Impact of Macroeconomic Variables On Islamic Banks Profitability

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Impact of Macroeconomic Variables on Islamic Banks Proﬁtability
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Journal of Accounting and Applied Business Research, Vol. 1, No. 2, 2018
Impact of Macroeconomic Variables on Islamic Banks Profitability
Qaisar Ali*
Faculty of Islamic Economics and Finance (FEKIM)
Universiti Islam Sultan Sharif Ali (UNISSA), Bandar Seri Begawan, Brunei
Email: aliqaisar21@gmail.com
*Corresponding author
Selamah Maamor
Islamic Business School (IBS)
Universiti Utara Malaysia (UUM), Sintok, Kedah Darulaman, Malaysia
Hakimah Yaacob
Muhammad Usman Tariq Gill

Abstract: The main objective of this study is to understand and determine the impact of macroeconomic
variables on Islamic banks’ profitability in Brunei. The impact of GDP growth rate, inflation, interest rate,
exchange rate, oil prices, competition and money supply on Bank Islam Brunei Darussalam (BIBD) profitability
was determined from the year 2012 to the year 2016. The secondary data was obtained from DEPD, AMBD and
IMF annual reports. The collected data was analysed using Stata 15. The fixed effects panel regression technique
was adopted to measure the impact of each variable on Islamic banks’ profitability. The findings revealed that
GDP growth rate, inflation, exchange rate, oil prices and money supply have a significant positive impact on
profitability. The findings further revealed that oil prices, GDP and inflation were the most significant and
exchange rate and money supply were the least significant determinants of profitability. The findings suggest the
regulators and policy makers to discover alternative resources to rejuvenate economic and financial system. Islamic
bankers may revamp its marketing strategies to reduce the intensity of macroeconomic variables. This study has
vigorously contributed in the existing literature of single country analysis of Islamic banks particularly in the
context of Brunei.
Keywords: Islamic banks, Brunei, profitability, macroeconomic variables, panel data analysis
Biographical notes:
Qaisar Ali is a research candidate in the Faculty of Islamic Economics and Finance (FEKIM) at Universiti Islam
Sultan Sharif Ali (UNISSA), Brunei Darussalam. His research interests include Islamic banking and finance,
Islamic finance consumer behaviour and human resource.
Selamah Maamor is an associate professor in the department of Islamic Business School (IBS) at Universiti Utara
Malaysia (UUM) Kedah. She specializes in Islamic Economics and has published various research papers on
Islamic Economics. Her research interests include Islamic microfinance, Islamic Economics and Management of
spirituality activities.
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Copyright © 2018 Al-Sham Post Publishing (APP)
Hakimah Yaacob is a senior assistant professor in the faculty of Islamic Economics and Finance (FEKIM) at
Universiti Islam Sultan Sharif Ali (UNISSA), Brunei Darussalam. She has published various research papers on
Victimology, Islamic finance, Islamic banking, takaful and capital market.
Muhammad Usman Tariq Gill is a research candidate in the faculty of Islamic Economics and Finance
(UNISSA) at Universiti Islam Sultan Sharif Ali (UNISSA), Brunei Darussalam. His Research interests include
Islamic finance, Islamic Economics and Islamic stock Market.
1. Introduction
Islamic finance plays a leading role in Brunei’s banking industry by holding the total assets
of BND9.5 billion and deposits of BND7.34 billion which accounts for 59 per cent of total
market share in the year 2017 (BIBD annual report 2016). The first Islamic bank in Brunei
Darussalam was established in 1992 and was named Tabung Amanah Islam (TAIB) (Shahid
and Kain, 2001). Brunei has a dual banking system, conventional and Islamic banking operates
side by side to cater the financial needs of its versatile multiracial community. Currently, there
are two Islamic and six conventional banks in Brunei. Bank Islam Brunei Darussalam (BIBD)
is a fully fledged Islamic bank whereas; TAIB partially functions as a retail bank.
Islamic banking is an organised and discrete banking system which operates under
predominant Shariah laws. Islamic banking comprised of two fundamental instruments of risk
and returns sharing. Shahinpoor (2009) stated that Islamic banking principles suggest that the
money should exclusively be manipulated for the exchange of goods and services. Islamic
banking is strictly prohibited to use the money for any illegal activity such as interest (riba),
gambling (maisir) and speculative trading (gharar). The objective to establish business is to gain
profit; therefore profitability is a fundamental goal of any business entity. Profitability is
defined as a circumstances resulting in financial gain or profit through the exchange of potential
risk. In the absence of sufficient profitability corporates do not manage to survive in the long
run. Therefore, to ensure organizational sustainable existence it is mandatory to measure present
and past profitability and subsequently forecast future profitability (Alareeni and Branson,
2013; Husain et al, 2015).
Similarly, Profitability is a significant component of banking world as profitability

