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Comparison between Islamic and Conventional Banking:
Evidence from Malaysia
International Journal of Islamic Banking & Finance
ISSN: 2220-8291
Vol. 4, Issue 1
Abduallah Al-Mamun, Qaiser Rafique Yasser, Harry Entebang
Department of Finance, Faculty of Economics and Business,
Universiti Malaysia Sarawak, 94300 Kota Samarahan,
Sarawak, Malaysia
abdullahalmamun14@gmail.com
Md. Ashikur Rahman
Institute for Postgraduate Studies, Multimedia University,
Putra Jaya, Malaysia
Thurai Murugan Nathan
Department of Economics, Faculty of Business and Finance,
Universiti Tunku Abdul Rahman, 31900 Kampar,
Perak, Malaysia
Shazali Abu Mansor
Department of Finance, Faculty of Economics and Business,
Universiti Malaysia Sarawak, 94300 Kota Samarahan,
Sarawak, Malaysia
Abstract
Purpose: To determine the financial performance of Islamic banks and non-Islamic banks from 2003
to 2010 in Malaysia by applying the theory of Sharī’ah Conformity and Profitability model.
Methodology: This study used accounting ratios which included profitability ratio, liquidity ratio and
credit risk ratio to measure the financial performance of the Malaysian banks.
Findings: Results indicate that conventional banks perform better in profitability, while Islamic banks
perform better in liquidity and credit risk. In t-test of the return on asset (ROA) and total equity to net
loans, there are no major difference between Islamic banks and non-Islamic banks. In the return on
equity and common equity to total assets, there are statistically significant differences in these two
groups. The statistically significant difference was shown in the area of liquidity which means that the
Islamic banks liquidity performance has major difference with the non-Islamic banks. These finding
are partially rejecting null hypothesis of profitability ratio and credit risk ratio. Moreover, the results
are also rejecting null hypothesis of liquidity ratio, that there is statistically significant difference in
the mean of liquidity ratio between Islamic banks and non-Islamic banks.
Keywords: Islamic banking, performance measurement, conventional banking, ROA, Malaysia,
Sharī’ah principle
March, 2014
Comparison between Islamic and Conventional Banking: Evidence
from Malaysia
International Journal of Islamic Banking & Finance – Vol. 4, Issue 1 Page 2
Introduction
In general, Islamic banking system is based on Sharī’ah principle, while non-Islamic banking
system is based on interest rate. Sharī’ah is a set of norms, values and laws that go to make
up the Islamic way of life. Characteristics of Sharī’ah -compliant banking and financial system
are free from riba. Riba is prohibited in Islamic banking system, because Islamic banking
system is based on the sharing of risk and profit. Interest is considered to be the price of
credit, reflecting the opportunity cost of money in non-Islamic banking system. From Turen
(1996) estimate on the performance of banks, the results found that Islamic banks are
performing better than the non-Islamic banks. Samad and Hassan (2009) found that Islamic
banks are more liquid and less risk in comparison to conventional banks. The result is
different from Rashid and Nishat (2009) which found the Islamic bank’s poor performance in
the areas of investor management, profit maximization and operating efficiency. However,
Sumachdar and Hasbi (2011), and Jaffar and Manarvi (2011) both found that Islamic banks
performed better than conventional banks. Hasbi and Haruman (2011) also found that the
Islamic Banking has a good performance; reflect to CAMEL on Depositor Funds. Kuppusamy,
Salleh and Samudhram (2010) used Sharī’ah conformity financial indicators and profitability
indicators, found that Islamic bank has maintained excellent position and has become a
benchmark institution.
Widagdo and Ika (2008) used inter-temporal comparison and inter-bank comparison to
examine the performance of banks and the result found that there was no major difference
between Islamic banks and conventional banks. This result was also shared by Samad (2004).
Compared to Al-Osaimy and Bamakhramah (2004) who used discriminant analysis technique
and they found that more Islamic banks are were in low performance level than high
performance. While Masruki, Ibrahim, Osman and Wahad (2011) found that the profitability
of conventional banks is higher than Islamic banks, however, the Islamic banks are more
liquid than conventional banks.
