolvency
expenses and show benefit later.
Indeed, even the majority of the researchers found that are huge positive relationship
between capital proportion and productivity yet a study by Wasiuzzaman and Tarmizi
(2010) and Pramato and Ismail (2006) found that the relationship in the middle of capital
and Islamic banks' profitability is negative in Malaysia. At the point when the estimations
of capital proportion is diminished, it will bring about a lower organization cost and
enhance the firm profit as notice in the study by Wasiuzzaman and Tarmizi (2010).
Hassan and Bashir (2003) additionally discovered the same result which is factually huge
9
negative relationship in the middle of capital and profitability. High capital ratio will reduce
the profitability of the banks.
2.5 RELATED LITERATURE REVIEW OF OVERHEAD COST
In business, overhead cost or overhead expenses refers to an ongoing expenses
that necessary to run a business, but are not attributed to a specific activity. Its also
referred to as “indirect costs”. The example of Operating Expenses such as rental,
electricity, wages and others. The term of overhead is usually used to group expenses
that are necessary to the continued functioning of the business, but cannot be
immediately associated with the products or services being offered do not directly
generate profit. Fixed costs versus variable costs and indirect cost versus direct costs are
closely related to accounting concepts.
Overhead costs are considered as fixed costs. Overhead costs are important to
monitor and control. Since they are not directly related to revenues, they can become a
larger share of the total expenses and burden a firm, soaking up net income and profits.
Typically, an overhead cost is expressed as a percentage of sales or labor cost. Keeping
the proportion of overhead cost low gives a business a competitive advantage, either by
increasing the profit margin or by allowing the business to price its products more
competitively.
Abdul Hamid M. Bashir (2003) found that the higher overhead costs the higher
profit earned by bank. The counter intuitive finding about the association between
performance and overheads suggest that high profits earned by banks may be
appropriated in terms of higher wages and salaries or investment in costly technology
used these banks.
10
2.6 RELATED LITERATURE REVIEW OF GROSS DOMESTIC PRODUCT
As per Francis (n.d.), GDP or financial development is embraced as a control
for repetitive yield impact. It is relied upon to be decidedly in connection with banks'
productivity. The Gross Domestic Product is a fundamental measure of the safety of a
nation's economy in light of the fact that it is a measure of the general monetary yield of
that nation the GDP is basically the business estimation of the merchandise and
administrations that are made inside of the nation amid one year. A study from Abdel
Hamid M. Bashir (2003) additionally found that the higher the GDP of the nation, the
higher banks; productivity. It is considered as an outside determinant of banks' profitability
that was given the positive relationship between the development of the economy and the
prosperity of the managing an account division (Levine and Zevros, 1988)
Numerous researchers have concentrated on the impact of financial development
on banks' benefit. Case in point, a solitary nation thinks about in which getting to the
effect of money related emergency on bank execution in Indonesia by Suffian and
Habibullah (2010). In their studies, they found that there is a positive relationship between
banking sector performance and monetary development. This further study affirm the
discoveries of Pasiouras and Kosmidou (2007) in which the macroeconomic conditions,
for example, monetary development is factually huge and decidedly identified with both
household and remote banks in 15 European nations.
All things considered, another single study on Tunisian managing an account
industry that has been finished by Ben Naceur and Goaied (2006) in which break down
the effect of the money related structure, macroeconomic marker and banks' trademark
on banks' net interest margin and profitability. They have found that the macroeconomic
proxy, for example, GDP have no effect on banks' profitability. Another study done by
Athanas, Delis and Staikouras (2005) in South Eastern European additionally found that
GDP does not show any significance effect on banks' productivity.
11
2.7 RELATED LITERATURE REVIEW OF INFLATION RATE
In economics aspects the inflation rate is a of progress in value level after some
time. The rate of abatement in the buying influence of cash is more or less equivalent.
Inflation rate alludes to a general ascent in costs measured against a standard level of
acquiring force. Costs of merchandise and administrations vary after some time, however
when costs changes an excess of too rapidly, the impacts can stun an economy. The
estimation to gauge inflation rate is Customer Price Index.
The impact of expansion on bank profitability was initially talked about by Revell
(1980). Revell accepted that inflation could be a component in the causation of varieties
in bank's productivity. This theory was experimentally tried by Boyd, Levine and Smith
(2000). The authors utilized different relapse strategies as a part of his studies and found
that there is an in number non straight relationship in the middle of expansion and money
related segment execution. Boyd (2000) conclude that inflation is measurably significant
and adversely identified with the financial sector performance.
