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Essay: Overview of determinant of Bank Islam profitability in Malaysia

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  • Subject area(s): Finance essays
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  • Published: 17 October 2015*
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  • Words: 647 (approx)
  • Number of pages: 3 (approx)

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Bank Islam Malaysia Berhad is an Islamic bank which operate in Malaysia. It has been in operation since July 1983. Bank Islam was established primarily to assist the financial needs of the country’s Muslim population, and extended its services to the broader population. The bank currently provides Shariah-compliant card services and mobile banking, in addition to traditional banking.
Bank Islam was set up with an initial authorized capital of RM 500 million and paid in capital of RM 79.9 million; the bank has gradually increased its authorized and paid-in capital to RM 2 billion and RM 563 million respectively.
Islamic banking can be defined as banking operations which are consistently conducted with the principles of the Syariah compliant which is Islamic ruling. It was practical application through the development of Islamic economics. Islamic banking is the underlying principles that govern Islamic banking are mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.
Islamic banking is not only can be use by Muslim but it also open to the non-Muslim uses. The Islamic product Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited. Through the use of various Islamic finance concepts such as ijarah (leasing), mudharabah (profit sharing), musharakah (partnership), financial institutions have a great deal of flexibility, creativity and choice in the creation of Islamic finance products. Furthermore, by emphasising the need for transactions to be supported by genuine trade or business related activities, Islamic banking sets a higher standard for investments and promotes greater accountability and risk mitigation.
There are many challenging that are faces by Bank Islam in Malaysia such as the risks associated with profit sharing seemed to be so high. Big challenge that are faces by Islamic Banking system is to be provide interest free products to their customers not all customer can accept this rules of Islamic banking. In Islam, Riba (interest) is defined as any effortless profit gained on a loan or debt. It is also defined as any increase without a specific cause. So it was the first factor which can be highlight that is not prohibited in Islamic banking transaction.
A study may investigate the profitability that incurred in Bank Islam in Malaysia which is by referring the dependent and independent variable factor. The dependent variable is return on assets (ROA). ROA is function to measure the effectiveness of the firm to generate profit with all its available assets. ROA is a profitability ratio that measures the net income produced by total assets during a period by comparing net income to the average total assets. In other words, the return on assets ratio or ROA measures how efficiently a company can manage its assets to produce profits during a period. For this study, ROA is use because want to know the profitability of the bank Islam in Malaysia. The company will know the ROA by using these formulae:
Return on investment OR Return on assets = Net profit
Average Total assets
Higher ratio indicates higher ability of the firm to obtain profit from the given level of assets.
The independent variable can be conduct in this study can be divided to four variables such as expense management, investment, liquidity and capital ratio. For the first independent variable is expense management. Expense management refers to the systems deployed by a business to process, pay, and audit employee-initiated expenses. These costs include, but are not limited to, expenses incurred for travel and entertainment.
Expense management includes the policies and procedures which govern such spending, as well as the technologies and services utilized to process and analyze the data associated with it. According to other study, expense management is one of the main contributors to poor profitability performance. But according to another yet study, the decrease in expenses will improve the efficiency and will raise the profit.

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