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Research Proposal Mgt646 (5.0)
Research Proposal Mgt646 (5.0)
Research Proposal Mgt646 (5.0)
MGT646
TITLE:
GROUP MEMBERS:
NO NAME MATRIX.NO
LECTURER’S NAME:
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ACKNOWLEGMENT
First and foremost, we are very grateful to Allah the Almighty due to His blessing that it is
possible for us to finish up this assignment right on time. We had finally managed to
complete this assignment with great determination. All the time spent in doing research on
this topic were worth all the time and effort.
Furthermore, we would like to express our sincere gratitude to our family for their continuous
support. Thanks to them who have always prayed well for us to finish this assignment. We
would also like to thank our lecturer of Quantitative Research Method (MGT646), Dr. Dahlia
Ibrahim, who constantly motivated and helped us in improving and to have a better
understanding about this subject throughout the completion of this assignment. Lastly, not to
forget our classmates who were always ready to help whenever we have any questions
regarding this assignment.
We hope that this assignment is complete and fulfilled all the criteria’s
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TABLE OF CONTENTS
ACKNOWLEGMENT..........................................................................................................................2
TABLE OF CONTENTS......................................................................................................................3
ABSTRACT............................................................................................................................................4
1.0 INTRODUCTION...........................................................................................................................5
1.1 BACKGROUND OF STUDY.......................................................................................................6
1.2 PROBLEM STATEMENT............................................................................................................7
1.3 RESEARCH QUESTION..............................................................................................................8
1.4 RESEARCH OBJECTIVES..........................................................................................................9
1.5 SCOPE OF STUDY.......................................................................................................................9
1.6 LIMITATIONS OF STUDY.........................................................................................................9
2.0 INTRODUCTION.........................................................................................................................11
2.1 PROFITABILITY........................................................................................................................12
2.2 RETURN ON ASSET (ROA) AND PROFITABILITY.............................................................12
2.3 RETURN ON EQUITY (ROE) AND PROFITABILITY...........................................................12
2.4 NET PROFIT MARGIN (NPM) AND PROFITABILITY.........................................................13
2.5 LEVERAGE (LEV) AND PROFITABILITY............................................................................14
2.6 BANK SIZE (BS) AND PROFITABILITY................................................................................15
2.7 HYPOTHESES DEVELOPMENT.............................................................................................16
2.7.1 THE RELATIONSHIP BETWEEN RETURN ON ASSET (ROA) AND PROFITABILITY
....................................................................................................................................................16
2.7.2 THE RELATIONSHIP BETWEEN RETURN ON EQUITY (ROE) AND
PROFITABILITY..........................................................................................................................17
2.7.3 THE RELATIONSHIP BETWEEN NET PROFIT MARGIN (NPM) AND
PROFITABILITY..........................................................................................................................18
2.7.4 THE RELATIONSHIP BETWEEN LEVERAGE AND PROFITABILITY......................18
2.7.5 THE RELATIONSHIP BETWEEN BANK SIZE AND PROFITABILITY.......................19
2.8 FRAMEWORK...........................................................................................................................20
3.0 INTRODUCTION.........................................................................................................................21
3.1 TYPES OF RESEARCH.............................................................................................................21
3.2 RESEARCH DESIGN.................................................................................................................21
3.3 DATA AND SOURCE................................................................................................................22
3.4 VARIABLES MEASUREMENT................................................................................................22
3.5.1 DIAGNOSTIC CHECKS.....................................................................................................24
3.5.2 ORDINARY LEAST SQUARES (OLS).............................................................................25
4.0 REFERENCES...........................................................................................................................26
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ABSTRACT
Purpose – The purpose of this research is to investigate the profitability of RHB Islamic
Bank for the last 10 years performance. This study focuses on five internal factor which is
Return on Asset Return on Asset (ROA), Return on Equity (ROE)), Net Profit Margin
(NPM), Leverage (LEV) and also Bank Size (BS).
Findings – The finding that we conclude in this research is the relationship between
profitability and the other five internal factors is substantial correlation.
