The Effect of Risks on Malaysian Banks Profitability: The Islamic and Conventional Banks

Abstract

The banking sector in Malaysia has seen substantial changes since the
global financial crisis, with a greater focus now being placed on the
value of risk management. The study aims to examine the impact of
internal and external bank risks on Malaysia’s profitability. Utilising
unbalanced panel data from 2010 to 2022, it includes 29 banks,
comprising 14 Islamic banks and 15 conventional banks. The random
effect model is found to be the most appropriate for the full samples and
Islamic banks, while the fixed effect model is the preferred choice for
conventional banks. Notably, Islamic banks tend to be less profitable
compared to conventional banks. Even though Islamic banks display
lower profitability compared to conventional banks, they have greater
resilience, and their profitability is less impacted during crisis periods
compared to conventional banks. Stronger resilience in Islamic and
conventional banks is important to ensure sustainability and
profitability.