CHAPTER 1 1.

0 INTRODUCTION

1.1 Background of the Study

1.1.1

Background of RHB Islamic Bank

RHB Islamic, access to Islamic Banking has never been easier. They are uniquely positioned to offer time-tested expertise and ingenious know-how, bringing to customers a wealth of more than 15 years of banking experience. RHB Islamic is one of the few Malaysian Islamic banks that fully adopt International Shariah standards. Giving customers a global platform in providing Islamic financial solutions, not just in Malaysia but throughout the world. They are backed by the strength of the RHB Banking Group and thrive on their tradition of professionalism. This is proven through their ability to have access to viable opportunities, strategic insights and to navigate through industry intricacies. They dedication and continued efforts have surged RHB Islamic to the forefront of todays Islamic banking sector. RHB Islamic are among the fastestgrowing Islamic financial institutions in Malaysia. They intend to be a pace-setter as can bring their innovative brand of Islamic banking to regional and global markets.

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RHB Islamic serves clients with more than 180 RHB Banks and RHB Islamic branches throughout the nation. Both form and substance shape Islamic banking. There substance is proven by their ability to serve the needs and aspirations of their clients, from all religions, as can blend their banking experience with Shariah expertise. (RHB Banking Group website)

1.1.2

Development of Al Ijarah Thumma Al Bai (AITAB)

Ijarah refers to leasing contract which transfer the benefit or usufruct of an asset between lesser ans lessee within the specific period agreed by both party. Ijarah being used in the financial product by the financial institution who offer the Islamic product. One of the famous product using Ijarah contract by the financial institution is Al Ijarah Thumma Al Bai (AITAB) (Resolution of Shariah Advisory Council by Bank Negara Malaysia). The operation of AITAB has undergone several phases. Bank Islam was the first bank that initiates AITAB facility. Its operation was then extend to conventional banks under Islamic Banking Scheme (IBS), which were pioneer by three anchor banks; Maybank, Bank Bumiputera Malaysia Berhad and Bank Rakyat. 2|Page

Consequently, Bank Islam set up a consultant to assist other banks and finance companies to operate IBS thus expand AITAB operation to finance companies and cooperative societies. By this time, AITAB has been very well receiving to the extent that, the government also adopt the concept in their dealings. The hirepurchase business in Malaysia has a unique governance structure. There are few government agencies and ministries involve in overseeing and regulating the practice. The most significant role is by Ministry of Domestic Trade and Consumerism which has exclusive jurisdiction over hire-purchase businesses. Any substantial issue should be referring to this ministry. On the other hand the Finance Ministry holds a power to grant licenses to finance company that wishes to offer AITAB (Abdullah & Dusuki, 2006). Since motor vehicles have the most demand goods under AITAB financing, the transaction will certainly involve Ministry of Transportation which handles approval of vehicles grant and license. Notwithstanding its popularity and wide acceptance amongst the general public, government, banking and finance industry players, AITAB is still facing problems particularly with regards to inadequacy of Syariah regulatory framework to govern its practice. Until now, there is no specific law enacted to support AITAB operation. As a result, the AITAB operation is still referring to conventional Hire3|Page

Purchase Act 1967. This poses anxieties amongst practitioners especially those who highly observe Syariah compliant issues due to the inherent limitations of Hire-Purhase Act to address certain Syariah issues (Adullah, 2009). Consequently, there is an attempt by the government of Malaysia to study the possibility of introducing a specific law for AITAB. However the idea so far has yet come to fruition. Until today the industry is still allow to offer AITAB even though the issue of whether to have a specific law governing AITAB operation is still under review. Figure 1 depicts an overview of the development of AITAB in Malaysia.

