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ANALYSIS OF FACTORS AFFECTING PROFIT DISTRIBUTION MANAGEMENT AT ISLAMIC BANKS IN ASIA

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This study aims to analyze factors that affect Profit Distribution Management (PDM) at Islamic Banks in Asia. Data used are secondary data with the observation period of 152 financial statements of Islamic banks in Asia in 2010-2013. The method is quantitative with panel data with regression test. The results of the study showed that capital adequacy, Third Party Fund Effectiveness (EDPK), and Third Party Fund Proportion (PDPK) have a significant negative effect to PDM. Inflation and growth of Gross Domestic Product (GDP) have signifincant positive effect to PDM. While, age variable has no significant effect on PDM.
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Proceedings of International Conference and Doctoral Colloquium in Finance 2017
ISSN: 2580-7625
ANALYSIS OF FACTORS AFFECTING PROFIT DISTRIBUTION MANAGEMENT
AT ISLAMIC BANKS IN ASIA
Mohamad Nurreza Rachman
Faculty of Economics and Business, Universitas Indonesia
Depok, Indonesia
Email: m.nurreza.r@gmail.com,
Dodik Siswantoro
Faculty of Economics and Business, Universitas Indonesia
Depok, Indonesia
Email:kidod25@yahoo.com
Abstract: This study aims to analyze factors that affect Profit Distribution Management (PDM)
at Islamic Banks in Asia. Data used are secondary data with the observation period of 152
financial statements of Islamic banks in Asia in 2010-2013. The method is quantitative with
panel data with regression test. The results of the study showed that capital adequacy, Third
Party Fund Effectiveness (EDPK), and Third Party Fund Proportion (PDPK) have a significant
negative effect to PDM. Inflation and growth of Gross Domestic Product (GDP) have
signifincant positive effect to PDM. While, age variable has no significant effect on PDM.
Keywords: Profit, Distribution, Management, bank, Sharia,
1. Introduction
The rapid development of Islamic banking in the 21st century was caused by the strong
resilience of Islamic banks over the impact of global financial crisis (Rosman, Wahab, and
Zainol, 2013). This resulted in an increase of public interest in Islamic products offered by
Islamic banks, thus creating Islamic banks developed rapidly. One of the famous Islamic
products collected by Islamic banks from the public is the deposit or in Islamic banks called
with third party fund.
Some studies concerned with the motivation of customer in choosing Islamic banks as a
deposit of funds has not been based on Islamic values, but to seek maximum profit (Rachmawati
and Eki, 2004; Karim and Afif, 2006; Kasri and Salina, 2009; Andriyanti, 2010). All the studies
Proceedings of International Conference and Doctoral Colloquium in Finance 2017
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were measured by observing the activity of Islamic bank customers who usually transferring
fund of saving. Deposit fund was transferred from Islamic banks to conventional banks due to
get bigger income of interest rates. In fact, Islam has banned the use of interest as applied by
conventional banks with the term riba. Ibn Al-A’rabi in Nurhayati and Wasilah (2013) stated
that the basic principles of Islamic economics are prohibiting the interest, unfair treatments,
uncertainty, and considering issues based on the benefits of mankind.
Ismal (2011) found the possible determination of interest rate on savings and loans by
conventional banks to saving amount of customer savings in Islamic banks. Chong and Liu
(2009) stated that Islamic banks are not interest-free but still interest-based as strong
relationship between profit-sharing of Islamic banks and the conventional bank interest rates.
By the strong effect of interest rate, Islamic banks need to manage the distribution of profit-
sharing by considering factors that can affect the distribution of profit-sharing. The
management performed by Islamic banks against the profit-sharing given to its customers is
called Profit Distribution Management (PDM) (Farook, Hassan, and Clinch, 2012).
