A comparative study of Indonesian and Malaysian Islamic banks

The aim of this study is to analyze the influence of the non-performing financing (NPF), financing to deposit ratio (FDR), operational efficiency ratio (OER), and firm size (SIZE) on return on assets (ROA). The object of the research is the Islamic bank in Indonesia and the Islamic bank in Malaysia for the period of 2010–2015. Another aim of this research is to determine if there are differences in the impact of FDR, NPF, OER and firm size on ROA between the Islamic bank in Indonesia and the Islamic bank in Malaysia. The findings show that not all studied independent variables affect the ROA of the Indonesian Islamic Bank and the Malaysian Islamic bank. OER has a negative and significant effect on the Indonesian Islamic Bank’s ROA, while FDR and size have a positive and significant influence on the Indonesian Islamic Bank’s ROA. In the Islamic bank of Malaysia, NPF affects ROA positively, while OER affects ROA negatively. In the Indonesian Islamic bank, independent variables that influence ROA are FDR, OER, and SIZE. In Malaysian Islamic bank, only OER influences ROA significantly. Based on the Chow test, one can conclude that there is a significant difference between the Indonesian Islamic bank and the Malaysian Islamic bank. Regarding operational costs, banks should pay more attention to validation of the costs to be incurred, so there is no need to spend unnecessary costs. Mochammad Chabachib (Indonesia), Anafil Windriya (Indonesia), Robiyanto Robiyanto (Indonesia), Hersugondo Hersugondo (Indonesia)


INTRODUCTION
In the context of the ASEAN Economic Community (AEC), the opportunities of Islamic banks in the face of industrial competition are a matter of concern (Robiyanto, Hersugondo, & Chotijah, 2016). The most important issue is the level of performance and the health of Islamic banking in each ASEAN country. This study compares the financial ratios of Islamic banking industry in Indonesia with Islamic banking in Malaysia, due to differences in state ideology between Indonesia and Malaysia, where Indonesia adopts the Pancasila ideology and Malaysia is an Islamic state. This ideological difference is expected to lead to different results in both countries (Sahabuddin, 2017).
Profitability is an indicator of bank performance (Jatmiko, 2017;Wahyudi, Nofendi, Robiyanto, & Hersugondo, 2018). One of several indicators used as a measure of profitability is the level of return on assets (ROA). ROA is used as a measure of the company's effectiveness level as to the ability to generate profits through the utilization of assets owned (Handriani & Robiyanto, 2019;Husnan, 2017). The central bank of the Republic of Indonesia, Bank Indonesia (BI), is more concerned about ROA compared to return on equity (ROE) http://dx.doi.org/10.21511/bbs.14(4).2019.06 in determining the bank health. The BI's monitoring duty nowadays has become the Financial Services Authority's monitoring duty, sees more on bank profitability calculated through assets, where funds are obtained from public savings (Lukman, 2009).
The performance of banks proxied by ROA can be affected by various variables. This study uses four variables affecting ROA. These are: liquidity (proxied by financing to deposit ratio/FDR), financing risk (proxied by non-performing financing/NPF), operational efficiency ratio (OER), and firm size (Size). Muhammad (2002) stated that FDR is the ratio of financing disbursed divided by the amount of public funds collected by banks. Credit risk or financing risk (NPF) is the risk of a default occurrence by the customer paying off his/her liabilities, or the risk arising because the debtor is unable to pay his/her debts (Riyadi, 2004;Sistiyarini & Supriyono, 2017). Operational efficiency ratio (OER) is the ratio of the bank's efficiency rating in performing its operations (Lukman, 2009). Meanwhile, the size of the firm is a small scale of the small company classification seen from the value of total assets.
Based on the studies mentioned, this study examines the influence of liquidity (FDR), financing risk (NPF), efficiency (OER), and firm size (SIZE) on the profitability of Islamic banks in Indonesia and Malaysia during the 2010-2015 period. This research is expected to contribute to the field of financial management, especially in Islamic banking, to control FDR, NPF, OER, SIZE and to improve bank financial performance; to provide a practical reference to the world of Islamic banking to improve bank financial performance; and to provide an input for policymakers to foster and supervise Islamic banks.

