The Determinant of Islamic Bank Profitability and Stability in Malaysia DOI: https://doi.org/10.33093/ijomfa.2025.6.1.7
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Abstract
This study examines the determinants of profitability and stability of 14 Islamic banks in Malaysia using secondary data from 2018 until 2022. Hausman and Breush-Pagan's tests indicate that the fixed effect panel model is the best model to predict the relationships. The final fixed effect model for the profitability of Islamic banks shows that capital adequacy ratio (CAR), Z-score, and gross domestic product (GDP) have significant relationships with return on assets (ROA). CAR has a negative effect, while Z-score and GDP positively affect ROA. On the other hand, the final fixed effect model for the stability of Islamic banks shows that the liquidity ratio is negatively related to Z-score. At the same time, ROA has a positive relationship with Z-score. An optimal CAR would ensure banks meet their obligations and optimise the use of their funds to maximise profits. The study shows that Islamic banks with higher Z-score have a reduced likelihood of insolvency, suggesting that they operate in a stable environment and, as a result, generate profits and excellent performance. Additionally, the study found that Islamic banks flourish during periods of robust economic expansion. Finally, the results show a rise in return on assets (ROA) would enhance the viability of financial institutions by ensuring a steady stream of profits and a consistent performance.
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References
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