Malaysian Banking System
Malaysian banking system consists of Bank Negara Malaysia, and banking institutions which
are finance companies, commercial banks, merchant banks and Islamic banks, and a
miscellaneous group that are representative offices of foreign banks and discount house.
The banking system is the major component of financial system which accounts about 67%
of total assets of financial system (KPMG International, n.d.). Bank Negara Malaysia was
established on 26 January 1959 under the Central Bank of Malaysia Ordinance 1958. The
main objectives of the Bank Negara Malaysia are to issue currency and keep reserves to
safeguard the value of currency, act as banker and financial adviser to the Government,
promote monetary stability and a sound financial structure, and influence the credit
situation to the advantage of Malaysia. Bank Negara Malaysia is important to promoting
economic growth with price stability and maintaining financial and monetary stability.
Besides that, Bank Negara Malaysia is the supervision and regulation of financial institution
March, 2014
Comparison between Islamic and Conventional Banking: Evidence
from Malaysia
International Journal of Islamic Banking & Finance – Vol. 4, Issue 1 Page 3
and deposit-taking institutions which are engaged in the provision of finance and credit
(KPMG International, n.d.). Commercial banks are the major and best significant to provide
the fund in the banking system. The function of commercial banks is to provide retail
banking services such as acceptance of the deposit, granting of loans and advances, and
financial guarantees. Besides that, it also provides trade financing facilities such as trust
receipts letters of credit, shipping guarantees, discounting of trade bills and Bankers
Acceptances. Treasury service, cross border payment service, and custody service such as
the safe deposits and the share custody are also provided by the commercial banks (KPMG
International, n.d.). Separate Islamic legislation and banking regulation exist side-by-side
with other conventional banking system in Malaysia. Bank Islam Malaysia Berhad is the first
Islamic bank which commenced operation on 1July 1983. The second Islamic bank is Bank
Mualamat Malaysia Berhad which was established on 1 October 1999. Other financial
institutions also provide Islamic banking service through the Islamic Banking Scheme. All the
products offered by the Islamic banking are based on the Islamic principles, which are Al-
Wadiah, Al-Mudharabah, Al-Murabahah, Bai’Bithaman Ajil, Al-Ijarah and Al-Musyarakah
(KPMG International, n.d.).
Conceptual Framework
In the study, profitability ratio, liquidity ratio and credit risk ratio as the independent
variable, while financial performance of Islamic banks and non-Islamic banks as the
dependent variable. Profitability ratio, liquidity ratio and credit risk ratio are representing
the value being manipulated or changed, while the financial performance of Islamic banks
and non-Islamic banks is the observed result of the independent variable being manipulated.
Below show the conceptual framework of the financial performance.
Theoretical Basis
In the study, the theory applies with the Sharī’ah Conformity and Profitability (SCnP) model
to measure the financial performance of the banks which is used by the Kuppusamy, Saleh,
and Samudhram (2010). Kuppusamy, Saleh, and Samudhram (2010) have stated that non-
Islamic banking performance measures are sufficient indicator of profitability, business
strength and stability, while the Islamic bank adhered to Sharī’ah principles. In this model,
March, 2014
Comparison between Islamic and Conventional Banking: Evidence
from Malaysia
International Journal of Islamic Banking & Finance – Vol. 4, Issue 1 Page 4
there are four different types to identify the Sharī’ah Conformity and Profitability model.
They are:
i. High profitability banks that have good Sharī’ah compliance
ii. High profitability banks that have weak Sharī’ah compliance
iii. Low profitability banks that have good Sharī’ah compliance
iv. Low profitability banks that have weak Sharī’ah compliance
Figure 2: Sharī’ah Conformity and Profitability (SCnP) Model
Turen (1996) used the financial theory as the framework to examine the performance and
risk analysis of the Islamic banks in Bahrain; risk and return have linear relationship. Low risk
is associated with low return and high risk consequently brings high return. Rosly and Bakar
(2003) used two concepts to examine the performance of Islamic and mainstream banks in
Malaysia. First is the concept of X-efficiency, which deals with the management of banks
inputs, namely deposits, labour and capital while scale and scope examines how the size and
type of bank assets are able to reduce costs and thereby increasing profits. Second is
equivalent counter value concept, any profit created from a trade and commerce must
contain an equivalent counter value. Kuppusamy, Saleh, and Samudhram (2010) used
Sharī’ah Conformity and Profitability (SCnP) model as the framework to measure the
performance of Islamic banks. Four different types of Islamic banks are separated and
identified in the Sharī’ah Conformity and Profitability model. Those are:
High profitability banks that have good Sharī’ah compliance.