PDM actually is not a new issue and study, it has been conducted many times. Sundararajan
(2005) in Farook, Hassan, and Clinch (2012) found that Islamic banks have PDM which refers
to interest rate and implicitly affected by fee management. Interest rate had a significant
relationship to PDM. Furthermore, Farook, Hassan, and Clinch (2012) conducted research on
the effect of PDM relationship using asset spread with determinant factors derived from internal
and external Islamic banks. The result found that Brunei, Malaysia, and the United Arab
Emirates perform a low PDM, while Bahrain, Indonesia, Pakistan and Saudi Arabia perform a
high PDM. Mulyo (2012) and Rizaludin (2013) conducted a study on PDM based on internal
and external factors of Islamic banks in Indonesia. The result showed that Islamic banks in
Indonesia perform high PDM (Farook, Hassan, and Clinch, 2012).
2. Theory
In general, a company is an entity that not only operates for its own purpose, but must also
provide benefits to stakeholders. Freeman (1984) defined stakeholder as “any group or
individual who can affect or is affected by the achievement of the firm’s objectives”. It means
that stakeholder is a group or individual able to influence or be influenced by the achievement
of corporate goals. In Islamic banking activities, Islamic banks need to maintain a good
Proceedings of International Conference and Doctoral Colloquium in Finance 2017
ISSN: 2580-7625
relationship with stakeholder, especially customers willing to deposit their funds in Islamic
banks. The other perspective is by offering an interesting profit-sharing for customers.
Farook, Hassan, and Clinch (2012) stated that Profit Distribution Management (PDM) is an
activity of managers in allocating the distribution of profit-sharing of Islamic banks to their
customers. Bank Indonesia defines profit-sharing distribution is the profit-sharing of Islamic
banks to deposit customers based on the agreed ratio every month. It is concluded briefly that
PDM is an activity conducted by managers in allocating the distribution of profit-sharing of
Islamic banks to their customers every period/month agreed.
The capital adequacy describes banks ability to maintain sufficient capital to cover possible
losses which may occur from risky earning assets fund, as well as for financing in fixed assets
and investment (Idroes, 2008). Capital Adequacy Ratio (CAR) is the ratio used to measure
capital adequacy. The greater this ratio means the healthier of the bank to perform their
performance.
High CAR creates banks able to reduce possible risks that cause bank managers to perform
Profit Distribution Management (PDM) wider from the asset return because the bank is in a
safe condition. The argument is in line with Mulyo’s (2012) findings that there is a positive
relationship between capital adequacy and the level of profit-sharing of Islamic banks. Thus,
the proposed hypothesis is:
H1: Capital adequacy has positive effect to the Profit Distribution Management (PDM)
High inflation rate cause costs to increase and less profitable productive activities. To
maintain customers from withdrawing their funds to other investment schemes (Sukirno, 1998),
Islamic banks would tend to raise the profit-sharing rate. This is similar to the study by Kartika
(2013). The hypothesis is then:
H2: Inflation has negative influence to the Profit Distribution Management (PDM)
A good economic condition may indicate healthy domestic production activities and is
reflected by the growth of Gross Domestic Product (GDP). In such condition, population as the
owner of production factor in aggregate earns higher income (Nasution, 2009). This greater
income has a good impact on the financial health of the bank. On the other hand, in opposite
the poor condition of a country’s economy such as recession, there is an increase in
unemployment and decrease in an economic growth.
Proceedings of International Conference and Doctoral Colloquium in Finance 2017
ISSN: 2580-7625
At recession, GDP growth does not exist, but the decrease in GDP exists. In a recession,
there is the possibility that individual and business would be difficult to pay their obligation to
the bank. As a result, asset funded by depositors may have poor performance. Thus, the
financing provided by Islamic banks becomes bad debt and reduces revenue received by Islamic
banks. To maintain good relationships to customers or to minimize withdrawing deposits,
however, Islamic banks distribute profit-sharing revenue higher that asset return. Therefore, to
prove the relationship, the proposed hypothesis is:
H3: Gross Domestic Growth (PDB) has negative influence to the Profit Distribution
Management (PDM)
The Third Party Fund Effectiveness (EDPK) reflecs the bank’s intermediary function, for
example how effective the Islamic banks in distributing third party funds in financing. The
higher this ratio is (according to Bank Indonesia 85% - 100%), the better of the health of the
bank due to bank financing distribution smoothing. so the banks revenue is increasing. High
FDR indicates a high level of financing and this has an impact on the increased returns
generated from financing. It can automatically raise revenue that can be shared to customers.