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CHAPTER 1
1.0 INTRODUCTION
Its operational efficiency is evaluated through its resources, such as its labor, capital,
and the materials use all of this thing are significant terms in measuring profitability in a
company. A company’s profitability will bring their own competitive value towards other
company. To know whether the company has a good performance, we can see it based on
their profitability, because it will show that the company has a better cost management,
higher profitability may give a good competitive advantage and a superior pricing power.
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1.1 BACKGROUND OF STUDY
The banking sector serves as the backbone of any economy, facilitating financial
transactions, fostering investment, and driving economic growth. Within this landscape, RHB
Islamic Bank stands out as a formidable player, navigating through dynamic market
conditions to establish itself as a leading financial institution in Malaysia and beyond. As the
banking industry continues to evolve amidst technological advancements and changing
consumer behaviours, understanding the profitability dynamics of RHB Islamic Bank
becomes increasingly vital. This study aims to an investigation into the profitability of RHB
Islamic Bank.
Research has indicated that certain characteristics of banks, such as equity financing,
liquidity. leverage, and bank size, as well as financial factors like Gross Domestic Product
(GDP) and inflation, play a significant role in influencing the financial performance of banks.
However, in the realm of Islamic banking, Return on Asset (ROA) Return on Equity (ROE)
and Net Profit Margin (NPM) are the prevailing indicators utilized to evaluate profitability, as
demonstrated by the studies conducted by, Ismail (2022), Iqram (2020) and K. Azar (2021)
Return on Asset (ROE) gauges the efficiency of generating profits from shareholders'
equity, while Return on Asset (ROA) assesses how effectively assets are leveraged to
generate income compliant with Sharia principles. These metrics have been widely embraced
by previous researchers based on their empirical findings. Occasionally, Net Profit Margin
(NPM) is also employed to gauge bank profitability, but it is less commonly used due to its
perceived limitations in explaining bank performance, as highlighted in studies by Zaid
(2023)
As a matter of fact, the issue on RHB IB to enhances due diligence following Bursa 's
reprimand, penalty: CEO. This move reflects a proactive stance by RHB Islamic Bank to
address any shortcomings highlighted by the regulatory authority and demonstrates a
commitment to maintaining trust and integrity in the financial market. Other than that,
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investigations have delved into how the size of a bank affects different financial indicators
such as net profit margins Net Profit Margin (NPM), return on assets Return on Asset (ROA),
and Return on Equity (ROE). The results have indicated a mix of positive and negative
connections, depending on the financial metric under examination and the study in question.
The notion of economies and dis-economies of scale is encapsulated by the concept of bank
size. Studies suggest that enlarging a bank can enhance its profitability to a certain extent.
This study aims to an investigation into the profitability of RHB Bank focus on a
decade of performance of its Islamic window. A critical measure of profitability success. The
primary goal of this study was to examine the effects of bank financial factors on financial
findings of RHB Bank during a 10-year period from 2014-2023. The dependent variable
under consideration was Profitability. The independent variable was Return on Asset Return
on Asset (Return on Asset (ROA), Return on Equity (ROE) and Net Profit Margin (NPM).
Thus, it leads to the question of what are the important factors that correlated RHB
Islamic Bank’s performance. Sofi, Farah Amalina (2017) did a study to recognize the
relationship between profitability and performance of RHB Islamic Bank Berhad. The results,
which were obtained using panel data from RHB Bank financial statement from year 2011 to
2015 available from RHB website, indicate that every internal factor has a significantly
proven effect on the bank profitability. Gaining knowledge of these factors can help the bank
to identify their main success factors. Studies have been conducted to demonstrate the factors
affecting bank’s performance. Research conducted by Raed Abueid (2022) demonstrates that
there is a useful connection among BSC (Balanced Scorecard) estimates, attributes of Shariah
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Compliance and Islamic banks' performance and tremendous improvement has been seen in
the Malaysian Islamic banks, which used both the BSC measures and Shariah Guidelines
Compliance.