High profitability banks that have weak Sharī’ah compliance.
Low profitability banks that have good Sharī’ah compliance.
Low profitability banks that have weak Sharī’ah compliance.
March, 2014
Comparison between Islamic and Conventional Banking: Evidence
from Malaysia
International Journal of Islamic Banking & Finance – Vol. 4, Issue 1 Page 5
The graph of Sharī’ah Conformity and Profitability model can be seen at the Figure 2.
Hypothesis
The hypothesis used to test the differentiations of profitability ratio, liquidity ratio and credit
risk ratio of Islamic banks and non-Islamic banks. If the t-test, the p-value is at 5% significant,
the null hypothesis (H0) will be rejected. The hypothesis for this study is:
H0: There is no statistically significant difference in the mean of financial ratio between
Islamic banks and non-Islamic banks.
Ha: There is a statistically significant difference in the mean of financial ratio between
Islamic banks and non-Islamic banks.
Because the study has tests on three types of ratios so also the Null Hypothesis (H0) has
three, which are presented below:
H01: There is no statistically significant difference in the mean of profitability ratio between
Islamic banks and non-Islamic banks.
H02: There is no statistically significant difference in the mean of liquidity ratio between
Islamic banks and non-Islamic banks.
H03: There is no statistically significant difference in the mean of credit risk ratio between
Islamic banks and non-Islamic banks.
Methodology
This section will discuss the conceptual framework that is used in the study to evaluate the
financial performance of the Islamic banks and non-Islamic banks. Besides that, this section
also will discuss the research design of the study which includes the sample size, data
collection and data analyses. The hypothesis test also will be discussed in this section.
Sample Size
This study used Bank Islam Malaysia Berhad and Bank Muamalat Malaysia Berhad as
representatives of Islamic banks with the reason that these banks comply with the principles
of Sharī’ah and are local fully-fledged Islamic banks in Malaysia. With regards to non-Islamic
banks, the sample consists of Affin Bank Berhad, Hong Leong Bank Berhad, Malayan Banking
Berhad, Public Bank Berhad and RHB Bank Berhad with the reason that these banks comply
with the principles of interest rate and are local banks. Besides that, the most important
reason these banks are being chosen is that they have been in operation for more than ten
years. Their long establishment means that these firms have strong performance for a long
period of time.
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from Malaysia
International Journal of Islamic Banking & Finance – Vol. 4, Issue 1 Page 6
Data Collection
In this study, two Islamic banks and five non-Islamic banks are considered. Database in
income statement, balance sheet and statement of changes in equity for the period 2003 to
2010 are used to examine the financial performance of the banks. The data collected
consists of Bank Islam Malaysia Berhad, Bank Muamalat Malaysia Berhad, Affin Bank Berhad,
Hong Leong Bank Berhad, Malayan Banking Berhad, Public Bank Berhad and RHB Bank
Berhad. Because the data 2000 until 2002 for Bank Muamalat Malaysia Berhad and RHB
Bank Berhad cannot be collected, so, the study only chooses 2003 to 2010 to examine the
financial performance of the banks. The data are collected from the annual report of each
bank which is already posted in the respective company’s web site.
Data Analysis
In evaluate of the financial performance of the banks, the financial ratio is used on the study.
Financial ratio procedure to evaluate the banks performance was introduced by Cole (1972)
(as cited in Rosly and Bakar, 2003). The ratios are grouped under three broad categories.