Izhar and Asutay (2007) and Haron and Azmi (2004) utilizing the consumer price
index (CPI) as an intermediary for inflation in their studies, both studies found that
inflation had a decidedly association with benefit. In spite of the fact that the first
observational testing on inflation was finished by Bourke (1989), Heggested (1977)
attempted to gauge the impact of inflation on profitability in his study. Heggested utilized
per capital wage as the autonomous variable rather than CPI. Heggested's discoveries,
however, did not demonstrate any relationship between per capital salary and a bank's
productivity.
Ben Naceur (2003) utilized regression analysis (panel data with random effects) to
explore the banks' productivity determinants of the Tunisian managing an account
industry execution. Ben Naceur recommended that development rate are inconsequential
and have no effect on banks' productivity and interest margin.
12
2.8 Hypothesis
Based on the theoretical framework, the hypothesis statement is formulated as follows:
a) H0: There are no significant relationships between inflation rate and Foreign
Islamic Bank profitability.
H1: There are significant relationships between inflation rate and Foreign
Islamic Bank profitability.
b) H0: There are no significant relationships between gross domestic product (GDP)
and Foreign Islamic Bank profitability.
H1: There are significant relationships between gross domestic product (GDP)
and Foreign Islamic Bank profitability
c) H0: There are no significant relationships between Overhead Cost and Foreign
Islamic Bank profitability
H1: There are significant relationships between Overhead Cost and Foreign
Islamic Bank profitability
d) H0: There are no significant relationships between risk-weighted capital ratio
(RWCR) and Foreign Islamic Bank profitability
H1: There are significant relationships between risk-weighted capital ratio (RWCR)
and Foreign Islamic Bank profitability.
13
2.9 CONCLUSION
This chapter provides conceptual background from the previous studies to
strengthen our argument to conduct this study. Gross Domestic Product (GDP) and
Inflation rate as the external factors while risk weighted capital ratio and overhead costs as
the internal factors have included in our context. Data methodology will be discussed in
chapter 3.
14
CHAPTER 3: DATA METHODOLOGY
3.0 INTRODUCTION
In this chapter, we will provide the discussion about the research methodology. We will
discuss about data collection methods, data description, theoretical framework,
hypothesis testing and this research is based on secondary data. The data will collect from
Islamic Banks’ balance sheet and income statement from annual banks report and
Bankscope, International Monetary Fund (IMF) and World Economic Outlook (WEO). Data
were analyzed by using Eview Software.
The purpose of this chapter is to discuss about the research techniques and detailed
methods panned to be used in this study. This chapter is divided into five sections. Section
3.1 is the theoretical framework of the study and discussed about the variables that will be
used in this study. Section 3.2 discusses about the data description. Section 3.3 discusses
about the target population, section 3.4 discusses about the data analysis and Section 3.5
discusses about model specification.
15
3.1 THEORETICAL FRAMEWORK
Theoretical framework is the system on how these variables are connected with one
another. It comprises of dependent and independent variables that are accepted to have
connections towards the examination subject in either a positive or negative way.
Dependent variable is the variable of essential interest to the analyst. Through the
investigation of the dependent variable, it is conceivable to discover answers or solution
for the issues. Independent variables can be characterized as the qualities theorized to
be the input past variable. It is accepted to an impact the dependent variable and is
controlled, measured or chose to gauge the result of dependent variable.
In this paper, Return on Asset (ROA) will be used as an indicator of profitability
estimation. The proportion is characterized as benefit before assessment and Zakat over
aggregate assets. As indicated by Flaimini, Mcdonald and Schumacher (2009), to focus
bank's profitability, ROA is a superior proxy than ROE. It is on the grounds that ROE has
ignored the financial leverage as referred to Wasiuzzaman and Tarmizi (2010).
Independent Variables Dependent Variable Independent Variables
Figure 3.1 The Determinants of Foreign Islamic Banks Profitability
Internal Factors External Factors
Profitability ( Return On Asset )
Risk- Weighted Capital Ratio
Overhead Cost
Gross Domestic
Product
Inflation Rate
16
3.2 DATA DESCRIPTION
The data for this study would be obtained mainly from secondary data. The
procedure for collecting data and attempt to analyze data which have relationship
between dependent variable (Foreign Islamic banks’ profitability) and the independent
variables (inflation, gross domestic product, overhead cost and risk-weighted capital
ratio). The discussion will provide in depth understanding on the relationship of variables.
