A Comparative Performance Analysis of Islamic and Conventional Banks in Malaysia (2010- 2018)

Abstract

This paper explores the impact of bank-specific and macroeconomic variables, including the 2015-2018 Chinese stock market crash, on bank performance (ROA) of Conventional and Islamic banks in Malaysia, during the 9-year period (2010 to 2018). For this purpose, 5 Conventional and Islamic banks were selected based on Moody’s investor service and BNM statistics. The Empirical data for the banks was retrieved from individual annual reports and the Malaysian Department of Statistics. This paper performs a multiple linear regression analysis, and Pearson’s correlation (r) test to determine significance of each variable with bank’s Return on Assets (ROA), as a measure of profitability. The specific variables tested include Total deposits, Non-performing Loans, Noninterest income, Gender diversification in the board, while macroeconomic variables include Interest rate, Inflation, GDP and the 2015 China Stock Market Crash. The results concluded that Total deposits have a positive impact on bank profitability for conventional banks, while Noninterest income increases profitability for Islamic banks. Non-performing loans was found to have a significant negative relationship with bank profitability for both Islamic and conventional systems. None of the macroeconomic variables impacted Malaysia’s bank profitability for this time period, including the China stock market crash. Islamic banks were deemed better performing than Conventional banks, achieving a higher ROA throughout the time period analysed. The findings of this study can aid Malaysian banks, their investors and shareholders, as well as policymakers and the government in deciding initiatives to maximise banks performance, especially to fulfil Bank Negara Malaysia’s Banks Business Plan (BP) objectives in the coming decade.