A

STUDY

OF

BANK

PROFITABILITY

BETWEEN COMMERCIAL AND ISLAMIC BANK BETWEEN 1997 TO 2011 : MAYBANK BERHAD AND BANK ISLAM MALAYSIA BERHAD SITI FAIRUS BT IBRAHIM 2011213874 BM222 JUNE 2013

MALAYSIAN FINANCIAL INSTITUTIONS

Commercial Bank Islamic Bank Investment Bank Other Financial Institution

COMMERCIAL BANK VS ISLAMIC BANK

Conventional Banks Islamic Banks Operates based on fully manmade principles. rate of interest. Operates based on the principles of Islamic Shariah. capital (investor) and the user of funds (entrepreneur). Aims at maximizing profit without any restriction. Does not deal with Zakat. Lending money and getting it back with compounding interest without know too much with the interest fluctuation. Aims at maximizing profit but subject to Shariah restrictions. Be the Zakat Collection Centre and they also pay out their Zakat. Participation in partnership business is the fundamental function of the Islamic banks. The customers business has to be understood. The investor is assured of a predetermined Promotes risk sharing between provider of

Can charge additional money (penalty and Not charge any extra money from the compounded interest) in case of defaulters. defaulters. Only small amount of compensation and these proceeds is given to charity. Rebates are given for early settlement at the Bank's discretion. Very often it results in the bank's own effort to ensure growth with equity. The status of a conventional bank, in debtors. A conventional bank has to guarantee all its deposits. The status of Islamic bank in relation to its trader, buyer and seller. Islamic bank can only guarantee deposits for deposit account, which is based on the principle of al-wadiah, thus the depositors are guaranteed repayment of their funds, however, if the account is based on the mudarabah concept, clients have to share the loss if it occurs. Gives importance to the public interest. Its

interest becoming well-known. It makes no ultimate aim is to ensure growth with equity.

relation to its clients, is that of creditor and clients is that of partners, investors and

BACKGROUND OF MAYBANK BERHAD

Maybank is a trade name of Malayan Banking Berhad is the largest bank and financial institution in Malaysia founded by Khoo Teck Puat on 31st May 1960. Maybank have 401 branches in Malaysia with 40 000 of employees. They also operate in Singapore, Indonesia, Philippines, China, Papua New Guinea, Vietnam, Cambodia, Brunei, Pakistan, United States, United Kingdom, Bahrain and Thailand Vission of Maybank is To Be A Regional Financial Services Leader, while its mission is Humanising Financial Services Across Asia.

BACKGROUND OF BANK ISLAM MALAYSIA BERHAD

Bank Islam Malaysia Berhad is a first Islamic bank in Malaysia which founded on 1st July 1983. Bank Islam currently has 127 branches and more than 1000 self-service terminals throughout the country. Vision of Bank Islam is To be a Global Leader in Islamic Banking While its missions are include: To continually develop and innovate universally accepted financial solutions in line with Syariah Principles; To provide a reasonable and sustainable return to shareholders; To provide for a conducive working environment and to become an Employer of Choice for top talents in the market; To deliver comprehensive financial solutions of global standards using state-of-the-art technology; To be a responsible and prudent corporate citizen

PROBLEM STATEMENT
The problem in this study is what is the factors affect the profitability of Islamic and commercial bank in Malaysia which are Maybank Berhad and Bank Islam Malaysia Berhad in term of Return on Asset (ROA)?

i.

RESEARCH OBJECTIVES
To identify trend analysis of profitability performances (ROA) of CIMB Berhad, and Bank Islam Malaysia Berhad. To investigate whether there is a positive or negative relationship between return on asset (ROA) and the independent variable which are capital adequacy, financial risk, deposits, inflation rate and gross domestic product (GDP). To compare the differences of profitability performance of conventional bank and Islamic bank in Malaysia which is CIMB Bank and Bank Islam Malaysia Berhad from 1997 until 2011 by using return on asset (ROA).

ii.

iii.