Islamic banking
The function of Islamic banks is almost the same as that of conventional banks, which are both intermediary institutions that collect public surplus funds and then distribute them to the community in need of funding (

The impact of financing-to-debt ratio (FDR) on ROA
According to Ascarya (2011), bank intermediation can be effective if banks are able to distribute all sources of funds in the form of credit or financing after calculating the mandatory reserves and daily liquidity. The intermediation function can be measured by comparing the amount of credit or financing distributed with the amount of thirdparty-fund that can be collected. Financial intermediation can be measured by a loan to deposit ratio, or, as Islamic banking calls it, a financing to debt ratio. An increase in the financing to deposit ratio indicates the source of funds owned by banks is more productive than the profit generated by banks.
According to the financial intermediation theory, its function is illustrated by high FDR that indicates high funding to increase returns. This is supported by the results of research by Almazari (2014), Mokni and Rachdi (2014) that the FDR variable has a positive impact on profit. Thus, the following hypotheses can be developed: H1a: The financing to deposit ratio (FDR) has a positive effect on the profitability of Indonesian Islamic banks.
H1b: The financing to deposit ratio (FDR) has a positive effect on the profitability of Malaysian Islamic banks.

The impact of non-performing financing (NPF) on ROA
Financing risk is the most risk faced by the bank that may cause it to fail. Credit risk (in a conventional bank) is measured by the ratio of non-performing loans to total loans. In Islamic banking, a non-performing loan is replaced by non-performing financing, since Islamic bank is not used for loans but for financing (Ernayani et al., 2017). Non-performing financing is financing that falls into the substandard, doubtful and congested category. Total financing is the amount of financing disbursed by banks that falls into the current, special interest category, substandard category, doubtful category and jam category. The larger the ratio of non-performing financing, the more bank is exposed to credit risk. The higher the credit risk, the more opportunity it offers for the decrease of profit sharing from the financing channeled by the bank. This is also supported by the research of Bilal, Saeed, Gull, and Akram (2013), Mawardi (2014), Mokni and Rachdi (2014), Petria, Capraru, and Ihnatov (2015), Putranto, Herwany and Sumirat (2012), which showed that NPF negatively affected profit. According to the credit risk management concept, high credit risk causes a decline in profit.
The following hypotheses can be developed: H2a: Non-performing financing (NPF) has a negative effect on the profitability of Indonesian Islamic banks.
H2b: Non-performing financing (NPF) has a negative effect on the profitability of Malaysian Islamic banks.

The effect of operational efficiency ratio (OER) on ROA
Operational efficiency ratio (OER) is an indicator of the efficiency level and bank competency to run its operations (Lukman, 2009). OER is usually called the efficiency ratio, a measurement of bank management competency; it sets operational costs and operational income. OER is the ratio of operational cost divided by operational income. If operational income is higher than operational cost, OER value will be lower. The low OER represents bank efficiency, where banks that operate efficiently can bring benefits. If OER increases, then ROA will decrease. Or it can be said that the lower the OER ratio to management, the more efficient the operational costs, so that the chances of the bank are in a less problematic state. Many studies have found that OER negatively affects ROA A low-value OER indicates the high bank efficiency. According to the theory of fundamental signals, information related to high efficiency of business is a good signal for the performance of the bank. Based on the framework of the hypothesis, it can be developed as follows: H3a: Operational efficiency ratio (OER) has a negative effect on the profitability of Indonesian Islamic banks.
H3b: Operational efficiency ratio (OER) has a negative effect on the profitability of Malaysian Islamic banks.

The effect of the firm size (Size) on ROA
Banks with high total assets, have a relatively high total funding allocation, which leads to higher interest income on loans (profit sharing). Banks with large credit distribution will contribute significantly to the community, and their existence is being felt by the community (Mawardi, 2014). Economy scale of theory refers to a situation where output growth is proportionately faster than input. Improved yield scale or decreased costs arise due to technological and financial reasons.
Many studies state that size has a positive effect on profit; these are Al-Jafari and Alchami H4a: Firm size (Size) has a positive effect on the profitability of Indonesian Islamic banks.
H4b: Firm size (Size) has a positive effect on the profitability of Malaysian Islamic banks.

Differences in the effect of FDR, NPF, OER, and Size on ROA for Indonesian and Malaysian Islamic banks
Contingency theory was first proposed by Galbraith (1973) who argued that there was no one way to organize, any way of organizing was not equally effective. Thus, based on the contingency theory, the management control system varies in each organization according to organizational and situational factors. Indonesia and Malaysia are two countries with different ideologies. Malaysia adopts the Islamic state, while Indonesia is based on Pancasila.
Other differences between the two countries are the economic system adopted, the characteristics of the population, the role of the government, the position of the sharia bank in the legislation, the madzhab adopted by the majority of its Muslim population, and the chosen development strategy.
Contingency theory gives a warning that executives can manage organizations according to their will. In such an organization, there is a different value of FDR, NPF, OER, and Size, and the difference between FDR, NPF, OER, and Size so that it will affect ROA differently. Therefore, it is worth examining whether there is a difference between the variables. According to the gap in the data, Indonesian and Malaysian Islamic banks had different ROA in 2010-2015 with the situation fluctuating and generating different ROA. Therefore, the following hypothesis is proposed: H5: There are differences in the effect of FDR, NPF, OER, and Size variables on ROA in Indonesian and Malaysian Islamic banks.

