Abstract
Islamic banks are recognised as entities which support social objectives as well as economic development of the country. Financial performance of the global Islamic banking and finance has shown promising growth as equal to well-established conventional banks. The study aims to investigate the effect of asset quality and operational efficiency on the financial performance of Islamic banks in Malaysia. The study uses panel data analysis, whereby the annual reports of 16 Islamic banks in Malaysia are analysed over a ten-year period from 2010 to 2019. The independent variables of the study are asset quality and operational efficiency. The dependent variable of the study is financial performance proxied by Return on Asset (ROA) and Return on Equity (ROE). Multiple regression models consisting of random-effect model and fixed-effect model are employed to analyse the data of the study. The findings of the study show that both asset quality and operational efficiency of Islamic banks have a significant influence on the financial performance proxied by ROA and ROE. Hence, the findings of the study evince the importance of proper management practices in protecting the wealth, as well as the financial performance of the Islamic banks.
Highlights
The Islamic banking and finance discipline is nearly four decades old and its substantial growth has become a part of global capital markets and international banking systems
The results of the study provide the evidence on how asset quality and operational efficiency influence the financial performance of the Islamic banks in Malaysia
The results of the study reveal that there is a significant effect of asset quality and operational efficiency on financial performance measured by Return on Asset (ROA) and Return on Equity (ROE)
Summary
The Islamic banking and finance discipline is nearly four decades old and its substantial growth has become a part of global capital markets and international banking systems. The increase in global Islamic banking assets was substantial, at around USD 1.77 trillion in 2019 (see Figure 1). Gulf Cooperation Council (GCC) countries dominated with the largest Islamic banking assets, amounting to USD854 billion in 2019, followed by Middle East, South Asian, Southeast Asian and African countries (see Figure 2). This substantial growth of global Islamic banking assets has led to the growth of the domestic market shares of Islamic banks in the world, including in Malaysia [3]. Protection of Bank's Wealth: How Islamic Banks's Financial Performance Affected by Asset Quality and Operational Efficiency
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