The Impact Of Financial Risks On Profitability Of Malaysian Commercial Banks: 1996-2005

Fauziah Hanim Tafri · Zarinah Hamid · Ahamed Kameel Mydin Meera · Mohd Azmi Omar

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Banking stability, regulation, efficiency Islamic Finance and Banking Studies Banking Sector Performance and Management

Abstract

This paper examines the relationship between financial risks and profitability of the conventional and Islamic banks in Malaysia for the period between 1996 and 2005. The measures of profitability that have been used in the study are the return on equity (ROE) and return on assets (ROA) while the financial risks are credit risk, interest rate risk and liquidity risks. This study employs panel data regression analysis of Generalised Least Squares of fixed effects and random effects models. It was found that credit risk has a significant impact on ROA and ROE for the conventional as well as the Islamic banks. The relationship between interest rate risk and ROE were found to be weakly significant for the conventional banks and insignificant for the Islamic banks. The effect of interest rate risk on ROA is significant for the conventional banks. Liquidity risk was found to have an insignificant impact on both profitability measures.

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