The word profit is very synonym in the business world because it represents how successful on the business is. It can also be found in daily usage of bank conversation and it stated in every year annual report. Profit is a reflection of the banks images the higher the profit means the more likely for the banks to gain better reputation or image. Profit is a crucial determination of banks' success, thus it is very important for them to maintain or increase the profit every year. As for that, everyone struggles and pushes themselves to achieve the highest amount of profit as possible.
In the context of Bank Kerjasama Rakyat Malaysia Berhad, better known as Bank Rakyat shows an outstanding achievement in terms of profitability increment. In year 2005, Malaysia economic growth was slow and the worldwide impact of higher the significant hike in oil prices gave a feeling of uneasiness to local banks including Bank Rakyat itself. The uncertainty of economic condition and some setbacks, the Malaysian economy remained sound in 2005. Although the economy condition was a distressing moment on that year, Bank Rakyat still managed to make a stupendous achievement by looking at the increase in its profit. Currently, Bank Rakyat continuously scores great accomplishments for the years ahead.
The history of banks' accomplishment has become an attractive topic to discover, many research has been made to find out what are the determinants of banks profitability. Recent research paper of this topic was conducted by Mona (2009) found that there are ten factors affect the banks profitability. The factors are capital ratio, expenses management, interest coverage, bank size, total deposits, total loan, total income, consumer price index, gross domestic product and inflation. Most researchers have found that there are two factors contribute to banks profitability which are internal and external determinants. The internal determinants are within the control of bank management, can be broadly classified into two categories, i.e. financial statement variables and non-financial statement variables. On the other hand, the external determinants are considered to be beyond control of the management of a bank. Among the widely discussed external variables are competition, regulation, concentration, market share, ownership, scarcity of capital, money supply, inflation and supply money (Haron, 2004). This study investigates the determinants of bank profitability for Bank Rakyat. It shows the relationship of the internal and external variables with bank's profitability.
OVERVIEW OF COMPANY
Bank Rakyat was established in September 1954 under the Cooperative Ordinance 1948, following an expansion of the cooperative movement in Peninsular Malaysia. To facilitate the expansion of the cooperative movement, the co-operatives set up their respective union banks provide financial needs to their members. On 28 September 1954, 11 of these union banks decided to merge and form Bank Agong (Apex Bank).In 1967, Bank Kerjasama Rakyat Malaysia Berhad replaced Bank Agong with its membership opened not only to the cooperatives, but also to individuals. Subsequent changes in the by-laws also resulted in the creation of its subsidiary companies and opening of branches to serve customers as well as members. On 6 January 1973, the name was changed to Bank Kerjasama Rakyat Malaysia Berhad or better known as Bank Rakyat. Bank Rakyat is governed by its by laws and Bank Kerjasama Rakyat (M) Berhad Act 1978 (Special Provision 202), which allows Bank Rakyat to provide financing to non-members. In 1989, Bank Rakyat was placed under the Ministry of Land and Co-operative Development and the Ministry of Finance. In 1993, the Cooperative Act was reviewed which allows the Bank to operate in Sabah and Sarawak. On 8 May 1993, Bank Rakyat took a giant step towards becoming a syariah co-operative bank by introducing Islamic banking products at four of its branches. Bank Rakyat became a full-fledged Islamic cooperative bank in 2002. Hence, with this major decision, Bank Rakyat marked another milestone in history where it became the third bank to offer total Islamic banking products in Malaysia. On 15 February 2002, Bank Rakyat together with six other financial and development institutions were placed directly under the supervision of Bank Negara Malaysia (Central Bank of Malaysia) under the Development of Financial Institution Act (DFIA). On 27 March 2004, Bank Rakyat was placed under the supervision of the Ministry of Entrepreneur and Cooperative Development. On 15 April 2009, after the cabinet restructuring, Bank Rakyat was absorbed under the Ministry of Finance and was later placed under the Ministry of Domestic Trade, Co-operatives and Consumerism. To date, Bank Rakyat has more than 127 branches offering Islamic banking facilities to its customers.