It will focus on profit of Foreign Islamic Bank that operated in Malaysia.
In this investigation of determinant of profitability of Foreign Islamic banks in
Malaysia, we will incorporate six years information from 2008 until 2013 and utilize the
information from yearly report of 5 International Islamic banks in Malaysia and industry
information from Bank Negara Malaysia to ascertain the proportion, for example, return
on assets, risk weighted capital ratio and overhead cost. In the meantime, we will also
gather total national output (Gross domestic product) and inflation rate information from
World Economic Outlook Database from International Monetary Fund (IMF). All this data
represent dependent and independent variables. This data can be use to examine the
relationship between the independent variables and the profitability of Foreign Islamic
banks in Malaysia. Statistical tools like E-views 7.0 software will be used for data and
analysis.
17
3.3 TARGET POPULATION
The optional information will be utilized as a part of this paper to direct the
exploration on profitability of Foreign Islamic Banks in Malaysia. Along these lines, the
information from 5 Foreign Islamic Banks in Malaysia from 2008 to 2013 will be gotten.
No. Name of the Banks
1. Al-Rajhi Banking & Investment corporation (Malaysia) Berhad
2. Kuwait Finance House (Malaysia) Berhad
3. Asian Finance Bank Berhad
4. OCBC Al-Amin Bank Berhad
5. Standard Chartered Saadiq Berhad
Table 3.2 List of licensed banking institutions for Foreign Islamic Banks in Malaysia
18
3.4 DATA ANALYSIS
The gathered information were analyzed by utilizing Eview software. Eview will be
utilized to examine the information gathered and it gives the outcome on the relationship
in the middle of determinants and benefit of The Determinants of Foreign Islamic Banks
profitability in Malaysia Islamic banks. A panel data method will also be directed to
expand a perception with a specific end goal to perform a more exact and solid
information.
Regression analysis describes the way in which one variable is related to another. It
derives an equation that can be used to estimate the unknown values of one variable on
the basis of the unknown values of another variable. Researcher would use the aid of
software such as Microsoft Excel and Eview to analyze and process the data. It is simplest
method to be used in analyzing raw data which can be used for panel or series data. There
are two types of linear regression analysis which are simple linear regression analysis and
multiple linear regression analysis. In this research, the researcher only uses multiple
linear regressions.
The speculations will be tried in light of the outcome in regression. The critical level
is situated at 0.05, and along these lines, the variable with a probability of t-statistic
beneath 0.05, it is considers to has significant effect on the probability of Foreign Islamic
Banks.
19
3.5 MODEL SPECIFICATION
This is the general linear model for estimation purpose:
Iijt =α0 + αi Bit + βj Xjt + γt Mjt + δj Cj +εijt
Equation 3.1
Where,
Iijt = ROA for bank i in country j at time t
X, M, C = Vectors of different independent variables
Bit = Bank Variables for bank i in country j at time t
α ,β ,γ and δ = Coefficients
εijt = Error term
This equation has been taken from the previous research (Abdel Hamid M. Bashir,
2003) that study on Determinants of Profitability in Islamic Bank in eight Middle Eastern
countries between 1993 and 1998.
Thus, above equation have been modified in this research as follow:
It = α + β1X1 + β2X2+ β3X3 + β4X4 +ε
Equation 3.2
Where,
It = ROA at particular year
α = Regression constant
β1, β2, β3, β4= Coefficient
X1, X2, X3, X4= Determinant (Inflation, GDP, Overhead Cost and RWCR)
εt = Error term
20
3.6 DIAGNOSTIC TEST
After analyst has the regression analysis result by utilizing the EVIEWS
programming, the regression can be investigate based on below determinant:
a) Testing the Coefficient of determination (R²)
b) Test of Significant of Coefficient Estimate (t-stats)
c) F-statistics
3.6.1 Coefficient of Determinant (R²)
The coefficient of determination (R²) is utilized to decide how well the regression line
fits the data. It likewise measures the rate of an adjustment in the independent variable
that can be measured or clarified by the adjustment in the dependent variables. The
estimation of R² extents from 0 to 1. On the off chance that the worth is 0 it demonstrates
that none of the independent variables clarify the adjustments in the dependent variable, if
the quality is 1 it demonstrates that every one of the adjustments in the dependent variable
is clarified by the variety in independent variable utilized as a part of the regression. As a
general guideline, the higher the estimation of R², the higher the logical force of the
assessed estimate equation and the more exact for forecasting purposes.