contributes to sustain destructive macroeconomic financial tremors through absorbing and
financially contributing in stabilizing the financial system. Based on these characteristics of
profitability, it is contemporary to examine and analyse the determinants impacting the
profitability of banks. Islamic banking is not limited to generate the profitable outcome for its
owners; it also aims to generate a satisfactory financial benefit for the depositors (Masood and
Ashraf, 2012). However, macroeconomic factors are beyond the control of banks and in certain
circumstances Islamic banking is unable to produce sufficient financial outcome for its
customers. Understanding the influence of macroeconomic factors is significant from
customers’ perspective to provide an estimation of expected profits. This study will enable the
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Islamic bank customers to understand, analyse and examine the external factors influencing
Islamic banks profitability.
The relationship between profitability and banking industry is substantially significant due
to the dependence of country’s economy on sound and steady banking sector (Albertazzi and
Gambacorta, 2009). It is essential to analyse the determinants of profitability in banking sector
due to country’s economic system dependence on the financial system. The banks’ profitability
is significant at both micro and macro stages of the economy as the increase in banking sector
shares lifts the overall financial system. A steady micro and macroeconomic banking sector
indicate the economic growth of a country. At the micro level, sound profits signify the crucial
state of callous resources and indicate funds accessibility for a financial institution.
The achievement of a profitable condition is not merely a choice to ensure financial gains
but also a predictability of flourish in banking world to survive in the presence of fierce
competition which has currently mounted in financial markets. As stated above a profitable
financial institution at micro level represents the availability of resources and funds, however,
the macro factors of gross domestic product (GDP), interest rate, inflation, money supply,
competition and exchange rate may result in lack of resources and funds (Aburime, 2009). The
empirically surveyed literature appears to be lacking to explain the impact of macroeconomic
variables on Islamic banks profitability especially in the context of Brunei Darussalam.
Consequently, the present study aims to understand, analyse and examine the impact of
macroeconomic variables on the profitability of Islamic banks in Brunei. This research further
aims to identify the most significant macroeconomic variable for Islamic banks impacting
Islamic banks profitability and the broader objectives of this research include assisting
managers and policy makers to improve banks’ performance by minimizing the impact of
macroeconomic variables.
The rest of paper is arranged as follows; section 2 empirically outlines literature review.
Section 3 describes the variables and methodology deployed in this study. Section 4 illustrates
the findings and discussion of the study and the section 5 concludes this research.
2. Literature review
Yousafi (2016) suggested that profitability variable characterized by two alternate
methods: profits to assets ratio, return on assets (ROA) and profits to equity ratio, return on
equity (ROE). Whereas, ROA indicates bank’s ability to generate profits from its assets and
ROE signifies return to shareholders on their equity which is equal to ROA times the t Bank-
specific profitability determinants. Banks profitability is influenced by two variables; micro and
macro variables. Micro variables such as bank size, capitalization, liquidity, asset quality,
capital ratios and collateral security are controlled variables whereas macro variables such as
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GDP, interest rate, inflation, exchange rates, money supply, competition and hydrocarbons
prices are perceived to be beyond the control of financial institutions (Nahar and Sarker, 2016).
There are a number of studies exist in literature analysing the impact of banks’ internal
variables and characteristics on Islamic banks profitability (Asutay and Izhar, 2007; Teng,
2012; Wasiuzzaman and Gunasegavan, 2013). To the best of researcher’s knowledge, the
literature contains a handful studies on the impact of macroeconomic variables and does not
contain any formal study measuring the impact of macroeconomic variables on Brunei’s Islamic
banks’ profitability. Hence, this study focuses to understand and analyse the impact of below
outlined variables on the profitability of Bruneian Islamic banks.
2.1 GDP Growth Rate