1.3 PROBLEM STATEMENT
In banking industry, risk and competition among banks is stiff since many of Islamic countries has witnessed of emergence of Islamic banking, thus its created stiffer competition among Islamic banks it including Malaysia. Haron (1996) said that market structure effects firm's performance. Studies have been undertaken to examine the effects of market structure on the performance of conventional banks. Theories such as expense-preference, risk-aversion, efficient-structure and structure-conduct-performance were tested in the conventional banks. But, research on the Islamic banks in terms of profitability is few. Since its existence, Bank Rakyat has made its own history in banking industry. The trend of its yearly profit shows an increment. Year 2008 was the best year for Bank Rakyat when the profit reached RM1 billion. There are many international researchers like Flamini, McDonald and Schumacher (2009) in Sub-Saharan Africa and, Dietrich and Wanzenrie (2009) in New Zealand who had done research in this area to prove internal and external determinants of profitability international banks. While in Asia region researches have been made in Hong Kong conducted by Jiang, Tang, Law and Sze (2003), Vong and Chan (2009). There were several research papers conducted in Malaysia which focused on both local and international banks operating within the country. But, there are only few researches on the profitability of Bank Rakyat Malaysia. Profit is very important for banks and it is one of the main reasons for a bank to keep standing and striving for the best in servicing customers.
In the context of Bank Rakyat, its vision is for all its product and service offerings are the best compared with those provided by other competing financial institutions. Since membership in Bank Rakyat is very significant, there is no reason for them to look at others. While the mission is to help improve the economic well-being of members by providing financing facilities at an affordable rate for agriculture, production, marketing, fishing, transportation, housing and business activities deemed beneficial to members and to also promote thrift and savings. The objective of Bank Rakyat is to ensure a satisfactory profit towards meeting dividend payments to its members while charging reasonable profit rates that is not a burden to its members. Here we can see how important profit is for a bank. Thus, this study is to find out whether the internal and external determinants affect the profitability of Bank Rakyat.
OBJECTIVES OF STUDY
To identify the profitability determinants of Bank Rakyat Malaysia.
To examine the significant determinants among independent variables selected in the study.
To find out which variable affects most to the Bank Rakyat's profitability.
RESEARCH QUESTIONS
Do internal determinants have significant relationship with the profitability of Bank Rakyat?
Do external determinants give an impact to the changes of Bank Rakyat profit?
SIGNIFICANCE OF STUDY
1.6.1 Bank Rakyat
This study will provide them information to analyze the level of profit and factors influencing it. It also gives them more innovative ideas and strategies that can generate more profit at the same time serve the customer with responsibility and good management. It will help the bank to be prepared in any economy condition and survive in the future adding more productive years to their existing significant 57 years of operation.
Researcher
From this study, the researcher can identify the determinants or factors that affect the level of profit of a bank. The researcher can also gain more knowledge about this study. In addition, this study can give some exposure to the researcher in conducting replicated or advanced research in the future.
University
From the study, university can have more valuable researches and references for their students in the future. Moreover, this research adds up the body of knowledge. University will be proud to produce an excellent student with a good attitude, hard working and precious research finding.
1.7 SCOPE OF STUDY
The scope of the study includes Kuala Lumpur and the researcher chooses Bank Rakyat Jalan Tangsi branch to gain information. Bank Rakyat is full-pledged Islamic cooperative bank and this is where the researcher's internship workplace. To have an efficient research report, the researcher must be near to the site (Sekaran, 2004). The data collected is from Bank Rakyat annual report, Bank Rakyat library and UiTM Arau data stream.
1.8 THEORETICAL FRAMEWORK
Liquidity (LIQUID)Independent variable Dependent variables
Internal determinants
Overhead (COSR)
Credit risk (LOSRES)
Bank profitability
(ROA) and (ROE)
External determinants
Money supply (MON)
Inflation (CPI)
Economic growth (GDP)
Figure 1: Internal and external determinants of bank's profitability.
ROA and ROE (Vong and Chan, 2005), Liquidity (Hasan and Bashir, 2005), Overhead (Hasan and Bashir, 2005), (Ghazali, 2008), Credit risk (Vong and Chan, 2005), Gross domestic product (Naceur, 2003), (Ramlall, 2009), Consumer price index (Haron, 1996), Money supply (Ghazali, 1999), (Molyneux and Thornton, 1992) Figure 1 shows theoretical framework of all the determinants of bank's profitability. Based on the theoretical framework above, there are six variables which explain the relationship between each variable namely dependent and independent. The dependent variable would be the bank's profitability. The independent variables are liquidity, overhead, credit risk, economic growth, inflation and money supply.
The three measures used as internal determinants of performance are: 1) cost to income ratio (COSR) as an indicator of efficiency in expenses management or overhead; 2) ratio of liquid assets to customer and short term funding (LIQUID) to represent liquidity; and 3) ratio of loan loss reserves (LOSRES) as an indicator of credit risk.