3.6.2 Coefficient Estimate (t-stats)
The t-stat is utilized to figure out whether there is a huge relationship between the
dependent and every independent variable. . The general guideline for t critical quality is 2.
On the off chance that the ascertained t stat is more significant than critical t value,
independent variable is significant to dependent variable at 95% of significance level.
However if the t-stat is less than critical t values the result is other way around.
21
Computed T- value > Critical T- value, reject Hο
Computed T- value < Critical T- value, accept Ho
3.6.3 F-statistics
The F-statistics is utilized as a part of a multiple regression analysis. F-statistic is
utilized to test the theory that the variety in the independent variable (inflation, GDP,
overhead cost and risk-weighted capital ratio) clarifies a huge variety in the subordinate
variable (Foreign Islamic Bank Profitability). Keeping in mind the end goal to lead the F
test, the computed F values should be contrast and the discriminating estimation of the F
distribution; researchers utilize the F distribution table which utilizes 5% significance level.
As a general guideline for F stats, if F computed value is more than 2, then the overall
independent variables are significant in clarifying the adjustments in the dependent
variable.
Computed F-value > Critical F-value, reject Hο
Computed F-value < Critical F-value, accept Hο
22
3.7 CONCLUSION
Overalls in this chapter are to discuss the method that used in the research and
sample data that collected for analysis. The financial ratio strategy and macroeconomic
information will be embraced to estimate the determinant variables. We have recorded
the 5 Foreign Islamic banks that incorporate in this study. we also have examined the
technique for data analyzed which is multiple linear regression has been used for conduct
the information to give empirical result of our study. The following part will examine about
data examination, for example, propose the result of regression model and discussion on
significant findings.
23
CHAPTER 4: FINDING AND ANALYSIS
4.0 INTRODUCTION
In the previous chapter, we have done for the data collection, model specification and
data processing. In this chapter, we will proceed with the analysis of the results that we
obtained through the multiple linear regressions. This chapter will present the empirical
results and findings by using Eviews software and the interpretations of the outcomes.
Eviews software used to run the data and comparing the outcomes with the significant
confidence level of 90%. The secondary data for both dependent and independent
variables are collected from year 2008 until 2013 from bank’s annual reports and
Bankscope. The annual data for the banks’ consists of five from Foreign Islamic bank. The
data of banks from Bankscope is not completed for each bank. The objective of this paper
is to investigate the determinants of profitability of Foreign Islamic Banks in Malaysia.
24
4.1 DESCRIPTIVE STATISTIC
Roa Rwcr Ohc Gdp Ifr
Mean 0.002393 0.218167 1.310637 -0.005960 0.024500
Median 0.003097 0.168450 0.879950 0.050100 0.019100
Maximum 0.011664 0.920200 4.149700 0.074300 0.054400
Minimum -0.015054 0.110700 0.431000 -1.510000 0.005800
Standard
Deviation 0.005858 0.157680 1.051695 0.285256 0.015695
Skewness -0.926949 3.242340 1.714277 -5.131098 0.130808
Table 4.1 Descriptive Statistic of Foreign Islamic Banks
Table 4.1 above shows the descriptive statistic for risk-weighted capital ratio,
overhead cost, gross domestic product and inflation rate for the year 2008 until 2013. The
table exhibits the value of mean, median, maximum, minimum, standard deviation and
skewness of Foreign Islamic Banks in Malaysia. The overall observation is thirty for every
independent variable. The average of the value of total sample data known as mean. The
highest mean in this model is overhead cost which at 1.310637 and the lowest is GDP at
-0.005980. For median value, the higher value is overhead cost at 0.879950 and the lower
is at ROA which is 0.003097. The standard deviation is measure the dispersion of a
sample from its mean. The highest value of standard deviation is also overhead cost at
1.051695 but the lowest is at Inflation rate. The higher the standard deviation the more
sensitivity the variables. The overall skewness shows the positive value.
