Financing Structures, Bank Specific Variables and Credit Risk ...

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Capital adequacy requirement introduced by Basel committee with intention toreduces or control risk taking by the banks. Commercial banks including Islamicbanks are required to follow the capital adequacy ratio which is consisting of TIER 1and TIER 2 capital. All commercial banks must maintain a minimum total capital of8% from risk weighted assets (RWA) of the bank (Basel, 2001). Under thisframework, TIER 1 must exceed at least 4% of the risk weighted assets and 3% oftotal assets. In TIER 2, the amount must not exceed the amount of TIER 1. Thissystem therefore requires at least 50% of the amount of total capital to be suppliedby TIER 1 capital. There are mixed result regarding relationship between capitalratios (CAPR) with credit risk. Berger and DeYoung (1997) suggest that capital ratioswill have negative relationship with credit risk. While Ahmad and Ariff (2007) finds apositive relationship between regulatory capital and credit risk in Japan, Malaysiaand Mexico.Figure 1: Three Types of Financing in Islamic BanksSize of the bank is expected to have either positive or negative relationship withcredit risk. Previous study done by Rahman and Shahimi (2010), Al-Smadi andAhmad (2009), Ahmad and Ariff (2007), Ahmad and Ahmad (2004) and Konishi and4
Yasuda (2004) reports mixed results. Size (TA) being measured by taking a naturallog of total assets of the banks. Theoretically, larger bank will be able to absorb morerisk taking activities compared to the smaller banks. Thus size of the banks mayincrease credit risk as larger banks are able to offer more loan compared to smallbanks.3.0 Data and methodology3.1 DataThe data for this paper is gathered from the financial statements and annual reportsof each Islamic bank in Malaysia. The data were gathered from Bankscopedatabases and website of each bank. As at June 2011, there are 17 full-fledgeIslamic banks in Malaysian banking system and 4 international Islamic banks. In thispaper, the observation focuses on the 17 full-fledge Islamic banks as data forinternational Islamic banks are not available in the Bankscope databases. Table 1below provide a list of Malaysian Islamic banks and year of establishment.Table 1: List of Full-fledge Islamic Banks in MalaysiaYear ofNoNameEstablishment1 Affin Islamic Bank Berhad (L) 20062 Al Rajhi Banking & Investment Corporation (Malaysia) Berhad (F) 20063 Alliance Islamic Bank Berhad (L) 20084 AmIslamic Bank Berhad (L) 20065 Asian Finance Bank Berhad (F) 20056 Bank Islam Malaysia Berhad (L) 19837 Bank Muamalat Malaysia Berhad (L) 19998 CIMB Islamic Bank Berhad (L) 20069 EONCAP Islamic Bank Berhad (L) 200610 Hong Leong Islamic Bank Berhad (L) 200511 HSBC Amanah Malaysia Berhad (F) 200412 Kuwait Finance House (Malaysia) Berhad (F) 200513 Maybank Islamic Berhad (L) 200814 OCBC Al-Amin Bank Berhad (F) 200815 Public Islamic Bank Berhad (L) 200816 RHB Islamic Bank Berhad (L) 200517 Standard Chartered Saadiq Berhad (F) 2008Source: Bank Negara Malaysia as at June 2011.Note: L = Local owned bankF = Foreign owned bankThis study employed unbalanced sample from the year 1995 to 2010 due to thedifferent in term of year establishment of each banks. Total number of observation is74.5
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Page 7 and 8: Table 2: Independent and Dependent
Page 9 and 10: 4.0 Analysis of Finding4.1 Correlat
Page 11 and 12: 6.0 ReferencesAHMAD, N. H. & AHMAD,

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