Variables Description
Dependent
ROA Return on asset defined as the net profit divided by total
assets represents the earning performance of the bank based on the total assets. Proxy for bank's profitability.
ROE Return on equity which is the net profit after tax divided by the shareholders' equity and represents the earning performance of the bank based on the shareholders' stake. Proxy for bank's profitability.
LIQUID Liquidity ratio expresses a bank's ability to repay short-term creditors out of its total cash. The liquidity ratio is the result of dividing the total cash by short-term borrowings. It shows the number of times short-term liabilities are covered by cash. Proxy for liquidity.
COSR Cost to income ratio is defined as cost incurred per dollar generation of income or in other words, income generated per dollar cost. Proxy for overhead.
LOSRES Loan loss reserve valuates reserve against a bank's total loan on the balance sheet representing the amount though to be adequate to cover estimated losses in the loan portfolio.
GDP Gross domestic product is the monetary value of all the finished goods and services produced within a country's borders in specific time period. Proxy for inflation.
CPI Consumer price index a measure of price changes in consumer goods and service such as gasoline and cloth. It is one of the most useful statistics to identify periods of inflation or deflation. Proxy for inflation.
MON Money supply is the total supply of money in circulation in a given country's economy at a given time.
1.9 HYPOTHESIS
Forms of Hypothesis
1.9.1 Null Form - It is stated in the negative. It states that there is no difference between the two phenomena.
Operational Form - It is stated in the affirmative. It states that there is a difference between two phenomena.
Hypothesis 1
H0: There is no significant relationship between liquidity (LIQUID) with Bank Rakyat's profitability.
H1: There is significant relationship between liquidity (LIQUID) with Bank Rakyat's profitability.
Hypothesis 2
H0: There is no significant relationship between overhead (COSR) with Bank Rakyat's profitability.
H1: There is significant relationship between overhead (COSR) with Bank Rakyat's profitability.
Hypothesis 3
H0: There is no significant relationship between credit risks (LOSRES) with Bank Rakyat's profitability.
H1: There is significant relationship between credit risks (LOSRES) with Bank Rakyat's profitability.
Hypothesis 4
H0: There is no significant relationship between economic growth (GDP) with Bank Rakyat's profitability.
H1: There is significant relationship between economic growth (GDP) with Bank Rakyat's profitability.
Hypothesis 5
H0: There is no significant relationship between inflation (CPI) with Bank Rakyat's profitability.
H1: There is significant relationship between inflation (CPI) with Bank Rakyat's profitability.
Hypothesis 6
H0: There is no significant relationship between money supply (MON) of the bank with Bank Rakyat's profitability.
H1: There is significant relationship between money supply (MON) of the bank with Bank Rakyat's profitability.
1.10 LIMITATION OF THE STUDY
There are several problems that the researcher has to face in completing this research. The limitations or constraints that occur are:
1.10.1 Data accessibility and availability
The data may not be easily accessible and only focus on secondary data which is limited to information available in the annual reports only. There are only few research papers on Bank Rakyat. Thus, it limits the data collection process. Data is collected at certain places which are far from researcher's internship workplace. Variables to be tested are based on past studies. There are new variables introduced in the model to Malaysian banks. The data collected is in small number of years which is only 11 years. The annual reports of Bank Rakyat have been used to gain information which is limited in yearly data.
Time
During the process of completing the research, the researcher is undergoing practical training at the same time. This affects the concentration paid upon completing the project paper. Four months in completing the research is insufficient time for the researcher to come up with detailed research findings
Generalization
In completing this research, the research findings may not be generalized to all other settings, situations, or organizations.
LITERATURE REVIEW
The literature review is divided into two (2) categories which the first category is international paper study wihich discovered the determinants banks profitability and second category is local paper study which investigate the determinants of banks' profit in Malaysia. The international paper study is cover in Hong Kong, China, Bangladesh, Middle East and Switzerland.
2. 1 DETERMINANTS BANKS PROFITABILITY
Most of previous studies have found that bank's profit is affected by both internal and external factors. As stated above the internal factors are within the control of bank management can be broadly classified into two categories, i.e. financial statement variables and non-financial statement variables. The financial statements are the balance sheet and income statement. Thru these statements the financial position of a bank can be measured. For this study ROA and ROE were used as they are typically tool of profitability indicator.
