Investigating the Performance of the Islamic Banking System and Social Welfare

Yao Ming  Lee; Hazman Samsudin; Jumadil Saputra

doi:10.56225/ijfeb.v1i2.27

Authors

Yao Ming Lee Department of Economics, Faculty of Business, Economics and Social Development, Universiti Malaysia Terengganu, Malaysia
Hazman Samsudin Department of Economics, Faculty of Business, Economics and Social Development, Universiti Malaysia Terengganu, Malaysia
Jumadil Saputra Department of Economics, Faculty of Business, Economics and Social Development, Universiti Malaysia Terengganu, Malaysia

DOI:

https://doi.org/10.56225/ijfeb.v1i2.27

Keywords:

Islamic financial institutions, shariah non-compliance risk, capital adequacy ratio, social welfare, three stages least square

Abstract

This study was conducted to investigate further how Islamic Banking Performance may improve social welfare in Malaysia since the bank put one of its objectives to improve livelihood through its Shariah non-compliance fund. Reports highlighted that exceeding Shariah's non-compliance risk will cause force majeure to the bank and even the risk of bankruptcy. This study aims to discuss and clarify the risk of non-compliance with Sharia Law in the Islamic financial system. The data for this research is based on annual financial reports ranging from the year 2014 until 2019, consisting of 8 Islamic Financial Institutions (IFIs) in Malaysia, namely; Affin Bank, Alliance Bank, Ambank, Bank Islam, Hong Leong Bank, Maybank, OCBC Al-Amin bank and Public bank. Three-stage least square method incorporates the mediator variable in the simultaneous equation model. The result of this study pointed out that both variables significantly impact each of them. In short, the Shariah non-compliance funds can indeed affect the main factor of bank failure, capital adequacy ratio, but it has a positive effect on social welfare through GDP at the same time. Therefore, to balance the relationship between the two points, the government must formulate effective maintenance methods for Islamic Financial Institutions (IFIs) in Malaysia. Under the premise of improving social welfare, the IFIs can also safely maintain and operate.

References

Abusharba, M. T., Triyuwono, I., Ismail, M., & Rahman, A. F. (2013). Determinants of capital adequacy ratio (CAR) in Indonesian Islamic commercial banks. Global Review of Accounting and Finance, 4(1), 159–170.

Ariff, M., & Lewis, M. K. (2014). Similarities and differences in Islamic and conventional banking. In Risk and regulation of Islamic banking. Edward Elgar Publishing.

Azahar, M., & Hanif, A. (2018). The Evaluating Banking Operation Management on Signature Bank. Available at SSRN 3301931. https://doi.org/10.2139/ssrn.3301931

Badalashvili, I. (2017). Determinants of capital adequacy ratio in banking sector of Greece [International Hellenic University]. https://core.ac.uk/download/pdf/236165426.pdf

Bälz, K., & (Cambridge, M. ). L. S. I. L. S. P. H. U. (2008). Sharia risk?: How Islamic finance has transformed Islamic contract law. Islamic Legal Studies Program.

Basiruddin, R., & Ahmed, H. (2019). Corporate governance and Shariah non-compliant risk in Islamic banks: evidence from Southeast Asia. Corporate Governance: The International Journal of Business in Society, 20(2), 240–262. https://doi.org/10.1108/CG-05-2019-0138

Bateni, L., Vakilifard, H., & Asghari, F. (2014). The influential factors on capital adequacy ratio in Iranian banks. International Journal of Economics and Finance, 6(11), 108–116.

Bokhari, I. H., Ali, S. M., & Sultan, K. (2012). Determinants of capital adequacy ratio in banking sector: An empirical analysis from Pakistan. Corporate Governance International Journal of Business in Society, 20(2), 240–262. https://doi.org/10.1108/CG-05-2019-0138

Boukhatem, J., & Moussa, F. Ben. (2018). The effect of Islamic banks on GDP growth: Some evidence from selected. Borsa Istanbul Review, 18(3), 231–247. https://doi.org/10.1016/j.bir.2017.11.004

Cristea, M., Marcu, N., & Cârstina, S. (2014). The relationship between insurance and economic growth in Romania compared to the main results in Europe–a theoretical and empirical analysis. Procedia Economics and Finance, 8, 226–235.

