Abstract
Ijarah (lease contract) is one of the essential financing contracts offered by Islamic banking institutions to meet the demand of the clients. This study investigates the impact of Ijarah financing on Islamic bank performance in Malaysia for the period from 2004-2018 using Fixed and Random Effect Models. Ijarah financing (IJFA) which becomes the focus variable of this study with other six independent variables; operating efficiency (EXTA), bank size (LTA), total financing (TFTA), base rate (BR), consumer price index (CPI) and gross domestic product (GDP) were regressed against return on asset (ROA) and net profit margin (NPM). The results show that Ijarah financing has a positive and significant impact on NPM. The findings suggest that Islamic banks should increase their portfolio of Ijarah financing and this is also support the concentration strategy used by banks in improving Islamic bank performances. An increase in demand for Ijarah financing will increase Islamic banks performance and this reflects that Ijarah financing as an asset creation tool that banks prefer particularly for generating income.
Highlights
The unique features of Ijarah financing might influence the risk that would affect the performance of Islamic banks in Malaysia
Islamic banks are financial institutions that do not involve any prohibited elements and all their products must strictly follow the principle of Shariah
IB: Islamic banks, LTA: log total asset, IJTA: Ijarah/total asset, EXTA: expenses/total asset, TFTA: total financing/total asset, BR: base rate, CPI: consumer price index, GDP: gross domestic product, P value are in parentheses ***p
Summary
The unique features of Ijarah financing might influence the risk that would affect the performance of Islamic banks in Malaysia. Islamic banks mostly face credit risk of Ijarah financing products because the clients do not have ownership of the asset compared to other types of financing (ISRA, 2018). This study analyzes the effect of Ijarah financing on Malaysian Islamic banks because the growth of Ijarah financing has significantly increased compared to other Islamic contracts such as Musyarakah and Istisna, which would positively affect the performance of Islamic bank in Malaysia.
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