Difference between previous studies and the current research
Research on banking ratio affecting profitability shows different results.

Data
The data consists of return on assets (ROA) as a dependent variable, and the independent variables are the financing to deposit ratio (FDR), non-performing financing (NPF), operational efficiency ratio (OER) and firm size (SIZE). The data is obtained from the Quarterly Financial Report published by Islamic banks, as well as quarterly balance of earnings obtained through the official website of each bank and Bloomberg. The period of data used is a quarterly financial report, which is published in 2010 through 2015.

Population and sampling
The population of this study is all Islamic commercial banks located in Indonesia and Malaysia. 3) the studied bank publishes the quarterly financial report during the period of 2010 to 2015 and contains the required variables studied.
Based on these criteria, the sample that can be used is presented in Table 2.

Multiple regression analysis
Multiple regression is used to analyze the data. In this study, the dependent variable is return on assets (ROA), while the independent variables are financing to debt ratio (FDR), nonperforming financing (NPF), operational efficiency ratio (OER), and firm size (Size where α -constant, β 1 -regression coefficient of FDR, β 2 -regression coefficient of NPF, β 3 -regression coefficient of OER, β 4 -regression coefficient of Size, e -error term.

Classical assumption tests
The classical assumption tests consist of residual normality, autocorrelation, multicollinearity and heteroscedasticity. Residual normality test is conducted using Kolmogorov-Smirnov statistics, autocorrelation test is conducted by using Durbin-Watson (DW) statistics, multicollinearity test is run using the Variance Inflation Factor (VIF), and heteroscedasticity test is conducted by employing the Glejser test. Unit root test is also conducted to check the data stationarity.

Chow test
Chow test is used as a test for equity of coefficient or coefficient equality test. Chow test is run by looking at observation research, namely observations that can be grouped into two or more groups of similar economic subjects (Ghozali, 2011). This research uses two groups, namely, Indonesian and Malaysian Islamic banks.

Descriptive statistics
Data taken from the financial statements of each Islamic bank in the period 2010-2015 show that the development of the Islamic bank's financial ratios always changes. This study uses a sample of seven Islamic banks including four Indonesian Islamic banks and three Malaysian Islamic banks.

Descriptive statistics on Indonesian Islamic banks
The financial statements of each Indonesia Sharia Bank in the period of 2010-2015 describe the specific banks taken use financing to debt ratio (FDR), non-performing financing (NPF), operational efficiency ratio (OER), firm size (Size), and return on asset (ROA). The minimum, maximum, mean (mean) and standard deviation values of each variable are described in Table 4.

Descriptive statistics on Malaysian Islamic banks
The financial statements of each Malaysian Islamic bank for the 2010-2015 period describe the banks' specific financing to debt ratio (FDR), non-performing financing (NPF), operational efficiency ratio (OER), firm size (Size), and return on assets (ROA). The minimum, maximum, average (mean) and standard deviation values of each research variable are described in Table 5.

Results of the classical assumption tests
The results of the residual normality test of Indonesian Islamic banks' regression and Malaysian Islamic banks' regression are shown in Table 6. Based on Table 6, both equations produce normally distributed residual values, with Kolmogorov-Smirnov statistics' probability higher than 5%.   The Glejser test results are shown in Table 9. The results show that no heteroscedasticity exists in both equations, because none of the independent variables have a significant effect on the absolute residual.
To test the data stationarity (whether the data contains unit root), the Augmented Dickey-Fuller (ADF) test is conducted. The results of the ADF test are shown in Table 10. They demonstrate that no unit root found in all data used in this study, since all ADF statistics are significant at the 1% level of significance.