2.2 DEPENDENT VARIABLE
From the financial statement, a variety of variables capable of influencing the bank's performance can be discerned. Looking at the previous studies many researchers found most attention received from the reading are cost, asset and liability composition and size. Many of researchers use capital ratio to measure banks' cost. The ratios have been used widely to get capital adequacy and should capital the general safety and soundness of banks. It is generally believed that well-capitalized banks face lower expected costs of financial distress and such an advantage will then be translated into high profitability. The study also discover that ROA regression shows the highest explanatory power when both internal and external variables are included in the estimation (Vong and Chan, 2005). Capital adequacy can be calculated by ratio of asset (ROA) and ratio of equity (ROE). In several researches discovered that the higher the ratio the better the financial position of the bank. This can be supported in a study by Flamini, Mcdonald and Schumacher (2009) which they said banks that expect to have better performance, credibly transmit this information to the market through a higher capital ratio.
In the literature in banking lots of researchers focus on ROA and ROE as the dependent variable. A study in Turkish, showed that the capital adequacy is affected by ROA. It means that the relationship between ROA and capital adequacy is significance (Sayilgan and Yildrim, 2009).In this research paper also conclude that the final results for the two dependent variables (ROA and ROE) were very similar. Thus, if the ROA changes due to amendment in capital adequacy it is said that ROE has positive relationship with capital adequacy.
In year 1998-99 during the Asian Financial Crisis, profitability of 14 banks including Asian, Japan, United States and Canada showed a declined in profitability and the performance of the across banks are varied widely. The profitability of banks decline is proved by calculating the ROA. The study shows that the profitability recovered during 2000-02. (Jiang, Tang, Law and Sze, 2003). Another study using ROA as measurement of banks' performance is a study conducted in Tunisia. ROA is a ratio computed by dividing the net income over total assets. ROA have been used in most banks' performance studies. ROA measures the profit earned per dollar of assets and reflect how well bank management use the bank's real investments resources to generate profits (Naceur, 2003). Once again in a paper study conducted by Dietrich and Wanzenried (2009) also used ROA as to measure the performance of banks which expressed in percentage.
In Malaysia there are several studies relating with ROA. The studies conducted by Rasiah (2010) and Yousef (2009) said that ROA indicates how a bank is capable to convert its assets into net earnings. Another alternative tool to determine the profitability is ROE. In this research paper the ROE ratio is calculated by dividing a bank's net income by its average total equity, that is common and preferred stock, surplus, undivided profits, and capital reserves. This measure of profitability is the most important for a bank's stockholders, since it reflects what the bank is earning on their investment.
2.3 INDEPENDENT VARIABLES
Most of the literature in banking industry many researchers focuses on internal determinants which define as the microeconomic factors and the external determinants as the macroeconomic factors. As the theoretical framework above it illustrated the internal determinants and external determinants.
2.3.1 Liquidity
A study written by Brock and Suarez (2000) reported that in the 1990s bank profitability was influenced by liquidity although the result differed across countries. Another study made by Chen and Lioa (2009) also found that liquidity has significantly positive effect of NIM, ROA, ROE, indicating positive relationship between liquidity and banks' profits. Molyneux and Thornton (1992) studied all banks in Europe as their sample and found similar results. While Steinherr and Huveneers (1994) studied the performance of banks in the US, UK, Western Europe and Japan found that liquidity relationship was significant in only certain countries only. Hassan and Bashir (2005) studied profitability of Islamic banks found the same result as in Western countries although liquidity is not a major problem to sound and stable banks but liquidity can change rapidly, requiring frequent updating of relevant indicators. Both of the researchers agree that in banking crises liquidity has its own power in controlling solvency problems. Thus, they banks should monitor their liquidity indicators because poor management of short-term liquidity may force solvent banks towards closure.
In a study case of commercial banks in Malaysia also discovered banks' profits determines by liquidity (Rasiah, 2010). In Golin (2001) report, his mentions, ""it is critical that a bank guards carefully against liquidity risk - the risk that it will not have sufficient current assets such as cash and quickly saleable securities to satisfy current obligations e.g those of depositors - especially during times of economic stress" (p. 273). The researcher reported that without the required liquidity and fulfills the short-term obligation banks can easily fail. Banks would be less vulnerable to failure when the ratio is higher which makes the bank more liquid. However, the researcher found that liquid assets and profitability of banks has a negative relationship which usually liquid assets associated with lower rates of return.