The purpose of this study is to provide an analysis of the financial factors affecting
RHB Islamic Bank’s performance, highlighting factors such as return on asset, leverage, bank
size and et cetera. To measure RHB Islamic Bank’s performance, data analysis technique
must be applied as a guide for decision making and to give a better foundation for bank’s
financial performance and also to evaluate bank’s overall performance. The focus of this
research will be on the variables that influence RHB Islamic Bank’s performance specifically
focusing on these three main areas: 1) Return on Asset; 2) Return on Equity; 3) Net Profit
Margin; 4) Bank Size; and 5) Leverage. By doing this research, we might be able to gain a
better understanding of the bank’s financial dynamics and banks can make strategic decisions
that will boost their productivity, maintaining its position as one of the leading financial
institutions, thus helping the Malaysian economy.
I. Is there any relationship between Return on Asset (ROA) and Profitability of RHB
Islamic Bank?
II. Is there any relationship regarding Return on Equity (ROE) and Profitability of RHB
Islamic Bank?
III. Is there any relationship between Net Profit Margin (NPM) and Profitability in RHB
Islamic Bank?
IV. Is there any relationship between Leverage (LEV) and profitability in RHB Islamic
Bank?
V. Is there any relationship between Bank Size (BS) and profitability in RHB Islamic
bank?
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1.4 RESEARCH OBJECTIVES
In general, the primary objective of this study is to measure the percentage of Net Profit Margin
(NPM) of RHB from the year 2014 to 2023 through the following research objectives:
The analysis’ reliability is vulnerable to potential data voids, including insufficient customer
information or the absence of financial records. This restriction may make the researchers not
to be able to capture all the important aspects of their data, which may lead to them having a
hard time in drawing thorough conclusions on the bank’s profitability.
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1.7 SIGNIFICANCE OF STUDY
The goal of the business is to point out the factors that they could shape the success of RHB
Bank through comparison with studies that have gone before. Stepwise the investigation will
find and prove major rates of profitability by implementing a research model similar to that
of Gržeta, Žiković, and Tomas Žiković (2023) in their work concerning bank profitability
under a market framework. This approach allows for the complete analysis of the external
(market conditions and regulatory settings) as well as the internal (operational efficiency and
asset utilization) elements. By rebalancing their focus based on priority, top management and
shareholders of the bank can put the strategic plans in place which have greater impact on
profitability. This brings higher chance of success for the implementation of the strategies.
An implementation of the Smith-based approaches, which are identifying the advantages and
disadvantages of the different bank size. But the matrix would lead to the personalized
programs directed to increase the profitability of RHB Bank. To illustrate, the bank may
explore possible service revisions or expansion that are related to the characteristics that are
known to impact profitability. The application of this gained knowledge can effectively help
RHB Bank to choose those projects which have the potential to bring higher returns, thus
helping the implementation of more initiatives that are faster and cheaper for consideration
for future, leading to increased sustainability and profitability. The prescriptions supplied by
Johnson et al. (2019) who place operations efficiency at the core of their asset utilization and
profits have a good level of consistency with the approach.
Through the integration of various techniques, the study not only adds to the body of
knowledge about bank profitability but also offers RHB Bank practical insights that will help
it better traverse the complicated terrain of financial performance and stakeholder
expectations.
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CHAPTER 2
LITERATURE REVIEW
2.0 INTRODUCTION
There are few factors affecting profitability in a company. In order to have a sustain
profitability and a good performance, a good pricing strategy will also be considered.
Because a good pricing strategy will improve a balance of competitiveness that will impact
the company’s overall profitability. Profitability is the main indicator of financial
performance in Islamic banking. Profitability can be a signal for the investor to invest the
Islamic banking, because the higher the profitability of the company the higher the
performance earned from the company. There are few factors affecting the profitability of
Islamic banking, it can be from financial factors, operational factors and also market factors.
According to Islam and Nishiyama (2016) this study may provide an overview of the factors
influencing the profitability of Islamic banks in Malaysia from 2011 to 2020. Hassan and
Bashir (2003) used return on assets Return on Asset (ROA) and Return on Equity (ROE) as
overall success measures when discussing the profitability drivers of Islamic banking. This
study also has the same thought as the previous study that the return on assets Return on
Asset (ROA) is the primary metric used to evaluate the performance of banks, whether
Islamic or conventional Bashir (2003), Guru (2002), Naceur, (2003), Obamuyi, (2013) and
Yensu (2021).