Results of the regression analysis of the Indonesian Islamic banks
The results of the regression analysis of Indonesian Islamic banks are shown in Table 11. The regression coefficient of the FDR variable with positive direction is equal to 0.019, with significant value of 0.012, where this value is significant at the level of 0.05. It can be interpreted that FDR variable has a positive and significant effect on ROA. Hence, Hypothesis 1a, which states that FDR has a positive effect on the profitability of Indonesian Islamic banks, is accepted. The results of this study are supported by Almazari (2014), Mokni and Rachdi (2014). From According to the theory of financial intermediation, the higher the FDR, the higher the funds distributed by a bank to its debtor. The standard used by Bank Indonesia as to FDR is 78% to 92%. The value of FDR in Indonesian Islamic banks in this study is 93.13% on average. The value is not too far above the standard set by Bank Indonesia; it can be said that Indonesia Islamic banks in this study have performed the intermediation function well, since it can distribute financing effectively.
The proposed Hypothesis 2a states that Nonperforming financing (NPF) has a negative effect on the profitability of Indonesian Islamic banks. The result shows that regression coefficient variable NPF has a negative direction of -0.009 with a significance value of 0.876, where this value is not significant at the level of significance 0.05 or even 0.10. This finding may indicate that the variable of NPF has a negative but not significant impact on    Bilal et al. (2013), who showed that the financing risk proportioned with NPF had no significant negative effect on profitability proxied by ROA.
The proposed Hypothesis 3a states that Operational efficiency ratio (OER) has a negative effect on the profitability of Indonesian Islamic banks. According to the research, the regression coefficient variable OER has negative direction of -0.027 with a value of significance 0.000, where this value is significant at the 0.05 significance level. Thus, Hypothesis 3a is accepted. The result of this study is supported by Almazari (2014) , which also found that firm size has a significant positive effect on ROA.
The results of this study are in line with the theory of economies of scale, which states that the cost advantages obtained by firms due to size, output, or scale of operations, with the cost per unit of output, generally decline with increasing scale (Moore, 1959). The improved yield scale or decreased costs arise due to technological and financial reasons. In the banking, only technological reasons can affect revenue because banks do not get discounts on raw material supply. Technology can also make work more efficiently to reduce costs. In addition to the technology existence, the positive effect between size and ROA is also due to banks that have large total assets, have a relatively large total financing so that income from interest on loans (profit sharing) is relatively large as well.

Results of the regression analysis of Malaysian Islamic banks
The results of the regression analysis of Malaysian Islamic banks are shown in Table 12. From Hypothesis 1b states that Financing to deposit ratio (FDR) has a positive effect on the profitability of Malaysian Islamic banks. As a result, FDR regression coefficient has a positive direction of 0.003 and a significant value of 0.369, where this value is not significant at the level of significance of 0.05 or 0.10. So it can be interpreted that the  (Galbraith, 1973). According to Scott and Davis (2016), the best way to run an organization depends on the characteristics of the environment where it operates. The most prominent difference between Indonesian and Malaysian Islamic banks is the basis of the country, where Malaysia is an Islamic State and Indonesia is a State with the Pancasila (five principles) ideology. Malaysia has different characteristics, such as the economic system adopted, the characteristics of the population, the role of the government, the position of the Islamic bank in the legislation, the school adopted by the majority of its Muslim population, and the chosen development strategy, thus having different effects on financial ratios.

CONCLUSION, LIMITATION OF THE STUDY AND FUTURE RESEARCH DIRECTIONS
The finding shows that not all independent variables studied influence ROA of Indonesian Islamic banks and Malaysian Islamic banks. OER has a negative and significant effect on ROA of Indonesian Islamic banks, while FDR and SIZE have a positive and significant influence on ROA of Indonesian Islamic banks. In Malaysian Islamic banks, NPF has a positive and significant influence on ROA, while OER has a negative and significant effect.
An Indonesian Islamic bank is suggested to be able to maximize the efficiency proxied by the OER ratio. The emergence of operational costs through services charged to customers is expected to provide income that exceeds its operational costs. The income will be able to contribute to the bank. In increasing its operational income, Indonesian Islamic banks are expected to make more varied sharia products. Regarding operational costs, banks are expected to pay more attention to the validation of costs to be incurred. Furthermore, an Indonesian Islamic bank with large assets is expected to have a relatively large financing portfolio, resulting in a large share of profit sharing. In addition to large financing distribution, the bank is expected to support the technological advances obtained from high assets so as to optimize operational efficiency. The technology is also expected to be an additional means of engaging customers' transactions using Islamic banking. An Indonesian Islamic bank also needs to be supported by the government like the Malaysian government. The Malaysian government strongly supports the development of Islamic banks in the country by placing state-owned funds as well as the savings of Hajj (pilgrimage) funds in Islamic banks in Malaysia. A full government support can accelerate the development of Islamic banks because there is a synergy in all sectors. As for FDR, Indonesian Islamic banks need to increase the amount of financing disbursed to customers.
A Malaysian Islamic bank is advised to maximize the efficiency level proxied by OER. The emergence of operational costs through services charged to customers is expected to provide income that exceeds its operational costs. The revenue will be able to contribute to the bank. In improving operational income, a Malaysian Islamic bank is expected to make more varied sharia products. Regarding operational costs, the banks are expected to pay more attention to the validation of costs to be incurred, so there is no need to spend unnecessary costs. Operational costs can be reduced by increasing the portion of low-cost funds, optimizing the role of information technology, optimizing the network offices, optimizing e-banking, pruning the general cost and administrating and reducing human resources to reduce labor costs.
The limitations of this study are as follows: the sample of Malaysian Islamic banks is still limited to only three banks and does not include the largest Islamic banks in Malaysia due to lack of data. Some suggestions for future research are: the future research could add some Malaysian Islamic banks such