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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

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MALAYSIAN FINANCIAL

INSTITUTIONS Commercial Bank

Islamic Bank

Investment Bank

Other Financial Institution

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COMMERCIAL BANK VSISLAMIC BANK

Conventional Banks Islamic BanksOperates based on fully manmade

principles.

Operates based on the principles of Islamic

Shariah.

The investor is assured of a predetermined

rate of interest.

Promotes risk sharing between provider of

capital (investor) and the user of funds

(entrepreneur).

Aims at maximizing profit without any

restriction.

Aims at maximizing profit but subject to

Shariah restrictions.

Does not deal with Zakat. Be the ZakatCollection Centre and they

also pay out theirZakat.

Lending money and getting it back with

compounding interest without know too

much with the interest fluctuation.

Participation in partnership business is the

fundamental function of the Islamic banks.

The customers business has to be

understood.

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Can charge additional money (penalty and

compounded interest) in case of defaulters.

Not charge any extra money from the

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

interest becoming well-known. It makes no

effort to ensure growth with equity.

Gives importance to the public interest. Its

ultimate aim is to ensure growth with equity.

The status of a conventional bank, in

relation to its clients, is that of creditor and

debtors.

The status of Islamic bank in relation to its

clients is that of partners, investors and

trader, buyer and seller.

A conventional bank has to guarantee all

its deposits.

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.

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BACKGROUND OF

MAYBANK BERHADMaybank is a trade name of Malayan Banking Berhad isthe 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 ofemployees. 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.

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BANK ISLAM MALAYSIA

BERHADBank 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

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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 ofReturn on Asset (ROA)?

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RESEARCH OBJECTIVESi. To identify trend analysis of profitability performances

(ROA) of CIMB Berhad, and Bank Islam Malaysia

Berhad.

ii. To investigate whether there is a positive or negativerelationship between return on asset (ROA) and the

independent variable which are capital adequacy,

financial risk, deposits, inflation rate and gross domestic

product (GDP).

iii. 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).

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SELECTED VARIABLESVariable Measure Notation

Profitability

Return on Assets

(ROA)

ROA

Capital Adequacy EQTA

Financial Risk LOTA

Deposits DETA

Inflation Rate Annual inflation rate INF

Gross Domestic

Product

Annual Real Growth

Rate

GDP

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SIGNIFICANCE OFSTUDY

To the researcher

To the banks and financial

institutions

To the public

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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

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LIMITATION OF STUDY

Lack of experience

Time Constraint

Limitation of data

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Fadzlan Sufian andRoyfaizal Razali Chong

(2008)

Examine the determinants of Philippinesbanks profitability by using return on asset

(ROA). All the bank-specific determinantvariables that are size, credit risk, noninterest income, expenses and capitaladequacy have a statistically significantlyimpact on bank profitability.

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

Study the bank profitability in Pakistan byusing return on assets (ROA). The bank-specific variables capital adequacy (CAP),credit risk (CR) and asset management (AM)are found to be significantly at 1% level of

significance, whereas the relation ofmacroeconomic variables gross domestic(GDP) and consumer price index (CPI) issignificant at 5% level of significance.

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HYPOTHESISThere is a significant relationship between capital adequacy

(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.

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METHODOLOGYIn details, it include research design, data

collection method, data entry and data

processing, and data analysis and interpretation

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RESEARCH DESIGNVariables:

Dependent variables return on asset (ROA)

Independent variables :i. Capital adequacy to total asset

(EQTA)

ii. Deposits to total asset (DETA)

iii. Loan to total asset (LOTA)

iv. Infaltion

v. Gross domestic product (GDP)

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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.