However, large third party funds absorbed through financing will cause liquidity risk faced by
Islamic banks due to the lack of available funds. Bank would find difficulty in distributing
profit-sharing t customers. The argument is in line wit the results of Mulyo (2012) and Rizaludin
(2013) who found a negative relationship between FDR with the level of profit-sharing. Thus,
the proposed hypothesis is:
H4: Third Party Fund Effectiveness (EDPK) has negative effect to the Profit Distribution
Management (PDM)
The ability of banks in collecting public fund would affect the growth of banks. The amount
collected would increase the efficient factor of the bank. Third party fund is fund entrusted by
the society under a depositary agreement. Fund is the most important item for the bank as a
financial institution, because the fund collected from the community is the operational motor
of a bank. If the fund is not sufficient, the bank cannot perform its functions with the maximum
efforts or even does not work at all. The Third Party Fund Proportion (PDPK) is a proxy
representing how much the bank is dependent on the third party fund. Farook, Hassan and
Clinch (2012) and Mulyo (2012) found a negative effect of PDPK to PDM. This is because
Proceedings of International Conference and Doctoral Colloquium in Finance 2017
ISSN: 2580-7625
Islamic banks with high PDPK values tend to manage PDM based on their asset returns. This
is due to strict supervision from customers, thus discouraging Islamic banks to manage the
distribution of profit-sharing. Therefore, the hypothesis proposed in this study is:
H5: Third Party Fund Proportion (PDPK) has negative effect to the Profit Distribution
Management (PDM)
Experience in running the business for banks would affect the existence of banks in facing
the competition. Nurhidayanti and Indriantoro (1998) showed that the age of the company can
show the information to potential investors to invest. According to Farook, Hassan, and Clinch
(2012), in the context of banks, a new bank is similar to a new company. New bank has a lack
of information about the condition of the bank itself and its business environment. In addition,
new bank must be able to develop trust with stakeholders. They found a negative effect between
the age of Islamic banks and the PDM as it is difficult for a new company to start their business
to generate profit in the early years of its operations. For Islamic banks, this may not be a good
issue due to profit-sharing system. The difficulty in generating income caused the distribution
of profit-sharing smaller. On the other hand, to maintain good relationships with customers,
Islamic banks must be able to distribute competitive profit-sharing with conventional banks.
This is conducted in order to keep depositors do not withdraw their funds and move to other
banks which give better returns (displacement funds). Thus the proposed hypothesis is:
H6: The age of bank has negative effect the Profit Distribution Management (PDM)
3. Method
The sample uses purposive sampling method from existing Islamic bank population in
2010-2013 in bankscope database. They are 38 Islamic banks in 10 countries with 152 reports
of Islamic banks in the period of 2010-2013.
This study refers model used by Farook, Hassan, and Clinch (2012) then modifying the
independent variables used. The model formulated in this study is:
PDM
=
α 0 + α 1 KMit + α 2 INFit + α 3 PDBit + α 4 EDPKit + α 5 PDPKit +
α6 UMURit + α7 LN_ASETit + ε. .....................................(1)
PDM
=
Profit Distribution Management using asset spread
Proceedings of International Conference and Doctoral Colloquium in Finance 2017
ISSN: 2580-7625
KM
=
Capital adequacy using Capital Adequacy ratio (CAR)
INF
=
Inflation using changes in Annual Consumer Price Index (CPI).