The gross domestic product is considered as one of the most significant macroeconomic
variables to represent profitability. Noor and Hayati (2012) investigated the efficiency of 78
Islamic banks in 25 countries and revealed that GDP along with other macroeconomic variables
positively impact Islamic banks efficiency. Yousafi (2016) analysed the impact of
macroeconomic and structural variables on Jordanian Islamic banks and revealed that GDP has
a positive impact on Islamic banks performance. A versatile study conducted by Alharbi (2017)
analysed the impact of GDP on the profitability of Islamic banks around the globe and found
that profitability is positively affected by GDP. Conforming to the findings of past studies and
variance in the scholars’ opinion, present study aims to investigate the effect of GDP growth
rate on Islamic banks’ profitability postulating following hypothesis;
H1: There is a significant positive relationship between GDP growth rate and Islamic banks’
profitability.
2.2 Inflation
The literature has profoundly discussed the significance of inflation especially its
relationship with banks performance. Inflation not only impacts corporates’ pricing but also has
significant influence on bank customers and financial resources. The higher inflation rate drives
corporates to increase the prices of their products as it facilitates corporates to avoid suffering
a drop in demand of their output (Driver and Windram 2007). The study of Izhar and Asutay
(2007) revealed that the impact of inflation on bank’s profitability was first described by Revell
(1980), who found that inflation is the most significant factor in causing disparities in banks’
profitability. Wasiuzzaman and Ahmed Tarmizi (2010), Bashir (2003), Athanasoglou et al
(2005), Vong and Chang (2006), Kunt and Huizinga (2000) and Haron (2004) studies found
that inflation positively impacts Islamic banks profitability. However, Sriari (2009) and Naceur
(2003) denied the existence of any significant relationship between Islamic banks’ profitability
and inflation. Pertaining to the findings of past studies and variance in the scholars’ opinion,
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present study aims to investigate the effect of inflation on Islamic banks’ profitability
postulating following hypothesis;
H2: There is a significant positive relationship between inflation and Islamic banks’
profitability.
2.3 Interest Rate
The amount/rate charged by the lenders as a compensation for the loss of assets or capital
use is known as the interest rate. Interest rate is the most significant factor affecting the demand
and supply of bank credit. Bashir (2003) studied the impact of bank characteristics on the
overall performance of Islamic banks and found that favourable macroeconomic conditions
such as lower interest rate increases Islamic banks profitability. Kader and Leong (2009)
analysed the impact of interest rate on Islamic and conventional banks financing in Malaysia
and found that interest rate is positively associated with Islamic banks credit but negatively
related to the conventional bank financing. Similarly, Adebola et al (2011) found that interest
rate negatively impacts on Islamic banks financing in Malaysia. Anber and Alper (2011) studied
the impact of bank specific and macroeconomic variables on Turkish Islamic banks and found
that non-interest income has a positive and significant impact on profitability. Nahar and Sarker
(2016) in a cross country analysis found that Islamic banks financing is positively affected by
the interest rate. Habib and Islam (2017) studied the impact of macroeconomic factors on
Islamic banks stock share and found that interest rate significantly influences the stock market.
Based on the findings of past studies and variance in the scholars’ opinion, present study aims
to investigate the effect of interest rate on Islamic banks’ profitability postulating following
hypothesis;
H3: There is a significant negative relationship between interest rate and Islamic banks’
profitability.
2.4 Exchange Rate
Yang and Zeng (2014) defined that “the exchange rate measures the relative price of non-
tradable goods in terms of tradable goods”. Iriani and Yuliadi (2015) studied the impact of
macro variables on non-performance financing of Islamic banks in Indonesia and revealed that
exchange rate positively impacts the nonperforming financing. Whereas, Nahar and Sarker
(2016) study contradicted these findings and found that exchange rate negatively impacts the
financing capability of Islamic banks. Javaid and Alalawi (2017) revealed that exchange rate
along with other macroeconomic variables is significant in determining the profitability of