In the previous literature most of the researchers focused more on commercial and investment banks whereas Islamic banks are left behind in research until Haron (2004) investigate the determinants of banks' performance. In his findings the determinants for Islamic banks are similar with the commercial and investment banks. This study found that liquidity had a significant positive relationship with total incomes received by the bank (TITA), the bank's portion of income (BITA), and income before tax to total assets (BTTA). No significant relationship was found between liquidity and profitability measures which were deflated against total capital and reserves (BTCR and ATCR). This result can be in line with Bashir (2003).In differentiating the liquidity ratios between commercial banks and Islamic banks there are two (2) ratios being used for the purpose. The ratios are net loan over customer and short term funding, and liquid assets over customer's short term funding. These ratios tend to be higher for high-performing banks. The liquidity ratios show that commercial banks are more liquid than Islamic banks (Hasan and Bashir, 2005). In this study the research used 21 countries to be evaluated.
Overhead
In providing information on variation in operation costs across the banking system, overhead to total assets ratio (OVRHD) is being used. OVRHD reflects the total amount of wages, employment and salaries as well as the cost of running branch office facilities. A high OVRHD is a sign of negative performance of a bank. It is proved in previous literature an efficient bank would have low cost of operation. The technology of ATM and other automated means of delivering services, allow banks to lower the cost by capital is substituted for labor. Factors such as capital, overhead, gross domestic product and conventional interest rates were positively related to profitability, while, loan ratios, reserves taxes, and size were adversely related. Hence, a lower OVRHD ratio might impact the performance to be positive (Hasan and Bashir, 2003).
Ben Naceur and Goaied (2008) examine the determinants of banks profitability including bank characteristics, financial structures, macroeconomic conditions on Tunisian during the period of 1980 to 2000. They reported that higher overhead tend to exhibit higher profitability levels. Thus, overhead is significant and positively related with banks' profits. A study by Molyneux and Thornton (1992), they concluded that overhead expenditure was positively correlated significantly with profitability. Bashir (2003) concluded in his findings the importance of overheads in promoting banks' profits. The counter intuitive finding about the association between performance and overheads suggests that high profits earned by banks may be appropriated in terms of higher wages and salaries or investment in costly technology used by Islamic banks.
According to (Ghazali, 2008) cost to income ratio (COSR) is one of the most frequently used for measuring the overheads or costs of running the bank, the major element of which is normally salaries, as percentage of income generated before provision. COSR is defined as cost incurred per dollar generation of income or in other words, income generated per dollar cost. Thus, it is one of the best tools to evaluate economic efficiency or profit performance. The lower the COSR ratio, the better is the profitability performance of a bank. It is typically used as an indicator of management's ability to control costs. In the stated that ROE has a significant relationship with COSR. Since higher expenses normally mean lower profits and vice versa, COSR has a negative effect on bank profits and margins (Kosmidou et al., 2006).
In a research paper of commercial banks in Malaysia after 1997 financial crisis done by Abduilalh (2009), concluded that overhead is one of source of interest conflicts between share holders and managers. The US bank's managers exaggerated salary and bonuses 2008 Global Financial Crisis has created an attention against the conflict, whereby for the increment in this ratio will reduce their profit. Pasioiras et al. (2007) and Kosmidou et al (2006), reported that the coefficient of cost to income ratio (COSR) as the indicator of expenses management or overhead was the most negatively related to profitability. COSR is expected to have negative impact to banks profits and vice versa this is because higher expenses normally mean lower profits and vice versa. Thus, the lower COSR ratio, the better is profitability performance of banks (Kosmidou, 2006).
Credit risk
Generally, credit risk is related to loans. When a bank offer loans to customers they have to bare the risk of default payment. Thus, it is important for a bank to analyze its customer worthiness before lending loans. In finance field many of the researches use loans as one of the indicator in measuring banks' performance. Loan is an item in balance sheet which represent the banking activities. Although bank loans are the main source of revenues and are expected to affect profits positively, findings from various studies are not conclusive (Vong and Chan, 2005).
Sufian, Fadzlan, Habibullah and Shah (2009), examine the performance of 37 Bangladeshi commercial banks between 1997 and 2004 by using an unbalanced bank level panel data. The findings from the study shows that bank specific characteristics, such as loans intensity, credit risk, and cost have positive and significant impacts on bank performance. A negative impact on profitability should be unleashed since the higher the level of high-risk loans, the higher the level of unpaid loans (Miller and Noulas, 1997). There are two causes of banks failure which are poor asset quality and low levels of liquidity. Credit quality would be affected by high allowance of doubtful debts. Flamini, McDonald and Schumacher (2009) found that credit risk has positive relationship and significant effect on profitability by using ROA as proxy. This suggests that risk-averse shareholders target risk adjusted returns and seek larger earnings to compensate higher credit risk. In Ramlall (2009) research paper found that credit risks trigger negative relationship with profitability. Awdeh (2005) in his findings show that credit risk and the efficiency show a significant influence on ROA.