They are profitability ratio, liquidity ratio and credit risk ratio. Profitability ratio consists of
the return on assets ratio and return on equity ratio. Liquidity ratio includes the cash deposit
ratio, loan deposit ratio and net loan to asset ratio, while, credit risk ratio includes common
equity to total asset ratio and total equity to net loans ratio. The t-test is used in this study
to test the financial performance of the Islamic banks and non-Islamic banks. It assesses
whether the mean of the financial ratio of Islamic banks and non-Islamic banks, which are,
profitability ratio, liquidity ratio and credit risk ratio are statistically significant different from
each other. If the probability value (p-value) is less than 0.05, the null hypothesis will be
rejected because there is the statistically significant difference between the two groups. The
financial ratio analysis provides a method for assessing the financial strengths and
weaknesses of the banks, by using the information fund in the financial statements of the
banks’ annual report.
a) Profitability Ratio
The profitability ratios are used to assess the capability of the banks to generate the
earnings as compared to their expenses and other relevant costs incurred during certain
period of time. This study used the following ratio to evaluate the profitability performance
of the banks:
i. Return on Assets (ROA) = net profit / total asset. The higher the value of the ROA is
indicator of higher capability of the firm.
ii. Return on Equity (ROE) = net profit / equity. The higher the value of the ROE is
indicator of higher financial performance. It assesses how effectively the banks used
the shareholder funds.
March, 2014
Comparison between Islamic and Conventional Banking: Evidence
from Malaysia
International Journal of Islamic Banking & Finance – Vol. 4, Issue 1 Page 7
b) Liquidity Ratio
Liquidity means how quickly the cash availability in the bank converts its assets into cash to
meet the needs of the depositors and borrowers. Following are the measures.
i. Cash Deposit Ratio (CDR) = cash/ deposit. The higher CDR is indicator of more liquid
in the banks.
ii. Loan Deposit Ratio (LDR) = loan/ deposit. The higher LDR is indicator of more
financial stress by making excessive loan.
iii. Net Loans to Asset Ratio (NetLTA) = net loans/ total asset. The higher the NetLTA is
indicator of less liquid the bank will be.
c) Credit Risk Ratio
Credit risk is the likelihood that a borrower will default on its loan or lease, causing the bank
to lose any potential interest earned. Following are the financial ratio that used to
measuring the credit risk performance of the banks.
i. Common Equity to Total Asset ratio (CeTA) = common equity/ total assets. The
higher the ratio of CeTA indicates the greater capacity for the bank to maintain the
assets losses.
ii. Total Equity to Net loans (TeNL) = total equity/ net loans. The higher the ratio of
TeNL indicates the higher capacity for a bank to adjust the loans losses.
Empirical Results and Discussion
This section will discuss the financial performance results of Islamic banks and non-Islamic
banks in Malaysia which have been evaluated. The results are separated into two sections.
The first section is financial ratio result which includes three parts; which are profitability
ratio, liquidity ratio and credit risk ratio. The second section is the hypothesis test result.
Figure 2 presents the average return on assets ratio of non-Islamic banksas1% and Islamic
banks as -0.26%. The result of average return on assets ratio indicates that non-Islamic
banks are performing better than the Islamic banks. This is because the percentage of non-
Islamic banks is positive while Islamic banks show the negative percentage. This finding is
consistent with Masruki, Ibrahim, Osman and Wahad (2011) which also found that non-
Islamic banks are performing better than Islamic banks in return on assets. It can be pointed
out that non-Islamic banks perform better in allocating asset into net profit when compared
to Islamic banks. For every ringgit of assets, non-Islamic banks are able to generate a return
of 1%. The part on the average return on equity ratio also shows the result that non-Islamic
banks percentage is higher than the Islamic banks because Islamic banks showed a negative
percentage. Non-Islamic banks are 41.15% and Islamic banks are -5.66%. This means non-
Islamic banks are more efficient performance than the Islamic banks. Besides that, it can be
pointed out that the non-Islamic banks are more capable to generate the profit with the
money which shareholders have invested. This finding is parallel to Samad (2004), Samad
and Hassan (2009) and Masruki, Ibrahim, Osman and Wahab (2011) which conclude that
non-Islamic banks are more capable in generating the profit with the equity capital.