PDB
=
Gross domestic product growth using changes in annual gross
domestic product
EDPK
=
The third party fund effectiveness using the Financing to Deposit
Ratio (FDR)
PDPK
=
The third party fund proportion of using the ratio of the amount
of third party funds divided by total assets
UMUR
=
Age of Islamic banks using dummy variable, score 1 for Islamic
bank that has been established 4 years or more, score 0 for
Islamic bank that has been established less than 4 years
LN_ASET
=
The Natural Logarithm of the total assets of Islamic banks from
the value of the US dollar currency in thousands
Calculating PDM uses Asset Spread. Asset Spread can be formulated as follows (Farook,
Hassan, and Clinch, 2012):
Asset spread = (|ROA ROIAH|)…………………...................….(2)
Asset spread is the absolute value of Return on Asset (ROA) minus Return on Investment
Account Holder (ROIAH). It means if ROA is smaller than ROIAH, it is said that Islamic banks
provide profit-sharing rate to its customers greater than the asset return generated by the bank
and vice versa. This indicates the existence of other factors that cause Islamic banks to do so.
4. Analysis
Descriptive statistics can provide a brief overview of Islamic banks. The PDM variable has
a minimum of 0.08 for Shahjalal Islami Bank Ltd in 2013. While the maximum of 5.11 is PT
Bank BNI Syariah in 2011. The average PDM is 2.07 with a standard deviation of 0.99. It
indicates the data in the research sample averagely have PDM which is far from asset return
with normal distribution of data.
Table 1. Descriptive Statistic
Variable
Min
Max
Average
Std. Dev
PDM
0,08
5,11
2,07
0,99
KM
10,36
48,22
20,23
7,39
Proceedings of International Conference and Doctoral Colloquium in Finance 2017
ISSN: 2580-7625
INF
-2,43
9,56
3,02
2,14
PDB
-2,4
13,66
5,51
2,46
EDPK
32,32
197,1
77,13
20,62
PDPK
40,32
94,24
73,78
9,38
UMUR
0
1
0,9
0,29
ASET
98.428
74.987.950
11.148.705
16.898.228
Source: Data
The following Table 2 is a descriptive statistical description outlined per country. The per-
country analysis displayed uses the mean variable which is in detail the characteristics of each
country of the variables used in this study.
Table 2. Descriptive Statistic per Country
Negara
N
PDM
KM
INF
PDB
EDPK
PDPK
AGE
ASET
UEA
16
0,97
20,84
0,88
4,09
85,4
78,13
0,88
15.893.542
Bangladesh
8
1,43
12,64
7,94
6,26
83,9
77,44
1
1.504.917
Bahrain
16
1,3
23,05
1,91
3,78
80,8
72,42
1
6.472.053
Brunei
4
3,67
26,32
0,8
1,3
51,11
73,98
1
4.617.967
Indonesia
24
3,18
20,86
5,22
6,19
84,27
69,83
0,5
1.903.174
Yordania
8
2,05
22,67
4,91
2,59
83,84
78,62
0,87
2.913.697
Kuwait
12
2,37
24,27
3,09
4,44
83,52
67,89
1
4.883.652
Malaysia
40
1,72
16,31
2,16
5,75
63,51
77,83
1
17.138.160
Qatar
12
2,19
19,68
1,11
9,82
73,62
69,55
1
13.355.250
Arab Saudi
12
3,01
25,43
3,91
6,4
88,97
68,52
1
27.738.619
Total
152
2,07
20,23
3,02
5,51
77,13
73,78
0,9
11.148.705
Source: data
From Table 2, it can be seen that Brunei, Indonesia, and Saudi Arabia have a high level of
PDM by using asset spread in its calculation because it has a PDM value above 3 (Three).
While, UAE, Bahrain, Bangladesh and Malaysia have low PDM with value less than 2 (Two).
These results are consistent with findings conducted by Farook, Hassan, and Clinch (2012) in
which Indonesia, and Saudi Arabia perform high PDM, then Malaysia and UAE perform low
PDM.