SELECTED VARIABLES
Variable Profitability Return on Assets (ROA) Capital Adequacy Financial Risk Deposits Inflation Rate Gross Domestic Product Annual inflation rate Annual Real Growth Rate Measure Notation ROA

EQTA LOTA DETA INF GDP

SIGNIFICANCE OF STUDY
To the researcher To the banks and financial

institutions
To the public

SCOPE OF STUDY
This study was focus on the factors that affect the

profitability of commercial and Islamic bank and two banks was selected that are Maybank Berhad and Bank Islam Malaysia Berhad.

The dependent variable selected is bank return on

asset (ROA) to measure bank profitability.

While the independent variables in this study was divided

into two types that are internal and external variables. Internal variables include capital ratio (EQTA), financial risk (LOTA), and deposits (DETA) , while external variables are data of inflation and gross domestic product (GDP).

All data are taken from 1997 to 2011 for 15 years annual

basis which derived from income statements and balance sheets of Maybank Berhad and Bank Islam Malaysia Berhad

LIMITATION OF STUDY
Lack of experience Time Constraint Limitation of data

LITERATURE REVIEW
AUTHOR
Khairul Anuar Desa (2003)

FINDINGS
He conducted a research to examine the bank profitability using return on asset (ROA). Six variables significance at the level 0.05 is capital ratio (CR), bank size (SIZE), interest coverage (INC), total loan (LOAN), total deposit (DEPOSIT) and total income (TI). While two external variables that are gross domestic product (GDP) and (INFL) are significance at the 0.20 She also used return on asset (ROA) to estimate the banks profit. The results however show that only expenses management (EXPS,) interest coverage (INC), total loans (LOANS), base lending rate (BLR) and inflation (INFL) are significant at 0.5 and 0.10 confidence level.

Abduilalh Yousef AlAdemi (2009)

Fadzlan Sufian and Royfaizal Razali Chong (2008)

Examine the determinants of Philippines banks profitability by using return on asset (ROA). All the bank-specific determinant variables that are size, credit risk, non interest income, expenses and capital adequacy have a statistically significantly impact on bank profitability. Study the bank profitability in Pakistan by using return on assets (ROA). The bankspecific variables capital adequacy (CAP), credit risk (CR) and asset management (AM) are found to be significantly at 1% level of significance, whereas the relation of macroeconomic variables gross domestic (GDP) and consumer price index (CPI) is significant at 5% level of significance.

Khizer Ali, Muhammad Farhan Akhtar, and Prof. Hafiz Zafar Ahmed (2011)

THEORETICAL FRAMEWORK

Adapted from framework model made by Melaty bin Ghazali

There is a significant relationship between capital adequacy

HYPOTHESIS

(EQTA) with banks profitability (ROA) in Malaysia.

There is a significant relationship between financial risk

(LOTA) and banks profitability (ROA) in Malaysia.

There is a significant relationship between deposits (DETA)

and banks profitability (ROA) in Malaysia.

There is a significant relationship between inflation rate (INF)

and banks profitability (ROA) in Malaysia.

There is a significant relationship between gross domestic

product (GDP) and banks profitability (ROA) in Malaysia.

METHODOLOGY
In details, it include research design, data

collection method, data entry and data processing, and data analysis and interpretation

Variables:

RESEARCH DESIGN

Dependent variables return on asset (ROA) Independent variables :

i.

ii. iii. iv. v.

Capital adequacy to total (EQTA) Deposits to total asset (DETA) Loan to total asset (LOTA) Infaltion Gross domestic product (GDP)

asset

DATA COLLECTION METHOD

In this study, secondary data is used. This type of

data is the data collected from financial statement of Maybank Berhad and Bank Islam Malaysia Berhad, data stream in the library, from the internet like Osiris and World Bank website.