Saudi Arabian banks. Similarly, Habib and Islam (2017) found that Islamic banks stock market
significantly influences due to interest and exchange rate in India. Based on the findings of past
studies and variance in the scholars’ opinion, present study aims to investigate the effect of
exchange rate on Islamic banks’ profitability postulating following hypothesis;
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H4: There is a significant positive relationship between exchange rate and Islamic banks
profitability.
2.5 Oil prices
Oil is the prominent source of revenue for Middle Eastern and North African (MENA)
countries and considered as the tipping points of Islamic banks growth in Gulf Cooperation
Council (GCC) (Alqahatani, 2017). The countries highly dependent on oil and gas are facing
further challenges in economic growth as the oil and gas prices are expected to further fall 70
per cent since mid- 2014 (Standard and Poor's, 2016). Brunei is no exception to it as the fall in
oil and gas prices will engender challenges in economic growth since 97% of its economy is
dependent on oil and gas exports (Ali and Swee, 2014). The shrink in economic growth will
result in less volatile market, which may minimise Islamic banks profitability. Said (2015)
analyzed the influence of oil prices on Islamic banks efficiency and revealed that fluctuations
in oil prices do not have a direct influence on Islamic banks efficiency in MENA. The impact
of fluctuations in oil prices on Islamic banks’ profitability is determined deploying following
hypothesis.
H5: There is a significant positive relationship between oil prices and Islamic banks
profitability.
2.6 Competition
Competition is described as a significant determinant of bank’s profitability. According
to the traditional approach, the impact of a new entrant on the profitability is difficult to describe
or measure. Heggested and Mingo (1976) revealed that the level of monopoly may influence
the competition; the higher monopoly level depicts greater profitability as it enables corporates
to gain a control over prices and services regulation. Whalen (1988) findings revealed that the
entry of new entrants will not impact the profitability of existing banks when the banking
industry is in a competitive state. The following hypothesis analyses the impact of competition
on profitability.
H6; There is a significant positive relationship between competition and Islamic banks
profitability.
2.7 Money Supply
Bourke (1989) determined the effect of money supply and profitability through the annual
growth of money supply as a proxy for growth in the market and found the existence of a
positive relationship between market expansion and banks’ profitability. The findings of Haron
and Azmi (2004) were also consistent with Bourke (1989) study as their findings confirmed the
positive relationship between money supply and Islamic banks profit. Iriani and Yuliadi (2015)
found that money supply along with other macroeconomic variables significantly impact the
profitability of non-performing financing of Islamic banks in Indonesia. Arif and Rosly (2011)
6
found that Islamic banks practices are to intensify credit and operate within fractional policies
of the banking system which allow them to generate deposits and money supply. Consequently,
tightening or relaxation of the money supply by the central bank may affect the profitability of
Islamic banks. Pertaining to the literature review, this study aims to analyse the impact of
money supply on Islamic banks’ profitability postulating following hypothesis;
H7: There is a significant positive relationship between money supply and Islamic banks
profitability.
3. Methodology
3.1 Data
To achieve the objectives of this study the time series data from the year 2012 to 2016
was collected from multiple sources. In this study, one Islamic bank (BIBD) is selected, as it is
the only fully fledged Islamic bank in Brunei and TAIB was left out, as its functions are limited.
The data on ROA and ROE was obtained from BIBD’s and Authoriti Monetari Brunei
Darussalam (AMBD) annual reports. AMBD is the regulatory authority and consistently
updates the financial reports and contain the relative financial information of the financial
institutions in Brunei. The GDP, Inflation, interest rate, exchange rate, oil prices, competition,
and money supply data was collected from the yearly reports of Brunei’s statistical department
(Department of Economic Planning and Development, DEPD) and International Monetary
Fund (IMF) country reports.
The study deployed panel regression techniques to analyse the macroeconomic