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DATA ANALYSISRatio Analysis

Trend analysis

Pearson Correlation Analysis

Multiple Regression Analysis

Coefficients of Determination (R)

T-statistic

F-statistic

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RATIO ANALYSIS

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RETURN ON ASSET (ROA)Maybank (%) Bank Islam (%)

1997 2 1.397

1998 0.48 0.23

1999 0.86 0.71

2000 1.68 0.5

2001 1.07 0.552002 1.56 0.55

2003 1.63 0.95

2004 1.87 0.75

2005 1.82 -3

2006 1.78 -9

2007 1.7 1.186

2008 1.52 1.653

2009 0.54 0.058

2010 1.6 1.346

2011 1.52 1.113

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Maybank (%) Bank Islam (%)

1997 7.7 6.254

1998 7.6 18.49

1999 8 14.24

2000 8.4 11.52

20017.3 9.649

2002 8.6 8.468

2003 8.6 8.389

2004 8.4 8.115

2005 8.8 4.607

2006 7.8 -1.9022007 7.7 5.347

2008 7.5 5.6

2009 8.3 5.528

2010 8.5 8.345

2011 7.9 8.675

EQUITY TO TOTAL ASSET RATIO

(EQTA)

LOAN TO TOTAL ASSET

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LOAN TO TOTAL ASSETRATIO (LOTA)

Maybank (%) Bank Islam (%)

1997 5.86 55.846

1998 6.8 58.711

1999 6.49 50.345

2000 6.23 45.77

2001 6.58 48.6972002 6.34 46.897

2003 6.37 48.161

2004 6.08 50.234

2005 6.23 58.583

2006 5.86 58.207

2007 5.49 44.191

2008 6.12 38.466

2009 5.98 35.149

2010 6.1 39.033

2011 6.17 43.935

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DEPOSITS TO TOTAL ASSETRATIO (DETA)

Maybank (%) Bank Islam (%)1997 8.26 82.347

1998 8.24 74.101

1999 8.34 83.093

2000 8.33 85.91

2001 8.46 84.9992002 8.03 88.704

2003 7.99 90.143

2004 8.07 89.762

2005 8.18 85.073

2006 8.12 98.5022007 8.03 92.231

2008 8.01 88.105

2009 7.82 91.718

2010 7.83 88.417

2011 7.87 87.862

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TREND ANALYSIS

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RETURN ON ASSET

(ROA)

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EQUITY TO TOTAL ASSET(EQTA)

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LOAN TO TOTAL ASSET

DEPOSITS TO TOTAL

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DEPOSITS TO TOTALASSET (DETA)

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INFLATION RATE

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GROSS DOMESTICPRODUCT (GDP)

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Pearson Correlation AnalysisPearson correlation coefficient shows the

relationship between two variables.The table below shows the range of strengtness of

the relationshipRANGE STRENGTH

( - ) Negative Relationship

0 No Relationship

Less than 0.30 Weak Relationship

0.30 to 0.49 Moderate

Relationship

0.50 to 0.69 Strong Relationship

0.70 to 0.99 Very StrongRelationship

1 Perfect Relationship

CORRELATION ANALYSIS (MAYBANK)

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ROA1 EQTA1 LOTA1 DETA1 INF1 GDP1

ROA1

PearsonCorrelation 1 0.25 -0.499 -0.059 -0.076 0.211

Sig. (2-tailed) 0.369 0.058 0.835 0.787 0.449

N 15 15 15 15 15 15

EQTA1

PearsonCorrelation 0.25 1 0.011 -0.367 -0.024 0.11

Sig. (2-tailed) 0.369 0.97 0.178 0.933 0.695

N 15 15 15 15 15 15

LOTA1

PearsonCorrelation -0.499 0.011 1 0.407 -0.36 -0.507

Sig. (2-tailed) 0.058 0.97 0.132 0.188 0.054

N 15 15 15 15 15 15

DETA1

PearsonCorrelation -0.059 -0.367 0.407 1 -.785** -.800**

Sig. (2-tailed) 0.835 0.178 0.132 0.001 0

N 15 15 15 15 15 15

INF1

PearsonCorrelation -0.076 -0.024 -0.36 -.785** 1 .916**

Sig. (2-tailed) 0.787 0.933 0.188 0.001 0

N 15 15 15 15 15 15

GDP1

PearsonCorrelation 0.211 0.11 -0.507 -.800** .916** 1

Sig. (2-tailed) 0.449 0.695 0.054 0 0

N 15 15 15 15 15 15

CORRELATION ANALYSIS (MAYBANK)