March, 2014
Comparison between Islamic and Conventional Banking: Evidence
from Malaysia
International Journal of Islamic Banking & Finance – Vol. 4, Issue 1 Page 8
The average return on assets and return on equity ratio of Islamic banks show the negative
percentage. This is because the net profit of the Bank Islam in year 2005 and 2006 are
negative value which are –RM 507,807,000 and –RM 1,296,789,000 and Bank Muamalat has
also negative net profit in 2004, which is, –RM 26,819,000 according to annual reports of
Bank Islam Malaysia Berhad 2005 and 2006, and annual reports of Bank Muamalat Berhad
2004. Thus, based on the result of the average return on assets and return on equity ratio, it
can be concluded that non-Islamic banks perform better in their profit and more profitable
than the Islamic banks. Masruki, Ibrahim, Osman and Wahab (2011) also found that non-
Islamic banks are more profitable than Islamic banks. In term of t-test of statistical
differences, the return on assets ratio for the p-value is 0.0622 which shows no major
difference between non-Islamic banks and Islamic banks. However, the return on equity
ratio is 0.0008 and significant at 5% significant level by the t-tests shows that the two banks
are different (see Table 2).
Figure 2: Comparison between Profitability Ratio of Islamic Banks and Non-Islamic Banks
(Average 2003 until 2010 Period)
According to Samad and Hassan (2009), the cause for lower profitability performance of
Islamic banks is that the scope of investment of Islamic banks is limited. This happened
because Islamic banks must invest in the projects which are approved by the Sharī’ah Board
and Islamic banks are major investors in government bond and the rate of return is lower
than other types of investment. The profitability performance of non-Islamic banks is better
than Islamic banks because non-Islamic banks can investing any type of investment that
gives higher rate of return or highly profitable.
a) Liquidity Ratio
Figure 3 presents the non-Islamic banks average liquidity ratio in comparison with the
Islamic banks. In liquidity measures, the average cash deposit ratio of Islamic banks is 31.25
% whereas the average cash deposit ratio of non-Islamic banks is 22.46%. The average cash
deposit ratio of Islamic banks is higher than the non-Islamic banks, and this indicates that
-10
0
10
20
30
40
50
Return on
Assets Return on
Equity
Non-Islamic Banks 1 41.15
Islamic Banks -0.26 -5.66
%
Profitability Ratio
March, 2014
Comparison between Islamic and Conventional Banking: Evidence
from Malaysia
International Journal of Islamic Banking & Finance – Vol. 4, Issue 1 Page 9
Islamic banks are more liquid in cash to customers’ deposit. This result is consistent with
Samad and Hassan (2009) which found that Islamic banks are more liquid in cash when
compared to non-Islamic banks. As for loan deposit ratio, non-Islamic banks are higher than
the Islamic banks. The average loan deposit ratio of non-Islamic banks is 78.83% and Islamic
banks are 47.77 %. This means non-Islamic banks have more financial stress by making
excessive loan than the Islamic banks. Besides, the non-Islamic banks are more dependent
on borrowed funds than the deposit from the customer and this leads to illiquidity. This
result is consistent with Samad and Hassan (2009) and Ansari and Rehman (2011) which
found that Islamic banks do not depend so much on the borrowed funds. The average net
loans to asset ratio of Islamic banks are lower than the non- Islamic banks. An average net
loan to asset ratio of Islamic banks is 42.87% and non-Islamic is 57.43%. From the result, the
non-Islamic banks are high in loans and liquidity is low, while Islamic banks are more liquid.
The result is consistent with Samad (2004), Masruki, Ibrahim, Osman and Wahad (2011) and
Ansari and Rehman (2011) which conclude that the non-Islamic banks are less liquidity than
Islamic banks.
Figure 3: Comparison between Liquidity Ratio of Islamic Banks and Non-Islamic Banks
(Average 2003 until 2010 Period)
So, from the result of the average liquidity ratio can conclude that Islamic banks are more
liquidity than the non-Islamic banks. Samad (2004), Samad and Hassan (2009), Masruki,
Ibrahim, Osman and Wahab (2011) and Ansari and Rehman (2011) also found that Islamic
banks are more liquidity than non-Islamic banks. For the t-test, the results show the liquidity
ratio of non-Islamic banks and Islamic banks is different. The mean of cash deposit ratio,
loan deposit ratio, and net loans to asset ratio show that the non-Islamic banks and Islamic
banks are statistically significant at 5% level where p-value of cash deposit ratio is0.0051 and
for the loan deposit ratio and net loans to asset ratio are 0.0000(see Table 2). Samad (2004)
mentioned that the cause of Islamic banks being more liquidity than non-Islamic banks is
that Islamic banks cannot invest in un-Islamic investment and the investment scope is
limited. Because of the limited scope investment, so Islamic banks have more liquid in assets
such as cash.