determinants of Islamic banks’ profitability. Panel data techniques have advantages in
providing explanatory data, which has an ability to provide cross sectional information. Panel
data describes variance in individual variables over the specific periods, which assist to record
dynamic adjustment. Overall, panel model simultaneously helps to identify the variances in the
characteristics of a variable. Another crucial justification to deploy panel regression model is
that it provides a degree of freedom and efficiency, which permits to study the impact of
macroeconomic variables on the developments in the financial industry. This study adopted
fixed effects panel regression model as the other technique, random effects estimation require
various cross sections to be greater than coefficients’ for between estimators for an estimate of
random effect innovation.
3.2 Measurement of Variables

Profitability is the dependent variable in this study; it is measured by two dummy variables
of ROA and ROE.
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3.3 Return on Assets (ROA)

ROA indicates the capacity of a corporate to attain deposits at minimal cost and generate
sufficient profits through investment. ROA ratio measures the generation of net income on per
dollar assets. A higher ROA ratio represents higher profitability of a bank (Kumbirai and Webb,
2010). ROA is widely used as a dummy variable to measure banks’ profitability. Peterson and
Schoeman (2008) found that ROA ratio is one of the most significant tools to indicate the
operational efficiency of a bank.
3.4 Return on Equity (ROE)

ROE represents the rate of return to shareholders on each dollar of equity invested in the
bank (Kumbirai and Webb, 2010). It is a basic tool to indicate a bank’s potential growth and
profitability. ROA is calculated by dividing net profit after tax by total equity, whereas, total
equity is the sum of total capital and reserves (Siraj and Pillai, 2012). Hence, a higher ratio
represents a better use of capital.
3.5 Model Specification

To determine the impact of macroeconomic variables on Islamic banks profitability
following regression equation is adopted.
ROAit = α + β1 (GDPit) + β2 (INFit) + β3 (IRit) + β4 (ERit) + β5 (OPit) + β6 (CMPit) + β7

(MSit) + έ
ROEit = α + β1 (GDPit) + β2 (INFit) + β3 (IRit) + β4 (ERit) + β5 (OPit) + β6 (CMPit) + β7
(MSit) + έ
Whereas, ROA and ROE in above equations represent return over assets and return over
equity, i refers to individual bank; t represents year. IR, GDP, INF, ER, OP, CMP, and MS
represent macroeconomic variables of interest rate, gross domestic product, inflation, exchange
rate, oil prices, competition and money supply and έ represents error term.
4. Empirical Findings and Discussion

4.1 Statistical Findings
The statistical findings of the variables deployed in this are presented below in table 1.
Table 1: Statistical detail of the variables
Variables 2012 2013 2014 2015 2016
ROA (%) 2.20 1.40 1.50 1.80 1.5
ROE (%) 10.20 5.60 7.50 8.70 9.8
GDP (BND/year) 59,535.5 55,733.1 52,748.0 42,684.3 37,257.0
INF +0.2% +0.4% -0.2% +0.4% +0.7%
IR 5.50 5.50 5.50 5.50 5.50
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ER (1USD to 1BND) 1.22 1.27 1.32 1.41 1.38