25
4.2 CORRELATION COEFFICIENT TEST
Roa
Roa 1
Rwcr -0.143092
Ohc 0.160180
Gdp -0.009578
Ifr 0.003374
Table 4.2 Correlation Coefficient of Foreign Islamic Banks
Table 4.2 shows the results from the correlation coefficient test that has been
conducted. This expresses the degree of correlation in the connection between
explanatory variables. Overall result shows that there is a negative relationship and
positive relationship between variables. RWCR and GDP show the negative relationship
while overhead cost and inflation rate gives positive results. Overhead cost refers to an
ongoing expense that necessary to run a business. The higher overhead costs the higher
profit earned by bank. Hence, this means that every one unit increase in overhead cost
will increase the profitability by 0.141736. Inflation is defined as a rise in the level of prices
of goods and services in an economy, and it could reflect the purchasing power of money.It
indicates higher inflation could bring higher profitability to banks. So that everyone unit of
inflation rate will increase the profitability by 0.003374.
26
4.3 MULTIPLE REGRESION ANALYSIS
ROA = 0.002069 + 0.010637*INFLATION - 0.000527*GDP + 0.000728*OHC -
0.004095*RWCR
Equation 3: The Relationships between all the variables
The equation 3, above shows the relationships between all the variables which are
inflation, GDP, overhead and Risk-Weighted Capital Risk towards return on assets (ROA).
Table 4.3 Panel Least Square Method for Foreign Islamic Banks
Variables Coefficient T-Statistic P- Value
Constant 0.002069 0.650278 0.5214
Rwcr -0.004095 -0.529174 0.6014
ohc 0.000728 0.635160 0.5311
Gdp -0.000527 -0.126031 0.9007
Ifr 0.010637 0.138277 0.8911
F-Statistic 0.240471
Prob (F-Statistic) 0.912701
Coefficient of Determinant (R²) 0.037050
Adjusted (R²) -0.004095
27
4.3.1 Coefficient of Determinant (R²)
The coefficient of determination (R²) is utilized to decide how well the regression line
fits the information. Estimations of R² that are near to 1 infer that the majority of variability
in dependent variable is clarified by the regression model. The estimation of R² for this
regression 0.037050 that shows 3.70% of the changes in the dependent variable that is
explained by the variation in independent variable used in the regression.
4.3.2 Coefficient Estimate (t-stats)
T-test measurement is utilized to test all the hypothesis statements in regards to the
coefficient of individual independent variables. In this exploration the probability are
between 0.5214 until 0.9007. On the other hand, to reject null hypothesis the probability
should not exceeding 0.1 which is at 10% significance level.
Hypothesis 1
H0: There are no significance relationships between inflation rate and International Islamic
Bank profitability.
H1: There are significance relationships between inflation rate and International Islamic
Bank profitability.
The probability for inflation is 0.8911. In this manner, do not reject null hypothesis as
probability for t-test is surpassing 0.1. The outcome also implies that there is positive
relationship between the inflation rate and Foreign Islamic Banks profitability but
insignificant to the significant value.
28
Hypothesis 2
H0: There are no significance relationships between gross domestic product (GDP) and
International Islamic Bank profitability.
H1: There are significance relationships between gross domestic product (GDP) and
International Islamic Bank profitability.
The probability for total national output is 9007 In this way, do not reject the null
hypothesis since the probability for t-test is surpassing 0.1. The outcome additionally
implies that there is positive relationship in the middle of GDP and Foreign Islamic Banks
profitability but insignificant to the significant value.
Hypothesis 3
H0: There are no significance relationships between Overhead Cost and International
Islamic Bank profitability
H1: There are significance relationships between Overhead Cost and International Islamic
Bank profitability.
The probability for Overhead Cost is 0.5311. Along these lines, do not reject the null
hypothesis since the probability for t-test is surpassing 0.1. The outcome also implies that
there is positive relationship between overhead cost and Foreign Islamic Bank profitability
but insignificant to the significant value.
Hypothesis 4
H0: There are no significant relationships between risk-weighted capital ratio (RWCR) and
International Islamic Bank profitability
H1: There are significance relationships between risk-weighted capital ratio (RWCR) and
International Islamic Bank profitability
29
The probability for risk-weighted capital ratio is 0.5214. Along these lines, do not
reject the null hypothesis since the probability for t-test is surpassing 0.1. The outcome
also implies that there is positive relationship between overhead cost and Foreign Islamic
Bank profitability but insignificant to the significant value.;.