According to Sofi (2017), increased leverage increases the risk of financial instability
even though it can increase returns on assets Return on Asset (ROA) if the bank is able to
create greater returns on its assets. This is since leverage makes the bank more susceptible to
unfavorable market circumstances and interest rate fluctuations. On the other hand, the bank's
operational effectiveness and capacity for generating income can be impacted by the total
assets, which in turn can affect profitability. Greater asset utilization and operational
efficiency may result in greater Return on Asset (ROA) for larger banks. The report does
point out, though, that there are a number of other variables, such as market conditions and
regulatory frameworks, that can affect the complicated link that exists between leverage,
asset size, and profitability.
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2.1 PROFITABILITY
2.2 RETURN ON ASSET (ROA) AND PROFITABILITY
Return on Asset (ROA) is used as an overall success measures when discussing about
the Islamic banking by Hassan and Bashir (2003). This study also finds that Return on Asset
(ROA) is the primary metric used to evaluate the profitability of a Banks, whether it is
Islamic nor Conventional. Return on Asset (ROA) of Islamic banks illustrates that all other
Islamic banks have a negative Return on Asset (ROA). It is a notable factor because in terms
of market competitiveness the Islamic banks are facing extreme pressure to maximize halal
profitability which seems quite difficult to achieve under the prevailing market conditions
when Islamic banks are compared to conventional banks in terms of market penetration and
profitability. (Girardone, Molyneux, and Gardener, 2007).
According to Van Horne and Wachowisz (2005), Return on Asset (ROA) can be
measured by deducted all the expenses, and taxes. A few studies show that an increase in
Return on Asset (ROA) ratio will bring a good performance in a Bank. The higher Return on
Asset (ROA) Ratio, the higher the profit obtained by the bank. If the lower the Return on
Asset (ROA) ratio, the lower the profit obtained by the bank. The bank performance will
depend on the Return on Asset (ROA), the lower the worst the performance can be (Hussain,
2011). Samad (2004) find out in his study that all the average of Return on Asset (ROA) and
Return on Equity (ROE) of Islamic banks are not significant difference between conventional
banks.
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shows that the bank is making good use of its equity to make profits.
Conversely, profitability is a more comprehensive metric that includes the bank's
capacity to make money off of its activities. It is impacted by a number of variables,
including as the bank's operational efficiency, cost control, and revenue creation. In order to
determine
RHB Islamic Bank's profitability, analysts must examine how well the bank can control
expenses and create revenue in order to produce a positive net income. According to Pandey
(2004), an organization's company size is determined by its total assets. The size of the
company is a key factor in determining the kind of connection it needs to improve its
performance and profitability.
Farah Nuramalina Binti Sofi (2017) explains that there are two categories of factors
that determine bank profit: internal and external factors. Factors impacted by management
choices and policy goals at the bank are known as internal determinants of bank profitability.
Different bank management goals, policies, choices, and actions all have an impact on
management effects, which are then reflected in variations in bank operating outcomes,
including profitability.
An analysis of RHB Islamic Bank's profitability in Malaysia, with a focus on Return
on Equity (ROE) and profitability in particular, will provide insightful information about the
bank's competitive situation and financial standing. A thorough examination of the bank's
profitability drivers and operational efficacy would be provided, providing insightful
information to all relevant parties, such as regulators, investors, and management of the bank.
Based on the research conducted in food and beverage sub sector company listed on
Indonesia Stock Exchange period 2016-2019, it can be concluded that Net Profit Margin
(NPM) has a significant positive effect toward Profit Growth (Novia Handayani and Srihadi
Winarningsih Zarkasyi, 2020). A firm’s performance depends on efficient management of
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economic resources and performance is usually a function of firm-specific economic factors
and macroeconomic factors, in other words, an efficient allocation, management and
manipulation of these factors is required to enhance profitability (Maity, 2019).
Maity (2019) present that firm specific (e.g. size of firm; age of firm; fixed asset
turnover) and macroeconomic variables (e.g. GDP; inflation; export intensity) made a
significant impact on profitability of this industry and the findings of the study should assist
managers as well as policy makers to frame sustainable policies of this mature industry.
Bougatef & Korbi (2018) reveal that net profit margins of Islamic banks may be explained for
the most part by risk aversion, inefficiency, diversification and economic conditions, and with
regard to conventional banks, their margins depend positively on market concentration and
risk aversion and negatively on specialization, diversification, inefficiency and liquidity.
