Jurnal Pengurusan 39(2013) 129 - 139 Determinants of Bank Performance: Conventional versus Islamic (Penentu Prestasi Bank: Konvensional berbanding Islam) Nabilah Rozzani Rashidah Abdul Rahman (Accounting Research Institute, Universiti Teknologi MARA) ABSTRACT Using CAMELS rating to measure bank performance, the present study compares the performance estimates for Islamic banks with conventional banks operating in Malaysia from 2008 to 2011. The present study further identiies the determinants affecting the performance of conventional and Islamic banks in Malaysia. Using a sample of 19 conventional banks and 16 Islamic banks, the results indicate that the levels of composite performance achieved by both conventional and Islamic banks in Malaysia are very similar. Furthermore, it is observed that the performance of conventional banks will improve following the reduction of operational costs, while the performance of Islamic banks will improve following the reduction of bank size and an increment of credit risk. Keywords: CAMELS; bank performance; Islamic banks; conventional bank; composite performance ABSTRAK Dengan menggunakan pentaksiran CAMELS bagi mengukur prestasi bank, kajian ini membandingkan anggaran prestasi bagi bank-bank Islam dengan bank-bank konvensional yang beroperasi di Malaysia dari 2008 hingga 2011. Kajian ini seterusnya mengenal pasti penentu yang mempengaruhi prestasi bank-bank konvensional dan Islam di Malaysia. Dengan 19 bank konvensional dan 16 bank Islam digunakan sebagai sampel, hasil kajian menunjukkan bahawa tahap prestasi komposit yang dicapai oleh kedua-dua jenis bank konvensional dan Islam adalah hampir serupa. Selain itu, dapat dilihat dari hasil kajian bahawa prestasi bank akan menjadi lebih baik bagi bank-bank konvensional dengan penurunan kos operasi, manakala bagi bank-bank Islam, prestasi adalah lebih baik dengan penurunan saiz dan peningkatan risiko kredit. Kata kunci: CAMELS; prestasi bank; bank Islam; bank konvensional; prestasi komposit INTRODUCTION In surviving today’s contemporary globalized business environment, organisations should place priority on maintaining their competitive edge. A competitive edge is possible to maintain when the performance objectives of an organisation are aligned with its business objectives (Barnes 2008). The need to maintain a competitive edge also exists among financial institutions, especially banks. However, due to new innovations and developments within international markets, no guarantee exists for the survival for any bank during a crisis (Ahmad & Hassan 2007). The conventional banking system in Malaysia was established long before the Islamic banking system. Hence, conventional banks have more experience and hold a more dominant position in the Malaysian financial sector. As such, conventional banks have been able to enjoy larger amounts of capital; spread very widely; and acquire more advanced technologies (Bader et al. 2008). The survival of conventional banks is affected by net interest revenue, as conventional banks make profits from the spread between the interest rates being received from borrowers and the interest rates being paid to depositors (Pappas 2010; Izzeldin & Pappas 2011). This is added to the on-going needs of banks to restructure their operations in response to an uncertain macroeconomic environment, such as changes in gross domestic product (GDP) (Eiya 2010; Pappas 2010). The restructuring process is important for banks to remain relevant in the future, especially with the current incursion of technology and globalisation of the global market. Islamic banks are as severely affected by the competition between organisations in the same manner as their conventional counterparts. However, according to Tarsidin and Warjiyo (2006), the Islamic banking system has unique properties that are regarded as being highly important to the survival of Islamic banks during times of economic downfall caused by recessions. First, the cost of funds of Islamic banks is always lower than its operational revenue, which leads to a relatively low level of non-performing loans. Combined with the absence of a negative spread in the operational activities, Islamic banks are able to channel a relatively lower cost of funds to entrepreneurs. The second characteristic is the existence of risk-sharing adoption between banks and their depositors during their financing activities. It is acknowledged that, in general, the activities of Islamic banks are expanding in financial markets, particularly in regards to the provision of loans. This growth is indicated by the relatively high loan to deposit ratio in Indonesia, Chapter 12.indd 129 2/24/2014 3:35:25 PM