Ijarah became one of earliest financing facilities

1983-1994 Bank Islam was the key player in Islamic banking

Bank Islam introduced AITAB

AITAB was extended to 3 Anchor Banks

1994 Islamic Banking Scheme was introduced and operation of AITAB was expanded.

AITAB was expanded to Finance companies & Cooperative Societies AITAB adopted by Government

FIGURE1: DEVELOPMENT OF AITAB 4|Page

AITAB combines Ijarah (lease) contract and Bay (sale) contract in one trading document. Under Ijarah contract, the bank as the owner of an asset leasing out the same to its clients (hirer) against predetermine rentals for an agree period of time. Upon expiry of the leasing or rental period, the hirer enters into a second contract to purchase the goods from the owner at an agree price. In Malaysian context, AITAB client normally identifies and approaches vendor or dealer of the asset he needs. The dealer then prepares all related documents pertaining to AITAB financing on behalf of the bank. Here, the dealer merely acts as an agent to the bank. Once the client and the bank conclude the AITAB contract, the car will be delivering to the client, hence effectively commencing rental payment. Upon completing all the agree payment, both parties shall enter into another agreement in which the customers pay a nominal amount of RM1 signifying sale contract (Abdullah & Dusuki, 2006).

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1.1.3

Modus Operandi of AITAB in Malaysia

( A C r i t i c a l A p p r a Critical Appraisal of Al Ijarah Thumma Al Bay (AITAB) Operation: Issues and Prospects) FIGURE 2: THE MECHANISM OF AITAB

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1.2 Problem Statement The profitability of the bank are come from the product offered by the Islamic banks financial activities. The profitability of Islamic hire purchase which is AITAB being influence by the several factors from external and internal factor. What are the factor that influence the profitability of the RHB Islamic Bank Berhad? Is the factor effect the trends of the total profit of the RHB Islamic Bank Berhad? This study is to show the relationship between the variables that consist of internal and external factors. The factors of dependent variable; profit of the AITAB of RHB Islamic Bank Berhad and the independent variables; based financing rate (BFR), total amount disbursed (TAD), total aaset (TA), non-performing loan (NPL). It will based on the research and findings at the end of the investigation. Are the relationship were significant or not? The profitability of the Islamic hire purchase, will measure the performance of the bank. The bank should know the factor that effect the profitability of Islamic hire purchase (AITAB). Therefore, what is the major contributor of the Islamic hire purchase (AITAB) profitability?

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1.3 Research Objectives First objective is to identify the trends of the profitability of Islamic RHB Islamic Bank through the total profit of the RHB Islamic Banks. It will show the movement of the profitability of the bank, while the management can take action, if any movement in the trends show the unfavour total profit position. The trends will help the management to prevent the barriers to gain more profit from the hire-purchase business. The factors that can be influence the profit of the bank are based financing rate (BFR), total amount disbursed (TAD), total asset (TA), and non performing loan (NPL). Therefore this reserch is to examine the relationship between the independent variables as listed with the profit gain by the RHB Islamic Bank Berhad . It can be determine through the significancy of the relationship between the independent and dependent variables during the findings. This study attempts to determine the major factors contributing the profitability of Islamic hire purchase of the RHB Islamic Bank Berhad. The profitability can be influence by many factors which internal or external. The factors are not only can increase the profitability, but also can decrease the profitability when changes happen. Especially for the external factor which based of market condition and cannot be control by the institution.

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1.4 Theoritical Framework Theoritical framework show the relationship between independent variable and independent variables. The dependent variables is the profit of Islamic hire purchase, while the independent variables are the based financing rate (BFR), total disbursement amount (TDA), total asset (TA), and non performing loan (NPL).