Ghazali (2008) reported that credit risk and operating expenses management has negative relationship with profitability. Ghazali studied on determinants of Islamic banks profitability concluded that Islamic banks are less expose to credit risk compared to conventional banks. A study on South Eastern European (SEE) countries done by Athanasoglou, Panayiotis, Delis, Manthos, Staikouras and Christos (2006) found that credit risk is negatively and significantly related to banks' profits and since credit risk has become a problem in the recent years, they suggest SEE banks should alert more on credit risk management. The failure of banks to recognize impaired assets and create reserves for writing-off these assets would be a major problem to a bank. An improvement of financial systems would smoothen the problem which in turn will assist banks to evaluate credit risk more effectively and avoid problems associated with hazardous exposure.
The higher the loan ratio, the higher the credit risks. A study shows a higher loan ratio actually impacts profits negatively. The latter study notices that banks with more non-loan earnings assets are more profitable than those that rely heavily on loans (Hasan and Bashir, 2003).
2.3.4 Economic Growth (GDP)
A result shows banks' performance will be influenced positively by the GDP per growth capital, this expectation is based on a well documented literature focusing on the relation between economic growth and financial sector performance (Naceur, 2003). The rapid growth of economic help to increase banks' profitability, from the previous literature review it is proved that GDP captures upswing and downswings manifesting in the business cycles. The profitability of banks is predictable to change according to the movement of the general activity of a country (Ramlall, 2009).
Chen and Liao (2009) reported that GDP growth rate, country risk, regulatory quality and government effectiveness in host country also significantly and negatively affect foreign bank profitability. GDP growth at the macroeconomic level and other external variables such as interest rate vitality, and inflation influencing banks' profits although the results differed across countries (Brock and Suarez, 2000). Study done by Sufian, Fadzlan, Habibullah, and Shah (2009), suggested that the economic growth not significantly related to bank performance. The results are in line with empirical result by Naceur and Omran (2008). Contradict with several studies, for example a study done by Jiang, Tang, Law and Sze (2003) focused on bank profitability in Hong Kong the macroeconomic factor; GDP growth is positively related to banks' profitability.
Inflation (CPI)
In previous studies most researchers used CPI as a proxy for inflation. In a study by Haron (1996) found that inflation had a significant relationship with profits. Among the earliest study of bank profitability and inflation was discussed by Revell (1980). In his research that inflation could be a factor in the variations in a bank's profitability. As the result of hypothesis was tested by Bourke (1989) and Molyneux and Thornton (1992) proved that inflation do affect banks performance.
Inflation is the rate at which the general level of prices for goods and services is rising. Profitability of bank will be affected positively or negatively by inflation depends on whether it is anticipated or unanticipated. Inflation also affects the real value of costs and revenues. In the case of anticipated inflation is the rate at which the general level of prices for goods and services is rising. While in the case of unanticipated inflation the interest rates will be adjusted slowly by the banks as the result the banks cost increased faster then the banks revenues . This will consequently have a negative impact on bank profitability (Pasiouras and Kosmidou, 2007).
A Ghazali (2008) who studied the determinants of Islamic bank profitability and the result was CPI and profitability had negative relationship on ROE, but the result shows CPI had a significant effect on ROA and NIM. In contrasts, a study by Haron (2004) found that inflation was positively related to all profitability measures for Islamic banks, but their relationship was not statistically significant. Many previous studies on inflation show that inflation positively effecting profitability. One of the studies is done by Molyneux and Thornton (1992) which they found that CPI had significant relationship with profits. This result is inline with Bourke (1989).
Money supply
In a paper study conducted by Bourke (1989) found that the increment of profit can caused by market expansion. In his study, growth of money supply has become the proxy for growth in the market. It also indicates that the result shows there is positive relationship between money supply with profitability. Similarly, a study by Molyneux and Thomton (1992) found that there is significant relationship between the variables. Contrast with Haron (1996), proved that money supply do not effect the profitability of Islamic bank. The same result also found by Ghazali (2008) money supply growth has no significant impact on profits.
Meanwhile for conventional banks, several studies reported that supply money had positive relationship with profitability. Bourke used the annual growth in money supply as a proxy for growth in the market. He found that money supply had a significant positive relationship with profits. Molyneux and Thornton (1992), who replicated Bourke's study, found similar results.