Bansal (2018) reveal that interest expended interest earned (IEIE) and credit deposit
ratio (CRDR) reduced the profitability of private banks in India. IEIE, CRDR and quick ratio
(QR) reduced the profitability of public banks in India, while cash deposit ratio (CDR) and
Advances to Loan Funds (ALF) increased the effectiveness of public banks, and under the
total banks IEIE, CRDR reduced the profitability, on the other side, CDR, ALF and Total
Debt to Owners Fund (TDOF) increased the profitability of total banks in India, and finally
under the dependency of Return on Asset (ROA), CRDR and TDOF reduced the return of
private banks in India, while CDR, ALF and QR enhanced the profitability of private banks
(Bansal, 2018).
In other Islamic banking investment cases, the investment allows their shareholders to
share profit and losses together so that they can minimize the percentage of losses in a
company. Several empirical studies have shown a negative relationship between profitability
and leverage such as Titman and Wessels (1988), Rajan and Zingales (1995), Wald (1999),
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Booth et al. (2001), Frank and Goyal (2009), Qureshi (2009), Sheikh and Wang (2011),
Sheikh and Qureshi (2014). Leverage is one of the important terms that should have in a
company, because its role is to balancing the company growth and performance. It is also use
to warn the company’s
financial risk, and this will improve the financial management in having a sustainable
profitability and also compliance with the sharia principle.
One of the financial leverage advantages, is to promote all the stakeholder in investing
in that company. The customer can review the company leverage whether it is sustainable or
otherwise. The financial status can be observe based on their financial health and risk profile.
Excessive leverage can be determined as high level of debt, means that if a company are
facing excessive leverage the stakeholder is not encouraged to invest in that particular
company. The small number of financial leverages the better the status of financial health in
that company.
Further evidence is advanced by Smith’s (2018) research that while bank size
provides more scrutiny, regulatory oversight, and higher risks the ability to access greater
resources and options to diversify is not eliminated. This can be costly and less profitable,
especially during the times of economic turmoil or when regulations are in the process of
being changed. The study conducted by Johnson (2019) titled “Asset Utilization and
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Operational Efficiency: One of the key points which the “Case Study on RHB Bank” stresses
is that a considerable influence which may be placed on profitability is the extent to which
assets are used effectively. Although larger banks are more likely to accelerate operational
efficiency due to the large-scale and thus broaden their asset base, they are the ones who need
to improve their investments since they are the one who own these assets.
Davis (2020) argues in “Market Conditions and Return on Asset (ROA): The author
of “An Empirical Analysis of RHB Bank” came to the conclusion that the state of the
external market is one of the most important factors that determine the level of banks’ profits.
Acted as resilient to economic recessions, the bigger banks, on the other hand, maintain an
enhanced risk of fluctuations on the market that might ruin their income. The topic of Patel’s
(2021) article “Regulatory Environment and Return on Asset (ROA): “Regulations: RHB’s
Perspective” or “Regulations and the Bottom Line at RHB Bank” illustrates the impact of
regulations on the profitability of the bank. The financial advantages of the larger banks that
derive from the scale may be undermined by the higher compliance costs and regulatory
obstacles that are connected to their more complicated operations.
The operation efficiency and the financial statement review of RHB Bank are two
factors which can be discussed in the context of the link between Return on Asset (ROA) and
profitability. In Sofi’s (2017) outrageous statement, she makes the point that leverage and
total assets embodied by RHB Islamic Bank determine the bank’s profit. The bank’s degree
of asset usage can be influenced by leverage, which is the use of debt to finance activities.
When the bank manages to reach higher returns on its assets, the new leverage ratio will
affect the Return on Asset (ROA) positively. Nevertheless, things might not run smoothly in
the future. On the one hand, the total quantity of assets can affect the Return on Asset (ROA)
by affecting the breadth of the bank operation and its ability of operation assessment.