DATA ANALYSIS
Ratio Analysis Trend analysis Pearson Correlation Analysis Multiple Regression Analysis Coefficients of Determination (R) T-statistic F-statistic

RATIO ANALYSIS

RETURN ON ASSET (ROA)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Maybank (%) 2 0.48 0.86 1.68 1.07 1.56 1.63 1.87 1.82 1.78 1.7 1.52 0.54 1.6 1.52 Bank Islam (%) 1.397 0.23 0.71 0.5 0.55 0.55 0.95 0.75 -3 -9 1.186 1.653 0.058 1.346 1.113

EQUITY TO TOTAL ASSET RATIO Maybank (%) Bank Islam (%) (EQTA) 7.7 6.254 1997
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 7.6 8 8.4 7.3 8.6 8.6 8.4 8.8 7.8 7.7 7.5 8.3 8.5 7.9 18.49 14.24 11.52 9.649 8.468 8.389 8.115 4.607 -1.902 5.347 5.6 5.528 8.345 8.675

LOAN TO TOTAL ASSET RATIO (LOTA)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Maybank (%) 5.86 6.8 6.49 6.23 6.58 6.34 6.37 6.08 6.23 5.86 5.49 6.12 5.98 6.1 6.17 Bank Islam (%) 55.846 58.711 50.345 45.77 48.697 46.897 48.161 50.234 58.583 58.207 44.191 38.466 35.149 39.033 43.935

DEPOSITS TO TOTAL ASSET RATIO (DETA)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Maybank (%) 8.26 8.24 8.34 8.33 8.46 8.03 7.99 8.07 8.18 8.12 8.03 8.01 7.82 7.83 7.87 Bank Islam (%) 82.347 74.101 83.093 85.91 84.999 88.704 90.143 89.762 85.073 98.502 92.231 88.105 91.718 88.417 87.862

TREND ANALYSIS

RETURN ON ASSET (ROA)

EQUITY TO TOTAL ASSET (EQTA)

LOAN TO TOTAL ASSET

DEPOSITS TO TOTAL ASSET (DETA)

INFLATION RATE

GROSS DOMESTIC PRODUCT (GDP)

Pearson Correlation Analysis

Pearson correlation coefficient shows the

relationship between two variables. The table below shows the range of strengtness of the relationship
RANGE (-) 0 Less than 0.30 0.30 to 0.49 0.50 to 0.69 0.70 to 0.99 1 STRENGTH Negative Relationship No Relationship Weak Relationship Moderate Relationship Strong Relationship Very Strong Relationship Perfect Relationship

CORRELATION ANALYSIS (MAYBANK)

ROA1 ROA1 Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1 15 0.25 0.369 15 -0.499 0.058 15 -0.059 0.835 15 -0.076 0.787 15 0.211 0.449 15 EQTA1 0.25 0.369 15 1 15 0.011 0.97 15 -0.367 0.178 15 -0.024 0.933 15 0.11 0.695 15 15 0.407 0.132 15 -0.36 0.188 15 -0.507 0.054 15 15 -.785** 0.001 15 -.800** 0 15 15 .916** 0 15 LOTA1 -0.499 0.058 15 0.011 0.97 15 1 DETA1 -0.059 0.835 15 -0.367 0.178 15 0.407 0.132 15 1 INF1 -0.076 0.787 15 -0.024 0.933 15 -0.36 0.188 15 -.785** 0.001 15 1 GDP1 0.211 0.449 15 0.11 0.695 15 -0.507 0.054 15 -.800** 0 15 .916** 0 15 1 15

EQTA1

LOTA1

DETA1

INF1

GDP1

CORRELATION ANALYSIS (BANK ISLAM)

ROA1 Pearson Correlation ROA1 Sig. (2-tailed) N Pearson Correlation EQTA1 Sig. (2-tailed) N Pearson Correlation LOTA1 Sig. (2-tailed) N Pearson Correlation DETA1 Sig. (2-tailed) N Pearson Correlation INF1 Sig. (2-tailed) N Pearson Correlation GDP1 Sig. (2-tailed) N 15 -0.186 0.507 15 0.504 0.055 15 0.047 0.867 15 0.279 0.313 15 0.398 0.141 15 15 -0.346 0.207 15 -0.393 0.147 15 -.555* 0.032 15 -.605* 0.017 15 15 0.339 0.216 15 .585* 0.022 15 .765** 0.001 15 15 -0.087 0.759 15 0.15 0.594 15 15 .916** 0 15 15 1 EQTA1 -0.186 0.507 15 1 LOTA1 0.504 0.055 15 -0.346 0.207 15 1 DETA1 0.047 0.867 15 -0.393 0.147 15 0.339 0.216 15 1 INF1 0.279 0.313 15 -.555* 0.032 15 .585* 0.022 15 -0.087 0.759 15 1 GDP1 0.398 0.141 15 -.605* 0.017 15 .765** 0.001 15 0.15 0.594 15 .916** 0 15 1

