Publication:
Risk management, asset liability management and their impacts on net interest margin (NIM)/net profit margin (NPM): a comparative analysis between conventional and Islamic banks
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Date
2019
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Abstract
The comparative analysis between conventional banks (CBs) and Islamic banks (IBs) were conducted to gain insights of factors that might explain risk management practices and their impacts on respective net interest margins (NIMs) and net profit margin (NPMs). The present research was aimed at investigating the simultaneous equation model that jointly determines the hedging techniques of maturity gap and interest rate derivatives (profit rate derivatives in the context of IBs) and their influence on the hedging decisions of CBs and IBs. This framework is highly relevant to IBs to distinguish whether these two hedging techniques were substitutes or complementary in light of the limited Shariah compliant tools available in the market. The results would have an impact on the RM and the ALM strategies to be adopted by IBs in managing profit rate risk exposure. The research found that maturity gap and interest rate derivatives of both bank types were substitutes. There was a tendency for CBs to increase the maturity gap (lower hedging) when faced with financial distress while IBs tend to reduce the maturity gap (higher hedging). However, there was no evidence that CBs and IBs increased the usage of interest rate derivatives when faced with higher likelihood of financial distress, which is inconsistent with hedging theory. The impact of hedging techniques and bank-specific variables on the performances of CBs and IBs as represented by NIMs and NPMs were further explored. To achieve this, panel corrected standard error (PCSE) and generalized method of moments (GMM) methodologies were employed. The differences in margins of both bank types were analyzed as to whether the factors that affect the margins of CBs affect IBs differently. The results showed factors that displayed differential impact on the margins of IBs were maturity gap, derivatives skills (usage of other derivatives), capital adequacy, operating cost, liquidity and bank growth. The findings also exhibited that the crisis has no positive impact on the margins of both banks. The results demonstrated important policy implications for IBs to further innovate financial derivatives for hedging purposes in view of the rapid growth of IBs in the financial system as well as the positive impact of derivatives skills on the margins.
Keywords
Risk management , Assets liability management , Conventional banks , Islamic banks
Citation
Raja Musa, R. S. D. (2019). Risk management, asset liability management and their impacts on net interest margin (NIM)/net profit margin (NPM): a comparative analysis between conventional and Islamic banks (Doctoral dissertation). INCEIF, Kuala Lumpur. Retrieved from https://ikr.inceif.org/handle/INCEIF/3112
Publisher
INCEIF
Available in physical copy and downloadable format (Call Number: t HG 1615.25 R161)
DOI
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Risk_management_asset_liability_management_and_their_impact_on_net_interest_margin_Raja_Shahridatul_Dewa.pdf
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