OP (BND) 16.43b 14.95b 13.93b 10.11b 8.2b
CMP 0.00 0.00 0.00 0.00 0.00
MS (BND) 13.96b 14.2b 14.62b 14.36b 14.58b
Source: DEPD, AMBD, IMF
Table 1 contains the statistics of ROA, ROE and macroeconomic variables deployed in
this study. The 1st and 2nd rows of table 1 contain statistics of ROA before taxes and ROE
after taxes. Net profit growth was BND97.9m in the year 2012 with an annual increase of
42.8%, 25% and 34.8% in ROA and ROE and net profit. However, it substantially dropped to
BND59.7m in the year 2013 with an annual reduction of 39.01%, 36.35% and 45.09% in net
profit, ROA and ROE. It revived in the following year of 2014 and became BND83.9m with
40.53%, 7.14%, 33.92% increase in net profit, ROA and ROE. The net profit continued
growing in the years 2015 and 2016 to BND100.6m and BND122.1m with annual growth of
19.90% and 21.37%. ROA increased 20% in the year 2015 and decreased 16.6% in the year
2016. ROE increased 16% and 12.64% in the years 2015 and 2016.
The 3rd row depicts the per capita growth rate of gross domestic product (GDP) in
Brunei. The row depicts that per capita GDP increased 0.9% in the year 2012 and it decreased
6.3%, 5.3%, 19.07%, and 12.7% in the subsequent years of 2013, 2014, 2015 and 2016. The
4th row represents inflation rate, the inflation rate increased 0.2 % to 0.4% in in the years
2012 and 2013. However, it decreased 0.2% in the year 2014 and increased again by 0.4% in
the year 2015 and continued increasing by 0.7% until the end of year 2016.
It can be noted from the 5th row that banks’ interest rate was constant at 5.50 per cent
from the year 2012 to 2016. The 6th row represents Brunei Dollar’s exchange rate compared
to United States Dollar, the row indicates that exchange rate dropped in the year 2012 by
6.1%. However, the exchange rate continued improving by 4.09%, 3.93% and 6.81% in the
years 2013, 2014 and 2015 and eventually decreased by 2.12% in the year 2016. The 7th row
of the table indicates the oil prices measured in billion Brunei Dollars, the oil prices increased
by 0.02% in the year 2012 which considerably dropped by 9% in the subsequent year 2013.
The prices continued falling in the following years 2014, 2015 and 2016 by 6.84%, 27.355
and 18.13% respectively. The 8th row of table 1 shows the competition level among Islamic
banks in Brunei. The absence of any new Islamic bank entrant resulted in zero competition
for BIBD from the year 2012 to the year 2016. The last row of table 1 shows the money
supply, it grew by 0.9%, 1.7% and 2.9% in the years 2012, 2013 and 2014. The money supply
decreased by 1.7% in the year 2015 and increased again by 1.5% in the year 2016.
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4.2 Descriptive Findings

The descriptive statistics of dependent and independent variables of this study are presented
in table 2.
Table 2: Descriptive analysis
Variables Mean Median Maximum Minimum S.D

ROA 1.680 1.500 2.2 1.4 0.3271
ROE 8.360 8.700 10.2 5.6 1.8663
GDP 49611.6 52848.1 59535.5 37257.0 9314.7
INF 0.380 0.400 0.7 0.2 0.2049
IR 5.500 5.500 5.5 5.5 0.0000
ER 1.32 1.32 1.41 1.22 0.07778
OP 12.448 13.930 16.4 8.2 2.7844
CMP 0.00 0.00 0 0 0.000
MS 14.344 14.360 14.623 13.961 0.2740
The table 2 shows that dependent variables of ROA and ROE mean are 1.680 and 8.360,
the standard deviation values of these variables are .3271 and 1.8663. Pertaining to
independent variables GDP, Inflation, interest rate, exchange rate, oil prices, competition and
money supply have means of 49611.6, 0.380, 5.500, 1.32, 12.448 and 14.344 and standard
deviation errors are 9314.7076, .2049, .0000, .07778, .0000 and .2740 respectively.
4.3 Panel Regression Analysis

The results of panel regression analysis are presented in table 3 and 4.
Table 3: Panel regression analysis: ROA on selected variables
Dependent variable: ROA

Independent Variables Coefficient S.E t-statistics Prob.
GDP 1.078447 1.007411 5.842420 0.000 ***
INF 1.015684 1.193860 1.824011 0.000 ***
ER 1.060315 1.072063 1.747652 0.0211 ***
OP 1.015138 1.008087 1.852777 0.0043 ***
MS (OEDR) 1.074354 1.01421 2.66524 0.000 ***
Effects Specification
Cross section fixed (dummy variables)
R square 0.744511 Mean dependent Var. 1.680
Adjusted R square 0.72554 S.D. dependent Var. .3271
S.E of regression 0.062552 Akaike info criterion -2.22997
Sum squared residual 0.594423 Schwarz criterion -2.68928
Long likelihood 149.2205 Hannan-Quinn criteria -2.87770
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F-statistics 17.6296 Durbin-Watson stat 2.299133

Prob. (F-statistics) 0.00000
***represents significance at 1%, ** at 5% and *10% respectively
Table 4: Panel regression analysis: ROE on selected variables