BASED FINANCING RATE

(BFR)

TOTAL AMOUNT DISBURSED

(TAD)

TOTAL ASSET
(TA)

TOTAL PROFIT OF ISLAMIC HIRE PURCHAS E

NON PERFORMING LOAN

(NPL)

FIGURE 3: THEOROTICAL FRAMEWORK

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1.5 Scope of the Study This study consider on the RHB Islamic bank Berhad, which provide the Al-Ijarah Thumma Al-Bai (AITAB), operate over the 6 years period between 2006 until now. These bank are selected due to their 6 years operation periods which meet the studys requirement. External and internal factors are use as the determinants for the bankss performances. The factors includes are base financing rates (BFR), total disbursement amount (TDA), total asset (TA), and non performing loan (NPL) . Total profit of islamic hire-purchase RHB Islamic Bank Berhad is use as a proxy for profitability. Previous studies use many tools and methodology in determining total outstanding balances for this study on banks profitability. Therefore, this researcher implementation ways wants to highlight the factors affecting by analyzing the relationship of selected factors towards total profit of Islamic hire purchase.

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1.6 Limitations of the Study The limitations in the study are some materials are confidential and only disclose for internal users only. In this study, RHB Islamic bank has being chosen to fulfill the needs of investigation. Data given for this study is obtaining by monthly basis from January 2009 until December 2011. Previous yearly data for total profit of Islamic hire purchase is limited to obtain. During the study, RHB Islamic Bank only operates in 6 years and 4 months. Therefore, it suitable to use the monthly data than yearly data to obtains better result. The previous study is an essence for the researcher as references in order to acquire additional information. It is difficult to get the literature review which equivalent with the topic of the research. As a researcher of BBA Islamic Banking in UiTM Kedah, the references are very limit and not sufficient for deeper study. The researcher has to find in others material such as articles, journals and so on. Another limitation is time factor, the time given to done the research about the topic of this study is inadequate. It is not enough to complete this study because of other commitments, which are job responsibilities. Then lack of knowledge and exposure in the scope of research in order to accomplish these research.

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1.7 Significance of the Study This study is much needed attempt to provide the empirical evidence concerning the development that was made in Islamic banking in Malaysia in terms of its profitability by producing the factors that affect its performance. From the indicators, the relationship between dependent and independent variables can be justified. In others words, this study will represents the performance of RHB Islamic Bank Berhad during 36 months period by identifying the key factors influencing profitability of bank. This study also contributes the information from RHB Islamic Bank Berhad regarding to the (Al-Ijarah Thumma Al-Bai) AITAB, which is significant to many parties especially for the automobile business parties. Among the significant contributes are: 1. To the student. This study will give benefit to the students especially the Islamic Banking students to get more knowledge about the Islamic banks. The student will more understand regarding to the operation and development of Aitab, yet the factors that influence the profitability of the AITAB. 2. To the universities. This study will also give benefit to the university because it provides the latest research from the RHB Islamic Bank Berhad. It can be used as a reference to the educational institution, which the academicians can gain benefit from the information stated in the study. It can be spread to the other, such as student by the academicians. 12 | P a g e

3.

To the bank. The management of the bank will also get a benefit on the research conduct from this study. Take as a notice and aware of the flow of the profitability of Islamic hire purchase whether it is improve or not. Using the research paper for the purpose of making adjustment of the weaknesses and maintain or improve on the strenghts which will increase the performance of the banks.

4.

To the society. This study also will benefit the society while they can obtain more information on the Al-Ijarah Thumma Al-Bai (AITAB) on Islamic banking performance. It also will add the number of references regarding to the AITAB topic, since it is lack of secondary information. Therefore, the society will understand more about the Islamic banking system, which has become increasingly important in the banking industry.

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1.8 Structure of the Study This study is to be structured according by chapter arrange in the paper. In the Chapter 1, the paper will review the background of the study which contents of background of RHB Islamic Bank Berhad and Islamic hire purchase, in other words, Al-Ijarah Thumma Al-Bai (AITAB) regarding to their development and modus operandi. Other than that, it also reveal about the problem statement, objectives of the study, therotical framework, study. In the Chapter 2, this paper explain about the literature review in the previous study, that related with the variables listed in this research paper. The independent variable is the total profit, while the independent variables are the based financing rate (BFR), total amount disbursed (TAD), total asset (TA), and non performing loan (NPL). It revealed the relationship among the variables. In the Chapter 3, this paper shows about the research methodology. It explains in details about the method use in this research paper. There are few of method being used to identify the relationship between the variables. Whether there are significant or not significant relationship between dependent and independent variables. This research paper also shows the hypothesis of the relationship. In the Chapter 4, this paper shows about the findings of the study. The result of the findings can be acquired by using the Statitiscal Package for Social Science (SPSS) version 12.0 for Windows. The method being use are the method listed in the Chapter 3, to recognize the 14 | P a g e scope, limitations and also significance of the