4.3.3 Hypothesis Testing (F-statistics)
The F-statistic is utilized as a part of a multiple regression analysis. F-statistics is
utilized to test the hypothesis that the variety in the independent variable (inflation rate,
GDP, overhead cost and risk-weighted capital ratio) clarifies a significant variety in the
dependent variable (Foreign Islamic Bank Profitability).
H0: The dependent variable is not affected by at least one independent variable
H1: The dependent variable is affected by at least one independent variable
Based on the result shows in the table 4.3, the researchers found that the probability
F-stats is 0.912701 which is more than 0.1. The null hypothesis has been accepted
because that the F-statistic is factually not significant at 10% significance level. The results
show that Foreign Islamic Bank profitability not influenced by at least one of the
independent variables.
Since the F-statistic is not significant, it is means that there is no relationship
between the Foreign Islamic Banks profitability with inflation rate, GDP, overhead cost and
RWCR.
30
4.4 CONCLUSION
In chapter 4, we have done on the discussion of empirical results and major findings.
Besides, the discussions of empirical results also include F- statistics, coefficient of
determination and testing of each independent variable. The next chapter will discuss
about the recommendation and conclusion of the study.
31
CHAPTER 5 : CONCLUSION AND RECOMMENDATION
5.0 INTRODUCTION
This chapter contains the conclusion, recommendations and limitation of study. We
discussed conclusion in first part. There are some recommendations and suggestion we
want to provide to the upcoming researchers for future research in second part. The
limitation of study is discussed in the last part.
5.1 CONCLUSION
Bourke (1989) and Molyneux and Thornton (1992) found that inflation had a huge
significant with profit by utilizing CPI as estimation of inflation. Bourke uncovered a
positive relationship between inflation and bank profitability.The researcher found that
there have positive relationships between dependent variable and independent variables.
Be that as it may, the relationship is not significant. If the Inflation rate is high, benefit of
bank additionally high since when inflation purchaser mean to make saving as opposed to
spending. In this manner, it will produce benefit to the bank. In any case, Foreign Islamic
Banks are still new, the investors like to store to other bank that more stable.
In this exploration, researchers found that there has positive relationship between
GDP and Foreign Islamic Bank profitability. This supported by past researcher, Abdel
Hamid M. Bashir who also found that the higher GDP of country, the higher bank
profitability. However, the relationship is not significance at 90% level of confident.
Essentially, profit will be increase when the overhead cost reduced. Then, the
researcher found that there has positive relationship between overhead cost and Foreign
Islamic Banks profit. This result supported via exploration done by Abdel Hamid M. Bashir.
He proposes that high profits earned by banks may be appropriated as far as higher
wages and pay rates or interest in unreasonable innovation utilized by the banks. Foreign
32
Islamic Bank is still new in Malaysia since year 2005 and the bank requires some
investment to increase economic scale in their expenses.
Furthermore, researcher found that RWCR have positive relationship between
Foreign Islamic Bank benefits. This is on the grounds that high RWCR will increase the
confident level among speculator to make venture with Foreign Islamic Bank in Malaysia.
In this way it will gain bank profit.
However F-statistic shows that all the independent variables are not significant to the
dependent variable. Maybe because of constraint data for investigation that need to be
analyzed.
5.2 RECOMMENDATION
This exploration has attempted to examine the relationship between dependent
variable and independents variables. Other than that, the researcher need to figure out
which independents variables is most significant to the Foreign Islamic Banks profitability.
From this study, a few suggestions can be made. Firstly, Foreign Islamic Bank itself needs
to control their overhead cost so it parallel with the benefit for the financial year. Moreover,
the bank itself need to accomplish more advancement so that Malaysian will more
acknowledge and aware for their extraordinary and point of interest of their Islamic item. In
other hands, the bank additionally needs to make development into their item so they can
compete with local Islamic Bank.
33
5.3 LIMITATION OF STUDY
There are some limitations for this study. The time period used in this study only six
years from 2008 until 2013. Foreign Islamic bank are new begin so limited sum of data
existing for research.