0
20
40
60
80
Cash
Deposit
Ratio
Loan
Deposit
Ratio
Net Loans to
Asset Ratio
Non-Islamic Bank 22.46 78.83 57.43
Islamic Bank 31.25 47.77 42.87
%
Liquidity Ratio
March, 2014
Comparison between Islamic and Conventional Banking: Evidence
from Malaysia
International Journal of Islamic Banking & Finance – Vol. 4, Issue 1 Page 10
b) Credit Risk Ratio
Figure 4 show the average credit risk ratio of Islamic banks and non-Islamic banks for 2003
until 2010. The average common on equity to total asset ratio, for Islamic banks and non-
Islamic banks is 5.15% and 2.85% respectively. This implies that the average common on
equity to total asset ratio of Islamic banks is 2.3% higher than non-Islamic banks. The results
indicate that Islamic banks are better in maintaining the assets losses in comparison to non-
Islamic banks. Akhter, Raza, Orangzab and Akram (2011) also found that Islamic banks are
performing better than non-Islamic banks in managing assets losses. In bank performance of
total equity to net loans, Islamic banks more than 1.14% which is higher than non-Islamic
banks. The results how that Islamic banks have higher capacity to adjust the loans losses.
This finding also same with Akhter, Raza, Orangzab and Akram (2011) who also found that
Islamic banks are perform better than non-Islamic banks in managing loans losses. Ahmad
and Ahmad (2010) pointed out that Islamic banks credit risk performance is better than the
non-Islamic banks because Islamic banks banking system is profit and loss sharing, while
non-Islamic banks are not.
Figure 5: Comparison between Credit Risk Ratio of Islamic Banks and Non- Islamic Banks
(Average 2003 until 2010 Period)
For the test, the common equity to total asset ratio is significant because the mean of
Islamic banks is 2.3% higher than non-Islamic banks. While the part of the total equity to net
loans ratio the result is no significant because there is no major different in the mean
percentage between non-Islamic banks and Islamic banks which is 1.14% different between
Islamic banks and non-Islamic banks. This result is same with the profitability ratio test that
the hypothesis test is partially reject null hypothesis because of the total equity to net loans
ratio is no significant and common equity to total asset ratio is significant at 5% significant
level. The finding of common equity to total asset ratio is consistent whit Samad (2004),
while total equity to net loans ratio is contrary with Samad (2004), which concluded that all
0
2
4
6
8
10
12
14
16
Common Equity
to Total Asset
ratio
Total Equity to
Net loans
Non-Islamic Bank 2.85 13.04
Islamic Bank 5.15 14.18
%
Credit Risk Ratio
March, 2014
Comparison between Islamic and Conventional Banking: Evidence
from Malaysia
International Journal of Islamic Banking & Finance – Vol. 4, Issue 1 Page 11
financial measures of credit risk is significant difference between Islamic banks and non-
Islamic banks.
Conclusion and Recommendations
The general objective of this study is to determine the financial performance of Islamic
banks and non-Islamic banks in Malaysia using financial ratio from 2003 to 2010. The specific
objective of this study is to test the profitability performance, liquidity performance and
credit risk performance of Islamic banks and non-Islamic banks. In the study, the theory of
Sharī’ah Conformity and Profitability (SCnP) model was applied have used to measure the
financial performance of the banks which is developed by Kuppusamy, Saleh, and
Samudhram (2010).
