Impaired Financing Determinants of Islamic Banks in Malaysia

Alias Mat Nor

doi:10.22610/imbr.v7i3.1149

Abstract

Despite commendable growth of Islamic banking on a macro level, impaired financing is an issue among Islamic banks at the micro level. The 2008 Global Financial Crisis shows large credit risk was largely attributable to staff inefficiency. This study investigates the moderating effect of staff efficiency on determinants of credit risk or impaired financing of sixteen Islamic banks in Malaysia over the 2005-2013 periods. The determinants include new variables such as political stability index and corruption index besides GDP, inflation, finance to deposit, loan loss provisions, liquidity, capital, net interest margin, profitability, loan growth and net charge offs. The study highlights new findings where impaired financing reduced with higher political stability index and corruption index. Loan loss provision has significant positive whilst loan growth has negative impact on impaired financing. Staff efficiency significantly moderates the impaired financing relationship with capital ratio, profitability and loan growth. This relationship yields model fit of 0.889. The results support Resourced - based Theory and provide statistical evidence of the importance of staff efficiency in managing banksâ€™ credit risk. None of the external factors had significant influence on impaired financing, which statistically proved that the profit and loss sharing concept of Islamic banking provides effective tool to mitigate external risks.

Highlights

According to Ahmed (2009), the global financial crisis (GFC) that began around 2006, caused several countries like Greece, Portugal, Ireland and Spain into bankruptcy. Laeven and Valencia (2008) highlighted that GFC had caused many banks to face high credit risk due to over leveraging and speculative activities in mortgage markets
Result and Discussion on the Moderating Effects of Staff Efficiency on the Relationship between Internal Factors and Impaired Financing: Table 6 presents the result of hierarchical multiple regressions on the moderating effects of STAFFX on the relationship between internal factors (FD, loan loss provision (LLP), LIQR, CAP, net interest margin (NIM), PROFIT, loan growth (LGROW) & net charged off (NCOFF)) and impaired financing (IF) of Islamic banks in Malaysia
This paper concludes the result that external factors such as gross domestic product (GDP), inflation, political stability index and corruption control index were not significant in influencing impaired financing of Islamic banks in Malaysia

Summary

Introduction

According to Ahmed (2009), the global financial crisis (GFC) that began around 2006, caused several countries like Greece, Portugal, Ireland and Spain into bankruptcy. Laeven and Valencia (2008) highlighted that GFC had caused many banks to face high credit risk due to over leveraging and speculative activities in mortgage markets. The GFC did destroy many mega banking institutions such as Northern Rock, Bear Stearns, Indy Mac Bank and Washington Mutual, and caused misery to millions of American and European society (Ahmed, 2009). They found that non-performing loans or impaired financing caused 124 systematic banking crises over the period of 1970 to 2007. The factors studied are management efficiency, risky sector financings, property financings, capital to total assets, loan loss provision, funding cost, risk-weighted assets, and natural log of total asset and financing to deposit. The effects of four new variables such as political stability index, corruption control index, net charged off and staff efficiency on impaired financing of Islamic banks intend to fill the gap in Ahmad and Ahmad (2004)

Objectives

Methods

Results

Discussion

Conclusion