Dependent variable: ROE
Independent Variables Coefficient S.E t-statistics Prob.
GDP 5.168424 4.797411 5.82450 0.000 ***
INF 5.934571 5.283420 4.826099 0.000 ***
ER 5.060315 5.072063 5.739872 0.0211 **
OP 5.015138 5.008087 4.846725 0.0043 ***
MS 5.074354 5.01421 2.627456 0.000 ***
Effects Specification
Cross section fixed (dummy variables)
R square 0.80409 Mean dependent Var. 8.360
Adjusted R square 0.79554 S.D. dependent Var. 1.8663
S.E of regression 0.261442 Akaike info criterion -2.43567
Sum squared residual 0.593499 Schwarz criterion -5.50354
Long likelihood 148.2351 Hannan-Quinn criteria -5.87770
F-statistics 80.0045 Durbin-Watson stat 5.235685
Prob. (F-statistics) 0.00000
***represents significance at 1%, ** at 5% and *10% respectively
The panel regression analysis results presented in table 3 and 4 depicted that values of R-
square are equal to 74.45% (.7445) 80.40% (.8040) which proved that the proposed model, to
predict Islamic banks’ profitability is the best fit as R-square values are greater than threshold
values of 60% (.60). Pearson correlation test was conducted to detect the problem of
multicollinearity in the proposed model as the variables of interest rate (IR) and competition
(CMP) was found constant and were dropped from further analysis. The final model measured
the impact of GDP growth rate, inflation, exchange rate, oil prices and money supply on
profitability. The F-statistics were found significant at 1% level in both models which proved
that all independent variables (GDP growth rate, inflation, exchange rate, oil prices and money
supply) collectively influence the dependent variables.
The coefficient and t values of GDP presented in table 3 and 4 shows that it is significant
and positively influence the profitability. It implies that Brunei’s Islamic banks may
substantially promote GDP growth rate and assist to diversify Bruneian economy provided
these banks are considered profitable. This result is parallel with the findings of Noor and
Hayati (2012), Yousafi (2016) and Alharabi (2017), these studies found a significantly
positive relationship between Islamic banks’ profitability and GDP growth rate. It has also
11
verified that the first hypothesis of this study was accepted. Turning to inflation (INF) rate
coefficient and t values, it depicted that inflation rate has a significant positive impact on
Islamic banks’ profitability. It is inferred that the higher inflation level drive corporates
including banks to increase the prices of their products and services to minimise the impact of
lack of demand which may considerably reduce the sales and ultimately impact the revenues.
A low inflation rate provides flexibility to consumers in purchasing goods and services at
lowest prices. This result is consistent with Bashir (2003), Haron (2004) and Vong and Chang
(2006), these studies have also found inflation positively impacting Islamic banks’
profitability. It verified the existence of a significant positive relationship between inflation
and Islamic banks’ profitability hence, hypothesis 2 of this study was accepted.
The panel regression results (see table 3 and 4) of exchange rate represent that it is
positive and significant suggesting that a higher exchange rate may considerably increase the
profitability of Bruneian Islamic banks. These findings are parallel with Javaid and Alalawi
(2017) and Habib and Islam (2017), these studies found that exchange rate is significant in
determining the profitability and stock prices of Islamic banks. It contradicts Nahar and Sarker
(2016) study which revealed that exchange rate has a negative impact on Islamic banks’
profitability hence; hypothesis 4 of this study is accepted. The results of oil prices presented
in table 3 and 4 revealed that it has a significant positive impact on the profitability. It is
inferred that lower oil prices result in lower profit for Islamic banks. It is an alarming condition
for the oil dependent countries including Brunei as oil and gas contribute more than 60% in
the national economy (DEPD, 2016). The countries highly rely on the income from oil and
gas resources are in dire need of relocation of alternative resources to reduce the shocks of
lower oil prices. This finding supports the acceptance of hypothesis 5 of this study.
The coefficient and t values of money supply revealed that it has a significant positive
impact on profitability ratios of ROA and ROE. It is submitted that provision of flexible and
