Durham THE PERFORMANCE OF MALAYSIAN ISLAMIC BANKING INDUSTRY AND THE IMPACT OF FOREIGN ISLAMIC BANKS

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Transcript of Durham THE PERFORMANCE OF MALAYSIAN ISLAMIC BANKING INDUSTRY AND THE IMPACT OF FOREIGN ISLAMIC BANKS

  • Durham E-Theses

    THE PERFORMANCE OF MALAYSIAN ISLAMIC

    BANKING INDUSTRY AND THE IMPACT OF

    FOREIGN ISLAMIC BANKS

    BASRI, MOHD,FAIZAL

    How to cite:

    BASRI, MOHD,FAIZAL (2016) THE PERFORMANCE OF MALAYSIAN ISLAMIC BANKING INDUSTRY AND THE IMPACT OF FOREIGN ISLAMIC BANKS, Durham theses, Durham University. Available at Durham E-Theses Online: http://etheses.dur.ac.uk/11580/

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  • THE PERFORMANCE OF MALAYSIAN ISLAMIC

    BANKING INDUSTRY AND THE IMPACT OF FOREIGN

    ISLAMIC BANKS

    MOHD FAIZAL BASRI

    Thesis Submitted in Fulfilment of the Requirements for the Award of the

    Degree of Doctor of Philosophy in Islamic Finance

    Durham University Business School

    Durham University

    United Kingdom

    2016

  • To my lovely wife, Yazmin

    and my daughters, Eryna Batrisyia and Hannah Zafirah

    Page | i

  • THE PERFORMANCE OF MALAYSIAN ISLAMIC BANKING INDUSTRY AND THE IMPACT OF FOREIGN ISLAMIC BANKS

    BY MOHD FAIZAL BASRI

    ABSTRACT

    Malaysia’s determination to become a hub for Islamic banking in Southeast Asia has led the Central Bank of Malaysia to grant licenses to foreign Islamic banks to operate in the country. Due to the intense competition among Islamic banks, the introduction of more innovative products is projected to tap investment opportunities not only for Malaysia but also for the rapidly growing Southeast Asian region. This research assesses the performance of Malaysian Islamic banking industry since the introduction of the first Islamic bank two decades ago, and evaluates the competition among the Islamic banks in the country. The research evaluates the impact of foreign Islamic banks in Malaysia by measuring their contribution to the growth of the Malaysian Islamic banking industry. In relation to this, the study is designed to address three primary areas. First, to measure the performance of the Islamic banks in Malaysia by using financial ratios, data envelopment analysis (DEA), and the Malmquist Productivity Index. Second, to compare and evaluate the nature of competition and market structure of the Islamic banks in the country by employing the bank concentration ratio (CR k ), Herfindahl- Hirschman Index (HHI), and the Panzar-Rosse (PR) model. Lastly, to validate the relationship between competition among Islamic banks in Malaysia and their financial performance. The selected financial ratios indicated that domestic Islamic banks performed better during the 2005 to 2012 period in terms of profitability, but the foreign Islamic banks excelled in terms of liquidity, risk, and solvency ratios. DEA results showed that the domestic Islamic banks are considered more efficient with the majority of domestic Islamic banks outperforming the foreign Islamic banks. Banks like Maybank Islamic, CIMB Islamic, and Alliance Islamic are considered among the top performers for technical efficiency and scale efficiency. The study also found that based on the Malmquist Productivity Index, the least efficient banks based on DEA have improved in technical efficiency, technology, and total factor productivity (TFP). The study also found that between 2008 and 2012, the Malaysian Islamic banking industry operated in monopolistic competition conditions with a moderately concentrated market structure. The introduction of foreign Islamic banks caused the market structure to become more competitive and less concentrated by comparing the results that include foreign Islamic banks against results generated with a subsample of domestic Islamic banks only. BNM’s financial reform and liberalisation of financial system proved to induce competition making the financial system more resilient, competitive, and dynamic. The Islamic banks have recorded consistent increased annual performance with the under- performing Islamic banks catching up to the top performers.

    Page | ii

  • DECLARATION

    I hereby declare that the materials contained in this thesis have not been previously

    submitted for a degree at this or any other university. I further declare that this thesis is

    solely based on my own research.

    Page | iii

  • STATEMENT OF COPYRIGHT

    The copyright of this thesis rests with the author. No quotation from it should be

    published in any format, including electronic and the Internet, without the author’s prior

    written permission. All information derived from this thesis must be acknowledged

    appropriately.

    Page | iv

  • CONTENTS Abstract .......................................................................................................................... ii Declaration .................................................................................................................... iii Statement of Copyright ................................................................................................. iv Contents ......................................................................................................................... v List of Tables ................................................................................................................ ix List of Figures ............................................................................................................... xi List of Abbreviations .................................................................................................. xix Acknowledgements ..................................................................................................... xxi

    CHAPTER 1: INTRODUCTION 1.1 General Introduction .............................................................................................. 1 1.2 Research Statement ................................................................................................ 5 1.3 Aims, Objectives, and Research Questions ........................................................... 6 1.4 Significance of the Research .................................................................................. 9 1.5 Research Methodology ........................................................................................ 10 1.6 Overview of the Research .................................................................................... 11

    CHAPTER 2: AN INTRODUCTION TO ISLAMIC FINANCE AND GLOBAL DEVELOPMENT IN THE ISLAMIC FINANCIAL SECTOR: A LITERATURE REVIEW 2.1 A General Introduction to Islamic Banking and Finance .................................... 13 2.2 Aspects of Islamic Banking and Finance ............................................................. 16

    2.2.1 Prohibition of Riba ....................................................................................... 16 2.2.2 Gharar .......................................................................................................... 19 2.2.3 Maysir .......................................................................................................... 20 2.2.4 Introduction of Zakat ................................................................................... 21 2.2.5 Prohibition of Production of Haram Goods and Services ............................ 21 2.2.6 Introduction of Takaful ................................................................................ 22

    2.3 Islamic Finance Instruments and Product Development ..................................... 22 2.3.1 Contract of Profit and Loss Sharing ............................................................. 23 2.3.2 Contract of Sale ............................................................................................ 24 2.3.3 Contract of Deposit ...................................................................................... 25 2.3.4 Contract of Wakalah .................................................................................... 25 2.3.5 Contract of Charitable / Gift (Hibah) ........................................................... 25

    Page | v

  • 2.3.6 Contract of Security ..................................................................................... 26 2.3.7 Other Products Development ....................................................................... 26

    2.4 Conclusion ........................................................................................................... 28

    CHAPTER 3: BANK PERFORMANCE AND COMPETITION ANALYSIS: A LITERATURE SURVEY

    3.1 Introduction to Bank Performance ....................................................................... 29 3.2 Conceptual Definitions ....................