Proceedings of International Conference and Doctoral Colloquium in Finance 2017
ISSN: 2580-7625
The model is based on Fixed Effect model as proposed by Chow and Hausman test. As the
model has problem in heteroscedasticity and autocorrelation, so it is used Generalized Least
Square (GLS) (Suwandi, 2011). The significance test of the research model in Table 3 has value
of R2 = 0.2303 which means that 23,03% of independent variable and control variable in this
research model, namely capital adequacy, Inflation, growth of Gross Domestic Product (GDP),
Third Party Fund Effectiveness (EDPK), Third Party Fund Proportion (PDPK), Age, and Assets
can explain the effect to dependent variable.
The result shows that independent variables and control variables used in the study, namely
Third Party Fund Effectiveness (EDPK), Third Party Fund Proportion (PDPK) can explain
together and influence significantly according to the hypothesis of the dependent variable used,
namely Profit Distribution Management (PDM).
The Third Party Fund Effectiveness shows that customer funds are distributed as much as
possible in order to provide a high profit-sharing rate so that customers can enjoy the funds
deposited in Islamic banks. This result is consistent with the study of Farook, Hassan, and
Clinch (2012) and Mulyo (2012). The same result is also found in the Third Party Fund
Proportion which has negative and significant results. In this case, there is prioritizing the
interest of the savings account holders.
Tabel 3. Result
Model Hipotesis:
PDM= α 0 + α 1 KMit + α 2 INFit + α 3 PDBit + α 4 EDPKit + α 5 PDPKit α 6 + UMURit α
7 + LN_ASETit + ε
Variabel
Prediksi
Koefisien
Z-Stat
Probabilitas
KM
+
-0,02
-3,30
0,0005***
INF
-
0,048
1,77
0,00385**
PDB
-
0,06
4,17
0,000000***
EDPK=
-
-0,0
-1,63
0,051*
PDPK=
-
-0,01
-1,89
0,029**
UMUR
-
0,13
0,46
0,323
LN_ASET
+
-0,04
-0,80
0,2115
R-Squared
0,2303
No.
Observation
152
Proceedings of International Conference and Doctoral Colloquium in Finance 2017
ISSN: 2580-7625
F-Stat
4,57
Wald chi-
square
1260,19
Prob (F-stat)
0,00002
Prob (chi-
square)
0,0000***
***Significant α = 1%, **Significant α = 5%, *Significant α = 10%
Source: Data
5. Conclusion
This study reinforces that Islamic banks in Asia do have a role in performing Profit
Distribution Management (PDM), especially in Indonesia and Saudi Arabia that have high
PDM value. The factors affecting Profit Distribution Management (PDM) are Third Party Fund
Effectiveness and Third Party Fund Proportion. Both factors have significant and negative
effect on PDM. From the results, it can be concluded that customers of Islamic banks receive
different treatment. In this case, Islamic banks seek to maintain the loyalty of Islamic bank
customers.
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... Bank Indonesia defined profit-sharing distribution as the profit-sharing of Islamic banks to deposit customers based on the agreed ratio every month. [6] stated that Profit Distribution Management (PDM) is an activity of managers in allocating the distribution of profit-sharing of Islamic banks to their customers. Profit Distribution Management is activity conducted by managers in allocating the distribution of profit-sharing of Islamic banks to their customers every period/month agreed. ...
... So indicator of Profit Distribution Management is: Profit Distribution Management influenced by several factor, one of them is a Capital Adequacy. Capital Adequacy can be interpreted as bank ability to cover the loss caused which is supported by the availability of fixed asset and investment [6]. The indicator used to measure the Capital Adequacy is CAR (Capital Adequacy Ratio). ...
... The rate of inflation year by year in Indonesia can be observed from the percentage of the change of consumer price index (IHK). Based on result [6] that high inflation rate cause costs to increase and less profitable productive activities. According to [12], the increase inflation rate may effect to reduce the corporate earnings, including Islamic Banking, so its consequently to reduce the Profit Distribution Management. ...
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Understanding Characteristics of Depositors to Develop the Indonesian Islamic Banks
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Islamic Banking Behaviour in Indonesia: a Qualitative Approach
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