relaxed policies by AMBD may enable Islamic banks in Brunei to intensify credit and generate
deposits which will result in higher profitability. These findings are consistent with Haron and
Azmi (2004) and Arif and Rosly (2011), a significant positive relationship was revealed
between money supply and profitability it signifies that H7 of this study was also accepted.
5. Conclusion
This study has shed a light on macroeconomic determinants affecting the Bruneian
Islamic banks’ profitability precisely from 2012 to 2016. The economic system of Brunei
heavily relies on revenue from oil and gas prices which have significantly dropped in this
phase. The secondary data of macroeconomic variables (GDP growth rate, inflation, interest
rate, exchange rate, oil prices, competition and money supply) was collected from DEPD,
AMBD and IMF annual reports. The fixed effects panel regression technique was adopted for
data analysis using Stata 15. During data analysis the variables of interest rate and competition
12
were dropped as these were found constant during the selected study period. The final model
focused on analysing the effect of remaining 5 variables on Islamic banks’ profitability. The
findings delineated that GDP, inflation, exchange rate, oil prices and money supply have a
significant positive impact on Islamic banks’ profitability. Overall, the findings revealed that
oil prices, GDP, inflation, exchange rate and money supply were the most significant
macroeconomic determinants of BIBD profitability. The analysis further verified that
hypotheses H1, H2, H4, H5, and H7 were accepted whereas, H3 and H6 were rejected.
This study has versatile practical implications for regulators, policy makers and Islamic
bankers. The government and regulatory authorities need to discover alternative resources
other than hydrocarbons to revitalize its economy and engender profitable financial structure.
The managerial team of Islamic banks needs to delineate flexible and profitable pricing
strategies during excessive inflation. AMBD may induce surplus money supply so that Islamic
banks are able to intensify credit and enhance its profitability through investment.
End Notes:
For further statistical reading view following pages;
1. Department Of Statistics Department of Economic Planning and Development
(DEPD). (2016), “Brunei Darussalam Key indicators”. Available at:
http://www.depd.gov.bn/DEPD%20Documents%20Library/DOS/BDKI/BDKI%202
016.pdf (Accessed on March 20, 2018).
2. Department Of Statistics Department of Economic Planning and Development
(DEPD). (2010-2013), “ANNUAL NATIONAL ACCOUNTS (NEW BASE YEAR
2010), 2010 – 2013”. Available at:
http://www.depd.gov.bn/DEPD%20Documents%20Library/DOS/ANA/ANA%20Ne
w%20Base%20Year.pdf (Accessed on March 20, 2018).
3. AMBD Annual Report. (2012). Available at:
http://www.ambd.gov.bn/SiteAssets/Lists/Publications/AllItems/Autoriti%20Moneta
ri%20Brunei%20Darussalam%20Annual%20Report%202012.pdf (Accessed on
March 20, 2018).
4. AMBD Annual Report. (2013). Available at:
http://www.ambd.gov.bn/SiteAssets/AMBD%20Annual%20Report/AMBD%20Ann
ual%20Report%202103.pdf (Accessed on March 21, 2018).
5. BIBD Annual Report. (2012). Available at:
http://www.bibd.com.bn/assets/pdf/media-centre/annual-
report/2012%20Annual%20Report%20-%20English.pdf (Accessed on March 21,
2018).
2018).
13

2018).
2018).
report/2016%20Annual%20Report%20-%20English.pdf (Accessed on July 10, 2017).
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Impact of Macroeconomic Variables on Islamic Banks Proﬁtability

Article · April 2018

Qaisar Ali Selamah Maamor

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Impact of Macroeconomic Variables on Islamic Banks Profitability

Muhammad Usman Tariq Gill

Similarly, Profitability is a significant component of banking world as profitability

2.1 GDP Growth Rate

The study deployed panel regression techniques to analyse the macroeconomic

3.2 Measurement of Variables

3.3 Return on Assets (ROA)

3.4 Return on Equity (ROE)

3.5 Model Specification

ROAit = α + β1 (GDPit) + β2 (INFit) + β3 (IRit) + β4 (ERit) + β5 (OPit) + β6 (CMPit) + β7

4. Empirical Findings and Discussion

ER (1USD to 1BND) 1.22 1.27 1.32 1.41 1.38

4.2 Descriptive Findings

Table 2: Descriptive analysis

Variables Mean Median Maximum Minimum S.D

4.3 Panel Regression Analysis

Dependent variable: ROA

F-statistics 17.6296 Durbin-Watson stat 2.299133

Table 4: Panel regression analysis: ROE on selected variables

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