Table 6: Test for Equality of Means between Financial Ratio of Islamic Banks and Non-
Islamic Banks
Financial
Ratio
Mean of
Non-Islamic
Banks(per
cent)
Mean of Islamic
Banks(per cent )
t-test for equality of means
Inference
t-value
Significant p-
value
Profitability
Return on
Assets
1.00
-0.26
2.026
0.0622
Partially
Reject H0
Return on
Equity
41.15
-5.66
4.243
0.0008**
Liquidity
Cash Deposit
Ratio
22.46
31.25
-3.314
0.0051**
Reject H0
Loan Deposit
Ratio
78.83
47.77
14.511
0.0000**
Net Loans to
Asset Ratio
57.43
42.87
8.405
0.0000**
Credit Risk
Common
Equity to
Total Asset
Ratio
2.85
5.15
-4.888
0.0002**
Partially
Reject H0
Total Equity
to Net Loans
Ratio
13.04
14.18
-0.656
0.5223
Note: **Significant at 5 per cent level
In general, Islamic banking system is based on Sharī’ah principle, while non-Islamic banking
system is based on interest rate. The main characteristic of Islamic banks is interest-free, as
March, 2014
Comparison between Islamic and Conventional Banking: Evidence
from Malaysia
International Journal of Islamic Banking & Finance – Vol. 4, Issue 1 Page 12
interest is prohibited in Islam. The non-Islamic banking system is organised based on a fixed
payment on interest (Widagdo and Ika, 2008). The principles of Islamic Banks are the
absence of interest-based (riba) transactions, avoidance of economic activities involving
oppression (zulm) and speculation (gharar). While non-Islamic Banks is basically based on
the debtor-creditor relationship between the borrowers and the bank on the one hand, and
between the depositors and the bank on the other. The study used financial ratio which are
profitability ratio, liquidity ratio and credit risk ratio to test the financial performance of the
banks. The profitability ratio, liquidity ratio and credit risk ratio as the independent variable,
while financial performance of Islamic banks and non-Islamic banks as the dependent
variable in this study. The banks chosen for the sample size of this study are Bank Islam
Malaysia Berhad, Bank Muamalat Malaysia Berhad, Affin Bank Berhad, Hong Leong Bank
Berhad, Malayan Banking Berhad, Public Bank Berhad and RHB Bank Berhad. Database in
income statement, balance sheet and statement of changes in equity of the period 2003 to
2010 are used to examine the financial performance of the banks. T-test is used to test the
differentiation of the Islamic banks and non-Islamic banks. The hypothesis test is the
rejection region for t-test.
Turen (1996) in estimate of the performance of banks, the results shows that Islamic banks
are performing better than non-Islamic banks. Samad and Hassan (2009) also found that
sIslamic banks are more liquid and less risk than conventional banks. The result is different
with Rashid and Nishat (2009) who found the Islamic banks having poor performance in the
areas of investor management, profit maximization and operating efficiency. However,
according to Widagdo and Ika (2008), the results indicate that there is no major difference
between Islamic banks and conventional banks. On the other hand, Masruki, Ibrahim,
Osman and Wahad (2011) have found that the profitability of conventional banks is higher
than Islamic banks; however, the Islamic banks are more liquid than conventional banks. The
result of profitability ratio indicates that the profitability performances of non-Islamic banks
are better than the Islamic banks where the result is consistent with Masruki, Ibrahim,
Osman and Wahab (2011). On the other hand, Samad (2004), Samad and Hassan (2009),
Masruki, Ibrahim, Osman and Wahab (2011) and Ansari and Rehman (2011) found that
Islamic banks are more liquid than non-Islamic banks. This is because the scopes of
investment in Islamic banks are limited and they can only invest in the projects that are
approved by the Sharī’ah Broad. This makes Islamic banks are more liquid in the assets such
as cash but the profitable is low. Because of the limit of investment, so, Islamic banks have
more cash in hand. Non-Islamic banks is high credit risk than the Islamic banks because the
banking system of the Islamic banks is profit and loss sharing while non-Islamic banks is
interest rate and when banks have assets and loan loss, the losses are not shared and the
banks meet the risk in credit. Samad (2004) pointed out that compared with non-Islamic
banks, Islamic banks are exposed to less credit risk.
March, 2014
Comparison between Islamic and Conventional Banking: Evidence
from Malaysia
International Journal of Islamic Banking & Finance – Vol. 4, Issue 1 Page 13
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