significancy of the variables. The relationship between dependent variable and independepnt variables can be known in this chapter. It will be explained through the table and graph. In the Chapter 5, this paper explain about the conclusion and recommendation of the study. It concludes about the result acquired in the previous chapter. It also giving the recommendation to this study for the few people in order to reveal the problems occured in the research. The recommendation being made based from the result get through the system.

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CHAPTER 2 2.0 LITERATURE REVIEW 2.1 Total Profit Profit is the surplus amount from the revenue and expenses of the business. The profit can show the stability of the business, whether it can be continue running or shut down. The financial institution objective usually is the profit maximization. The performance of the bank can be known through the profitability of the bank. The profit affected by several factor, which internal and external. The previous study explained the relationship between the variables. It has been analyzed that the bank profitability are usually influence by internal and external factors. It can be specify through return on equity (ROE), return on asset (ROA), return on capital employed (ROCE), and net interest margin (NIM) (Gal, Irshad & Zaman, 2011). Those factors are from the internal, which review from the balance sheet and income statement. The factors from the previous study were using the variables listed in this research paper. According to the Kabir Hassan and Hameed Bashir (2001), the profitability of the banks being controlled by the several characteristics of the bank. The internal characteristics includes bank size, leverage, loans, short term funding and overhead. The external characteristics controlled by macroeconomics, regulatory and financial market environment. Some of the factors can be measured easily without need to interview, questionnaires, and etc.

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Profitability can give benefit for the companies, not only for the financial institution, but also others company. According to Martini and Ronald (2009), the study for the financial institution can be used for the study of multifinancial companies. Return on asset (ROA) and return on equity (ROE) can be measured for determine the profitability of the company.

2.2 Based Financing Rate Islamic bank are using profit rate to acquire the profit from the automobile business. It is not such interest rate that not permissible in Shariah principle. Islamic is said to be free from the interest, however, if there is no rate to be charge, how the Islamic bank is going to have their profit. Some of the investigation are using interest rate in their study to be more familiar with the reader. AITAB is using profit rate to increase their profitability. The profit rate influence the Islamic financial product (Akhter, Raza & Akram, 2011). There are the relationship between BFR and the profit gain by the Islamic bank. Based on the previous study, it was revealed a negative correlation relationship between the BFR and the profitability of the bank (Kader & Leong, 2009). It is show the Islamic banking financing also are profit maximizing institution. However, some of the researcher have found that, interest rate have no effect on the bank profitability. It is only effect on the regulation of the bank management regarding to the loan rate (Haron, 2004). In contrast, Staikouras and Wood (2011) stated the result of the findings 17 | P a g e

on several countries on the bank profitability which show a negative relationship between the interest rate and the profit.

2.3 Total Amount Disbursed Total amount disbursed is the amount of financing approved to be paid to the dealer for buying the vehicles. It is the financing amount or in other words, the supplying the loan to the other party. It will increase the credit risk as the financing can not to be paid by the hirer. But it will show, the significancy of the amount disbursed with the profits. The financing approved by the bank, given to the hirer decrease the profitability. According to Selvili, Chang and Wu (2003) examined the relationship between the level of total amount of loans and the profits. It shows that, the positive significant relationship between both of variables . The results have been influenced by the relationship between credit risk and profitability. On the other hand, the higher amount disbursed can increase the profit. It is due to the profit rate imposed to the hirer. The total financing can be supply according to the deposit fund within the bank. If not, the profit of the bank will be reduce to pay for the interbank financing. However, if there is huge capital in the deposits, the credit risk may be reduce, which increase the profits (Demirguc & Maksimovic, 1998).