For example, of RHB Bank, the bank’s operational effectiveness and financial
performance are to be evaluated while knowing the relation between Return on Asset (ROA)
and profitability. Sofi (2017) specifies that the leverage and total asset of the RHB Bank are
directly associated with the bank’s revenue generation power. Leverage or the propensity for
banks to use debt in order to execute their course of activities can affect the efficiency of
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bank assets. If the bank is able to increase its returns on assets, the higher level of leverage
will cause the Return on Asset (ROA) to be higher; however, it will also increase the danger
of financial instability. Unlike wise, aggregate total assets can influence Return on Asset
(ROA) scale and revenue-generating capacity of the institution.
The opportunity to do better Is actually a solution for higher Return on Asset (ROA) if
the bank manages to produce higher returns on its assets, as a study by Smith (2018) shows.
Smith does as well accept that banks are indeed exposed to greater risks of financial
instability for by engaging in the marginal advantage with changing interest rates and the
state of economy. This indicates that the leverage has a pure advantage of the boost in the
return on assets, nevertheless, without a doubt, it leads to the same level of risk.
As Johnson (2019) study shows, the size of the bank’s total assets can significantly
influence the Return on Asset (ROA) by either making its operations huge or low and so, the
amount of money it can generate. Beyond that, reducing dead weight and working more
efficiently could generate better Return on Asset (ROA) in banks with higher total assets. The
correlation is in line with a fact that the total asset size’s influence on the return on equity
may be through its effect on the bank’s ability to generate income and its efficiency.
The study by Davis (2020) shows that the linkage between Return on Asset (ROA)
and profitability can also be Influenced by external market factors such as inflation and
economic growth. The outlook for the bank’s profitability as well as its ability to generate the
desired yields on their assets will both be dependent on market conditions. This is the more
concise summation of the chapter and illustrates the association between Return on Asset
(ROA) and profitability, where the performance of a company is not solely dependent on the
internal factors.
The second article that, like the first one, Patel (2021) talks about how the regulatory
environment can affect the relationship between Return on Asset (ROA) and profitability.
Management challenges can arise due to regulatory reforms because they can affect the
bank’s operational effectiveness, leverage, asset utilization ratio and influence Return on
Asset (ROA), and ultimately bank profitability. A regulatory environment is pointing out the
need to take into consideration the regulatory environment in the case of the relationship
between Return on Asset (ROA) and profitability.
In a nutshell, the correlation between Profitability and Return on Asset (ROA) is
positive, whereby companies with higher Ratio of Assets to Capital typically witness higher
Profitability. Nevertheless, the relationship between high leverage and asset size is dynamic
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and it can be modulated because of variables including leverage, asset size, market conditions
and regulatory environment.
H1: There Is Positive Relationship Between Return on Asset (ROA) And Profitability
This study is done by Kabir and Worthington (2017) that says bank’s concentration is
negatively related to Return on Equity (ROE). The result shows that lack of competition in
the GCC banking sector will reduced return on equity holder. Islamic banks’ Return on
Equity (ROE) is much lower than conventional banks, showing that higher equity buffer of
Islamic banks deteriorates their profitability. Loans to deposit ratio also negatively affect
banks Return on Equity (ROE) and profitability. In other words, expansion of loans (LTD)
reduces banks’ Return on Equity (ROE). This finding supports our earlier finding that Return
on Equity (ROE) negatively affects profitability according to Dimitrios (2016) and Sobarsyah
(2020). According to Omar and Kabir (2023), they observe consistent results that all three
dependent variables negatively impact Return on Equity (ROE) of Islamic banks. This
finding suggests that an augmented capital buffer of Islamic banks reduces their Return on
Equity (ROE).
H2: There is Negative relationship between Return on Equity (ROE) and Profitability
Wasiuzzaman and Nair (2013) in their comparative study between Islamic and
conventional banks' performance in Malaysia established that bank size is a key determinant
of financial performance in both Islamic and conventional banks. This finding was also
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confirmed by Awo and Akotey (2019) in Ghana who observed a statistically significant effect
of bank size on financial performance.
H3: There is a positive relationship between Net Profit Margin (NPM) and Profitability.
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and risk profile. Their results support the theory that regulation should not be designed to
apply the same rules to all banks but should be adapted to the characteristics and risk profiles
of individual banks. Consistent with the findings of Pasiouras (2009) and Barth (2013), they
also emphasize that imposed restrictions on activities and banking operations reduce and limit
the diversity of income streams, which is reflected in decreased banking efficiency.