MAYBANK
VARIABLES
EQTA DETA LOTA INF GDP

BANK PROFITABILITY
Weak Positive Relationship Insignificant Moderate Negative Relationship Insignificant Weak Negative Relationship Insignificant Weak Negative Relationship Insignificant Weak Positive Relationship Insignificant

*. Correlation is significant at the 0.05 level (2-tailed)

BANK ISLAM
VARIABLES
EQTA DETA LOTA INF GDP

STOCK PRICE
Weak Negative Relationship Insignificant Strong Positive Relationship Insignificant Weak Positive Relationship Insignificant Weak Positive Relationship Insignificant Moderate Positive Relationship Insignificant

*. Correlation is significant at the 0.05 level (2-tailed)

MULTIPLE REGRESSION ANALYSIS (MAYBANK)

Variables (Constant) Equity to Total Asset (EQTA) Loan to Total Asset (LOTA) Deposits to Total Asset (DETA) Inflation Gross Domestic Product (GDP) Coefficient 0.697 0.140 Standard Error 12.816 .055 T-statistic .054 2.545

0.156

.064

2.434

0.138 0.063 0.022

.055 .025 .009

2.506 2.502 2.541

Regression Equation Y = f (IPC, CPI, LR, GDP, T) Mathematically equation Y = + 1X1 + 2X2 + 3X3 + 4X4 + 5X5 + Y = 0.697 + 0.140 EQTA + 0.156 LOTA + 0.138 DETA + 0.063 INF + 0.022 GDP (0.054) (2.545) (2.434) (2.506) (2.502) (2.541)

n = 15 R = 0.586 F-statistic = 2.551

BANK ISLAM
Variables (Constant) Equity to Total Asset (EQTA) Loan to Total Asset (LOTA) Deposits to Total Asset (DETA) Inflation Gross Domestic Product (GDP) Coefficient -27.708 -.891 Standard Error 15.643 .892 T-statistic -1.771 -.999

3.853

1.961

1.965

6.028

5.292

1.139

.688 .671

4.176 .908

.165 .739

Regression Equation Y = f (IPC, CPI, LR, GDP, T) Mathematically equation Y = + 1X1 + 2X2 + 3X3 + 4X4 + 5X5 + Y = -27.708 + -0.891 EQTA + 3.853 LOTA + 6.028 DETA + 0.688 INF + 0.671 GDP (-1.771) (-0.999) (1.965) (1.139) (0.165) (0.739)

n = 15 R = 0.696 F-statistic = 4.129

BETA COEFFICIENT (MAYBANK)

VARIABLE
EQTA DETA LOTA INF GDP

COEFFICIENT
0.140 0.156 0.138 0.063 0.022

BANK ISLAM
VARIABLE
EQTA DETA LOTA INF GDP

COEFFICIENT
-.891 3.853 6.028 .688 .671

T-STATISTIC (MAYBANK)
Variable (Constant) T-Statistics -1.771 2.545 2.434 2.506 2.502 2.541 T-Value .110 .023 .029 .025 .025 .024 Significant Significant Significant Significant Significant Result

EQTA LOTA DETA INFLATION GDP

Variable (Constant) EQTA LOTA DETA INFLATION GDP

BANK ISLAM
T-Statistics -1.771 -.713 3.980 .527 -.264 1.020 T-Value .110 .494 .003 .611 .798 .334

Result

Insignificant Significant Insignificant Insignificant Insignificant

F-STATISTIC
Maybank = 2.551 Bank Islam = 4.129