Besides, we take secondary data in our study to analyze the profitability of Islamic
banks in Malaysia since it is difficult to be conducted through primary data due to time
constraint and money constraint. For the profitability of Foreign Islamic banks in Malaysia,
we are only able to review secondary data such like articles, journal and financial
statements of the Islamic banks to determine the factors that affect the profitability. When
reviewing the articles, there are a lot of arguments from different authors, some of the
authors might have the different opinion on the variables used to determine the profitability
of Islamic banks. Moreover that, the data were collected from annual report was not
completed and some of data missing.
34
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38
APPENDICES
List of Foreign Islamic used in this study
No. Name of the Banks
1. Al-Rajhi Banking & Investment corporation (Malaysia) Berhad
2. Kuwait Finance House (Malaysia) Berhad
3. Asian Finance Bank Berhad
4. OCBC Al-Amin Berhad
5. Standard Chartered Saadiq Berhad
Adapted from Bank Negara Malaysia’s official Website
Macroeconomic variables
2008 2009 2010 2011 2012 2013
GDP (%) 4.83% -1.51% 7.43% 5.19% 5.64% 4.73%
CPI (%) 5.44% 0.58% 1.71% 3.20% 1.66% 2.11%
Data from database: World Development Indicators
39
Descriptive Statistic Analysis
Correlation Coefficient Test
40
Multiple Linear Regression ( Least Square Method )
* Significant at the 10% level
Estimation Command:
=========================
LS ROA C INFLATION GDP OHC RWCR
Estimation Equation:
=========================
ROA = C(1) + C(2)*INFLATION + C(3)*GDP + C(4)*OHC + C(5)*RWCR
Substituted Coefficients:
=========================
ROA = 0.002069 + 0.010637*INFLATION - 0.000527*GDP + 0.000728*OHC -
0.004095*RWCR
41
Raw Data of Six Year Foreign Islamic Banks
Asian Finance Bank
Name Year ROA RWCR OHC GDP
AFB 2008 0.00863 0.920200 0.703700 0.048300
AFB 2009 0.001249 0.377600 0.854800 -0.015100
AFB 2010 -0.01505 0.466100 0.665200 0.074300
AFB 2011 -0.00340 0.398900 0.785700 0.051900
AFB 2012 -0.00255 0.257500 0.633900 0.056400
AFB 2013 0.00261 0.227400 0.754100 0.047300
Al Rajhi Bank
Name Year ROA RWCR OHC GDP
ALRAJ 2008 -0.00235 0.131900 1.132700 0.048300
ALRAJ 2009 0.00183 0.213400 1.021500 -0.015100
ALRAJ 2010 0.00415 0.172600 1.040200 0.074300
ALRAJ 2011 0.00506 0.164300 1.330400 0.051900
ALRAJ 2012 0.00198 0.134600 1.240800 0.056400
ALRAJ 2013 0.00047 0.139200 1.335700 0.047300
42
Kuwait Finance House
Name Year ROA RWCR OHC GDP
KFH 2008 0.00461 0.204700 0.431000 0.048300
KFH 2009 -0.00244 0.233400 0.640000 -0.015100
KFH 2010 -0.00893 0.237600 0.766000 0.074300
KFH 2011 -0.00569 0.177900 0.991500 0.051900
KFH 2012 0.00708 0.188900 1.029100 0.056400
KFH 2013 0.01005 0.212000 0.905100 0.047300
OCBC Al-Amin Bank Berhad
Name Year ROA RWCR OHC GDP
OCBC 2008 -0.00047 0.110700 4.138700 0.048300
OCBC 2009 0.003555 0.131200 4.148700 -0.015100
OCBC 2010 0.00554 0.155500 2.850800 0.074300
OCBC 2011 0.00351 0.128600 2.088800 0.051900
OCBC 2012 0.00662 0.146500 2.579800 0.056400
OCBC 2013 0.01062 0.152400 3.442900 0.047300
43
Standard Chartered Saadiq Berhad
Name Year ROA RWCR OHC GDP
SCSB 2008 0.00057 0.133900 0.708500 0.048300
SCBC 2009 0.00269 0.200000 0.773100 -1.510000
SCBC 2010 0.01166 0.144000 0.543500 0.074300
SCBC 2011 0.00721 0.128300 0.559100 0.051900
SCBC 2012 0.00712 0.118500 0.537800 0.056400
SCBC 2013 0.00589 0.137200 0.686000 0.047300