Ebenezer, O. O., Islam, A., Yusoff, W. S., & Shamsuddin, Z. (2018). An investigation into operational risk in commercial banks: Empirical evidence from Nigeria. International Journal of Accounting, 3(12), 49–62. https://doi.org/10.1016/j.sbspro.2014.04.043

Hamid, A., & Ginena, K. (2015). Foundations of Shari’ah governance of Islamic banks. John Wiley & Sons.

Hanif, S., Shi, X., Iqbal, N., Noor, T., Anwar, R., & Kannan, A. M. (2019). ZIF derived PtNiCo/NC cathode catalyst for proton exchange membrane fuel cell. Applied Catalysis B: Environmental, 258, 117947.

Hassan, L. F. A., Jusoh, W. J. W., & Hamid, Z. (2014). Determinant of customer loyalty in Malaysian Takaful Industry. Procedia-Social and Behavioral Sciences, 130, 362–370.

Herring, R. J. (2002). The Basel 2 approach to bank operational risk: Regulation on the wrong track. The Journal of Risk Finance, 4(1), 42–45. https://doi.org/10.1108/eb022953

Karasik, T., Wehrey, F., & Strom, S. (2006). Islamic finance in a global context: Opportunities and challenges. Chicago Journal of International Law, 7(2), 379–396.

Krishnamurthy, A., Adebayo, B., Gelles, T., Rownaghi, A., & Rezaei, F. (2020). Abatement of gaseous volatile organic compounds: A process perspective. Catalysis Today, 350, 100–119.

Kunhibava, S. (2012). Islamic Banking in Malaysia. International Journal of Legal Information, Spring(Summer), 1–9.

Li, J., Feng, J., & Chen, J. (2009). A piecewise-defined severity distribution-based loss distribution approach to estimate operational risk: evidence from chinese national commercial banks. International Journal of Information Technology & Decision Making, 8(04), 727–747.

Mohieldin, M. (2012). Realizing the potential of Islamic finance. World Bank, Washington, DC.

Nguyen, T. H. (2020). Impact Of Bank Capital Adequacy On Bank Profitability Under Basel II Accord: Evidence From Vietnam. Journal of Economic Development, 45(1), 31–46.

Noor, Z. M., Nor, N. M., & Ghani, J. A. (2007). The relationship between output and unemployment in Malaysia: Does Okun’s law exist. International Journal of Economics and Management, 1(3), 337–344.

Odunga, R. M., Nyangweso, P. M., Carter, D. A., & Mwarumba, M. (2013). Credit Risk,“Capital adequacy and operating efficiency of commercial banks in Kenya.” International Journal of Business and Management Invention, 2(9), 6–12.

Omar, H. N., & Hassan, R. (2019). Shariah Non-Compliance Treatment in Malaysian Islamic Banks. International Journal of Management and Applied Research, 6(4), 220–233.

Osama, E.-A., & Saleh, M. (2018). Predicting Egyptian banks distress. Int. J. Accounting Financial Rep., 8, 39–50.

Polat, A., & Al-khalaf, H. (2014). What determines capital adequacy in the banking system of kingdom of saudi arabia? A panel data analysis on tadawul banks. Journal of Applied Finance and Banking, 4(5), 27–43.

Sairally, B. S. (2013). Evaluating the corporate social performance of Islamic financial institutions: an empirical study. International Journal of Islamic and Middle Eastern Finance and Management, 6(3), 238–260. https://doi.org/10.1108/IMEFM-02-2013-0026

Shingjergji, A., & Hyseni, M. (2015). The determinants of the capital adequacy ratio in the Albanian banking system during 2007-2014. International Journal of Economics, Commerce and Management, 3(1), 1–10.

Tabash, M. I., & Dhankar, R. S. (2014). Islamic Financial Development and Economic Growth--Empirical Evidence from United Arab Emirates. Journal of Emerging Economies and Islamic Research, 2(3), 15–31.

Usmani, M. M. T. (2021). An introduction to Islamic finance. Brill.

Van den Bergh, J., & Antal, M. (2014). Evaluating alternatives to GDP as measures of social welfare/progress. WWWforEurope Working Paper.

Yahaya, S. N., Mansor, N., & Okazaki, K. (2016). Financial performance and economic impact on capital adequacy ratio in Japan. International Journal of Business and Management, 11(4), 14–21.

Zellner, A., & Theil, H. (1992). Three-stage least squares: simultaneous estimation of simultaneous equations. In Henri Theil’s contributions to economics and econometrics (pp. 147–178). Springer.