H5: There is a positive relationship between Bank Size (BS) and Profitability.
2.8 FRAMEWORK
The theoretical framework is essential to this study since it tries to clarify the connections
between different factors. Any components that have values that are conflicting or fluctuating
are considered variables in this context. The two main categories of variables in the
theoretical framework dependent and independent variables are used to determine how they
affect one another.
(IV)
Return on Asset (ROA)
This visual representation serves as a vital Return on Asset (ROA) map for the study,
illustrating the interplay between the dependent and independent variables. It provides a clear
overview of how these variables are connected and how they impact each other within the
context of the research, establishing a robust framework for analysis and interpretation.
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driving forces, are meticulously studied to discern their influence on the dependent variables.
Through systematic analysis, researchers can unravel the nuances of these relationships,
identifying causal links and uncovering underlying patterns that contribute to a deeper
understanding of the subject matter. Such clarity empowers researchers to make informed
decisions and draw meaningful conclusions based on the observed interactions within the
framework.
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CHAPTER 3
3.0 INTRODUCTION
The research strategy employed to carry out the study is covered in this chapter. Approaches
for data processing and analysis are addressed in detail in the end, along with the sampling
technique, data and data sources, and data analysis tools. The methodology used in this study
is based on ratios. Ratio is an assumption that sub-component indicators affect synthetic
profitability ratios (Czech 2011-2015). Meanwhile, research design is the arrangement of
conditions for data collection and analysis in a way that seeks to combine relevance to the
research purpose with economy of method (Kothari, 2004). It was essentially an outline for
carrying out the study to address the current situation.
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Furthermore, the research method encompasses comprehensive. diagnostic tests to validate
the regression model's assumptions. These tests include the Durbin-Watson test for
autocorrelation, the Jarque-Bera test for normality, and the assessment of multicollinearity
through the Variance Inflation Factor. Through this meticulous process, the study ensures the
reliability and validity of its findings, paving the way for insightful interpretations of the
identified variable relationships within the theoretical framework.
Return on an Asset (ROA) is the main indicator that we use to measure financial
performance of the company taking the net income and total assets as the reactions. In a
different way, Return on Asset (ROA) is used to create the profit and also, to assess the
companies’ profitability and efficiency.
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VARIABLES DATA DESCRIPTION SOURCES
24
+ Investment Securities
+Financing Facilities + Other
Assets
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3.5 DATA ANALYSIS METHOD
In our work, we applied the Variance Inflation Factor (VIF) to ascertain if there is
multicollinearity among the independent variables that we have included in our time-series
regression model. Collinearity is the junior word when the coefficients of two or more
independent variables are so highly correlated. It may result in failure to follow the individual
effect of each factor on the dependent variable; thus, it is not an effective measure. This is
most likely to result in wrong interpretations of the results. The VIF for each independent
variable was calculated, and we discovered that when the values were greater than 1,
especially significantly higher values, multicollinearity was present.
In our study, we used the Durbin-Watson test to determine if the residuals of our time-
series regression model have an autocorrelation. Autocorrelation is the phenomenon which
happens to the residuals, that they have a pattern of familiar correlation with their own past
values (have been happening before). Such a thing suggests that we have missed temporal
dependencies in our data which our model has not accounted for. This offered us test stats. A
value close to 2 means no autocorrelation, while high or low value give positive or negative
autocorrelation respectively.
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III. Jarque-Bera Test
Besides the spherical and Jarque-Bera test, we also used the Jarque-Bera test to
evaluate the normality of the residuals in our time series regressions. Normality is a key
assumption, because it guarantees that the residuals are distributed according to the normal
distribution. The failure of Jarque-Bera test to measure the fit between the residuals and
normal distribution suggests that the residuals do not follow normal distribution. In fact, this
fact is a crucial part of any future analysis, because, otherwise, the specific characteristics of
the non-normal residuals will influence our statistical inferences.
Research Hypothesis
and Profitability.
and Profitability
profitability
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4.0 REFERENCES
Leverage and Size (Total Asset). The Munich Personal RePEc Archive (MPRA)
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