The Impact of Financing Contracts on the Profitability of Islamic Banks

Stapah @ Salleh, Maisyarah (), Bayu Taufiq Possumah () and Nizam Ahmat ()
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Stapah @ Salleh, Maisyarah: Faculty of Business, Economics and Social Development University of Malaysia Terengganu 21030 Kuala Nerus, Terengganu MALAYSIA.
Bayu Taufiq Possumah: Faculty of Business, Economics and Social Development University of Malaysia Terengganu 21030 Kuala Nerus, Terengganu MALAYSIA.
Nizam Ahmat: Faculty of Business, Economics and Social Development University of Malaysia Terengganu 21030 Kuala Nerus, Terengganu MALAYSIA.

Jurnal Ekonomi Malaysia, 2021, vol. 55, issue 3, 149-164

Abstract: This paper investigates the impact of financing contracts on Net Profit Margin (NPM) of the Islamic banks. Focussing on two financing contracts of Bai’ Bithaman Ajil (BBA) and Al-Ijarah Thumma Al-Bai’ (AITAB), the paper employs static panel data of Malaysian banks over 2008 to 2018. Controlling for bank and market-specific factors, the results indicated that AITAB exerted significant impact on the NPM. The paper further found that risk aversion, operating cost, liquidity and asset quality improves the NPM. In addition, the results show that the market structure influence the level of NPM. The Islamic banks may control these variables in setting for their preferred NPM level. Finally, the banks may need to carefully examine the types of financing contracts offered as they have different characteristics and may affect NPM.

Keywords: Islamic bank; Net profit margin; Profitability; al-ijarah thumma al-bai’; bai’ bithaman ajil (search for similar items in EconPapers)
JEL-codes: G00 G20 G21 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:ukm:jlekon:v:55:y:2021:i:3:p:149-164

DOI: 10.17576/JEM-2021-5503-11

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