CHAPTER Bank will be explained to contribute the

CHAPTER
ONE

1.0 INTRODUCTION

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In this chapter, discussion on the research overview will be included.
There are six sections to be discussed in this chapter. It includes research
background, problem statement, research objectives, research questions, scope
and limitations, hypotheses, and significance of the study. First of all, the
background of Malaysia banking sector and the overall profitability of Islamic
Bank will be explained to contribute the context of this research. In problem
statement section, the main research problem and few research objectives will
be briefly discussed to address the purpose of this study. Consequently,
research questions and hypotheses will be identified as a guidance to carry out
this research. Furthermore, the significance of this study was constructed to
identify the contribution of this study.

 

1.1 BACKGROUND OF THE STUDY

 

 In recent year, the condition of
economy can be considered in steadily rise through the growing of various
sectors in country. Profitability is the indication to the organization’s
performance which highlight the importance of financial stability and good
management. In Malaysia, among all the sectors within an economy, the financial
institution can be one of the sectors that contribute to the growth of economy
and the most closely supervised and regulated by Bank Negara Malaysia.

Profitability are important variables which provide information about the
conduct of any business entity. A stable profitable banking sector set up
proper development of existing companies and encourages the establishment of
new companies by allowing the lending of capital and loans. In addition, by
continue good profit figures, banks are able to create public confidence to
stakeholders, depositors and potential shareholders, also able to stay
competitive in financial market. That why, banking profitability has become a
importance  issue and it captures the
interests from government and other parties such as bankers, shareholders and
investors to investigate the determinants on bank profitability. The
perspective of the known can help them to have a clearer picture in the current
circumstances of the Malaysia banking industry they are participating in and
can help in improving their consideration in the decision makings.
Profitability is one of the major goals of any business. Without being
profitable it is not possible for a business to survive and the business growth
is difficult (Ahmad, 2016). 

 

The population for this research studies consist of the bank
sector on Islam Bank in Malaysia. Islamic bank 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 presently provides
Shariah-compliant card services and mobile banking, in inclusion to traditional
banking. Bank Islam was set up with an initial authorised capital of RM 500
million and paid in capital of RM 79.9 million; the bank has gradually rising its
authorised and paid-in capital to RM 2 billion and RM 563 million subsequently.
We collect the data and information regarding base lending rate,
leverage of Islamic Bank from the 1986 to 2016 years. The sample size will
collect the date from 2008 until 2016 years by using quarter data from Islamic
Bank in Malaysia.         

In financial statement analysis engage the assessment of the
financial ability and stability of a business of financial ratios in averaging
the key areas of a business. One of the tools for financial statement analysis
is financial ratios; computed from a firm’s financial statement; which helps
users of financial statements to gain an insight into the future performance of
the firm (Chukwunweike, 2014).

 

1.2 PROBLEM STATEMENTS

 

 In the case of Malaysia, BIMB has the highest
ROE for 2008, yet it has the highest profitability risk. As the financial
crisis happened, Bank Negara Malaysia introduced the profitability framework in
1998 to boots profitability management and this is effective as during the
financial crisis happened in mid-2007 and 2008, Islamic banks in Malaysia are
profitability risk and financial performance as measured by ROE affected
(Ariffin, 2012). In this research we are going to concentrate on the
profitability of the Islamic Banks in Malaysia. By conducting this research it
can answer the question in mind and gives inner satisfaction to researcher. The
researchers want to study about the impact of profitability focusing on both
internal and external factors.

