Protection of Bank's Wealth: How is Islamic Banks's Financial Performance Affected by Asset Quality and Operational Efficiency

Islamic banks are recognised as entities which support social objectives as well as economic development of the country. Financial performance of the global Islamic banking and finance has shown promising growth as equal to well-established conventional banks. The study aims to investigate the effect of asset quality and operational efficiency on the financial performance of Islamic banks in Malaysia. The study uses panel data analysis, whereby the annual reports of 16 Islamic banks in Malaysia are analysed over a ten-year period from 2010 to 2019. The independent variables of the study are asset quality and operational efficiency. The dependent variable of the study is financial performance proxied by Return on Asset (ROA) and Return on Equity (ROE). Multiple regression models consisting of random-effect model and fixed-effect model are employed to analyse the data of the study. The findings of the study show that both asset quality and operational efficiency of Islamic banks have a significant influence on the financial performance proxied by ROA and ROE. Hence, the findings of the study evince the importance of proper management practices in protecting the wealth, as well as the financial performance of the Islamic banks.