CORRELATION ANALYSIS (BANK ISLAM)

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CORRELATION ANALYSIS (BANK ISLAM) ROA1 EQTA1 LOTA1 DETA1 INF1 GDP1

ROA1Pearson Correlation 1 -0.186 0.504 0.047 0.279 0.398

Sig. (2-tailed)

0.507 0.055 0.867 0.313 0.141

N 15 15 15 15 15 15

EQTA1

Pearson Correlation -0.186 1 -0.346 -0.393 -.555* -.605*

Sig. (2-tailed) 0.507

0.207 0.147 0.032 0.017

N 15 15 15 15 15 15

LOTA1

Pearson Correlation 0.504 -0.346 1 0.339 .585* .765**

Sig. (2-tailed) 0.055 0.207 0.216 0.022 0.001

N 15 15 15 15 15 15

DETA1

Pearson Correlation 0.047 -0.393 0.339 1 -0.087 0.15

Sig. (2-tailed) 0.867 0.147 0.216

0.759 0.594

N 15 15 15 15 15 15

INF1Pearson Correlation 0.279 -.555* .585* -0.087 1 .916**

Sig. (2-tailed) 0.313 0.032 0.022 0.759

0

N 15 15 15 15 15 15

GDP1

Pearson Correlation 0.398 -.605* .765** 0.15 .916** 1

Sig. (2-tailed) 0.141 0.017 0.001 0.594 0

N 15 15 15 15 15 15

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MAYBANK

VARIABLES BANK PROFITABILITY

EQTA Weak Positive RelationshipInsignificant

DETA Moderate Negative RelationshipInsignificant

LOTA Weak Negative RelationshipInsignificant

INF Weak Negative RelationshipInsignificant

GDP Weak Positive RelationshipInsignificant

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

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BANK ISLAM

VARIABLES STOCK PRICE

EQTA Weak Negative RelationshipInsignificant

DETA Strong Positive Relationship

Insignificant

LOTA Weak Positive RelationshipInsignificant

INF Weak Positive Relationship

Insignificant

GDP Moderate Positive RelationshipInsignificant

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

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ANALYSIS

(MAYBANK)Variables Coefficient Standard Error T-statistic

(Constant) 0.697 12.816 .054

Equity to Total

Asset (EQTA) 0.140 .055 2.545

Loan to Total

Asset (LOTA)0.156 .064 2.434

Deposits to Total

Asset (DETA) 0.138 .055 2.506

Inflation 0.063 .025 2.502

Gross Domestic

Product (GDP)0.022 .009 2.541

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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

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BANK ISLAMVariables Coefficient Standard Error T-statistic

(Constant) -27.708 15.643 -1.771

Equity to Total

Asset (EQTA)

-.891 .892 -.999

Loan to TotalAsset (LOTA)

3.853 1.961 1.965

Deposits to Total

Asset (DETA)

6.028 5.292 1.139

Inflation .688 4.176 .165

Gross Domestic

Product (GDP)

.671 .908 .739

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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

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BETA COEFFICIENT

(MAYBANK)VARIABLE COEFFICIENT

EQTA 0.140

DETA 0.156

LOTA 0.138

INF 0.063

GDP 0.022

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VARIABLE COEFFICIENT

EQTA -.891

DETA 3.853

LOTA 6.028

INF .688

GDP .671

BANK ISLAM

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T-STATISTIC

(MAYBANK)Variable T-Statistics T-Value Result

(Constant)-1.771 .110

EQTA2.545 .023

Significant

LOTA2.434 .029

Significant

DETA 2.506 .025Significant

INFLATION2.502 .025

Significant

GDP2.541 .024

Significant

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BANK ISLAMVariable T-Statistics T-Value Result

(Constant)-1.771 .110

EQTA-.713 .494

Insignificant

LOTA3.980 .003

Significant

DETA.527 .611

Insignificant

INFLATION-.264 .798

Insignificant

GDP1.020 .334

Insignificant

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F-STATISTICMaybank

= 2.551

Bank Islam

= 4.129