The financial crisis in 2008 conduct to financial distress in many
institutions across the globe. Banks strive during the financial crisis and
most of their financial instruments were affected, for example loans were defaulted.
This crisis has caused the failure of some banks around the world. Until now,
the global economy is not fully recover and still suffering from this severe
financial crisis. The commercial banks play significant role in maintaining the
stability of economy in a country, because potential of banks not only could
influence the financial sector, but also influence other sectors as well. The
main economic function of a bank is to facilitate the flow of funds from
surplus funds unit to deficit funds unit, which means commercial bank acts as
an agent to manage the funds in economy and also supply credit in economy.
According to GEE, HWEI, QI, MUM, & HAN (2015), commercial banks in Malaysia
is the dominant financial institutions and they are crucial in stabilizing
economy and commercial banks should perform well so that they can generate
financial benefits to individual, households, financial institutions,
non-financial institutions and government. 

Inflation in economy can bring negative financial effect to both
consumers and banking institutions as it reduce purchasing power of money. In
the view point of borrowers, when inflation occur unexpectedly, borrowers face
cash flow difficulties and it lead to the premature termination of loan
arrangements and therefore precipitate loan losses to bank .In the view point
of banks, inflation can directly or indirectly affects the banks through
different ways such as interest rate, asset price, and exchange rate, operating
cost, customer’s needs and the general economic environment. Even though
inflation is classified as macroeconomic variable which is not controllable by
bank management, however somehow researchers argue that inflation can be
anticipated by bank and then bank can adjust interest rate according to the expected
inflation rate so that revenue will be increased faster than cost.(GEE, HWEI,
et al., 2015)

             

1.3 RESEARCH QUESTIONS

 

1.      Is there any significant relationship between base lending rate
and profitability of the Islamic Bank (BIMB) in Malaysia?

2.     
How inflation affects the
profitability of the Islamic Bank (BIMB) in Malaysia?

3.     
How the leverage does affect the
profitability of the Islamic Bank (BIMB) in Malaysia?

 

 

1.4 RESEARCH OBJECTIVE

 

1.    To determine the relationship between base lending rate and
profitability of the Islamic Bank in Malaysia.

2.   
To identify the relationship
between the inflation and profitability of the Islamic Bank in Malaysia.

3.    To evaluate the relationship between leverage and the
profitability of the Islamic Bank in Malaysia.

1.5 SCOPE AND LIMITATIONS OF THE STUDY

 

            1.5.1 SCOPE

 

 This research paper will discuss about the
profitability of the Islamic Bank in Malaysia. Malaysia is a developing country
and can be seen on the level of sector in banking system happened in Malaysia.
Malaysia has a many number of financial banking system that listed in Bursa
Malaysia. The number of financial system that has been listed in Bursa Malaysia
is about 102 financial institutions. Based on that listed our group choose Bank
Islam Malaysia Berhad as our objective study. That is because Bank Islam (BIMB)
is the first bank that use the concept Islamic in Malaysia country, so we want
to look how long or how stable the profitability this bank compare to another
commercial bank in Malaysia. 

The objective study
will more focus on base lending rate, leverage and profitability.

Data collected using time series from year 2008 until 2016
by using the quartering data. 

 

 

            1.5.2 LIMITATIONS OF THE STUDY

             

The limitation
of this study of the factor of profitability that will affecting Islamic Bank
in Malaysia is to get information from journal or article that mostly not
related to the topic and basically the article is not enough information to
proceed for this topic. Basically, to there is hard to find an accurate and
enough data but there is some website that we can use such as World Bank which
is have a reliable data. 

Furthermore, the
data of internal variables is limited as only most recent years of annual
report could be found from the “Bursa Saham Malaysia? website. It is due to the
refurbishment of Website from time to time. 

 

 

 

 

1.6 SIGNIFICANCE OF THE STUDY

 

Islamic Bank financial managers can deliberately manage the ratios used
in this study with the aim of increasing the profitability of the firm. The
study will contributes to existing literature as it opens an opportunity for
researchers to consider looking at the implications of other factors when
investigated simultaneously with profitability variables on the growth of
profit. It will also be of interest to risk managers who will focus more on the
profitability risks associated with their operations. 

Lastly this research
will ensure that government can find themselves benefit from this research too
where they can implement a new policy or amend the existing policy to better
improve the economic growth of the country.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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