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2.4 Total Asset The third dependent variable is total asset of AITAB. The total asset consist of the capital provided for the financing purposes, known as the bank size. Most of the previous study using the calculated the bank size or total asset through the return on asset, which indicates the return based on the asset. According to the previous study, bank size have significant relationship with the profitability of the bank (Staikouras and Wood, 2011) but the relationship would be different for the different size of the banks. This research done on the Islamic hire purchase, which using the total asset of AITAB and relationship with the total profit of AITAB. In addition, the positive relationship between bank size and total profit not only for conventional bank, but also for Islamic bank (Haron, 1996). On the other hand, Martini and Ronald (2009) found that total asset or company size has a negative and significant effect on the profitability of the company, since the research paper done is for multifinancial companies.

2.5 Non Performing Loan The fourth dependent variable is non performing loan in Islamic hire purchase known as AITAB. In the other words is non performing account or non performing financing. It is the overdue installment payment by the hirer of the bank. The hirer are not paying the rent to the owner of the vehicles. The non performing loan can occur because 19 | P a g e

of many factors. One of the factor of non performing loan is due to the banking or financial crisis (Fofack, 2005). The profitability of the bank effect by non performing loan. The capital cannot be circulate within the business because of the hirer are not paying their rent. When the non performing loan increase, the profitability of the bank will reduce, and the capital become inadequate (Ranjan & Dhal, 2003). It is show the positive relationship between the non performing loan and profit. The non performing loan also can cause to the reducing the financing activities. It is due to the risk of the financing, which will contribute to the non-performing loan. Therefore, the profitability of the bank will be reduce to streghthen the existing financing. It is because, the nonperforming loan have an impact on the profitability (Selvili, Chang, Wu, 2003).

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CHAPTER 3 RESEARCH METHODOLOGY 3.0 Introduction This study analyze banks profitability in RHB Islamic Bank Berhad. The method conducted consist of total profit of Islamic hire purchase known as AITAB. All the data were collected from RHB Islamic Bank Berhad and Bank Negara Malaysia monthly report.

3.1 Data Description For the purpose of investigating the factors that influence the total profit of Islamic hire-purchase. The data collected from January 2009 until April 2011 on the monthly basis. The variables are based financing rate (BFR), total amount disbursed (TAD), total asset (TA), and non performing loan (NPL) also collected for the same years.

3.1.1

Data Collection Method

This study consist of yearly data monthly data starting from January 2009 until December 2011. The type of data for this study is secondary data. All data were obtained from the Bank Negara Malaysia, and RHB Islamic Bank Berhad monthly report. All of this data will be analyzed and interpret using the Statitiscal Package for Social Science (SPSS) version 12.0 for Windows.

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The period of 24 months was decided because it possibly can show performance trends in bank respectively. By using the monthly basis, it can clearly revealed the flow. Journals from the internet like individual journal or institution, reference books, data from annual reports of BNM, also the pamphlets and brochures from RHB Islamic Bank. Data for independent variable such as based financing rate (BFR), total amount disbursed (TAD), total asset (TA), and non performing loan (NPL) are collected from Anually Bulletin of Bank Negara Malaysia from 2009 until 2012 and data from RHB Islamic Bank. Other than that, the online searches of information via the internet search engines such as Google ans Yahoo also being assess to find the information for the study.

3.1.2

Data Analysis

Data is analyze using the statistical software known as Statistical Package for Social Science (SPSS) version 17.0

for Window in this study. This software is used to test and process the quantitative data. The data being analyzed for the pupose of testing the relationship between total profit of Islamic hire purchase and the factors influence it such as based financing rate (BFR), total amount disbursed (TAD) total asset (TA), and non performing loan (NPL). Trends of the data are execute using the graph in Microsoft Excel 2007.

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3.1.3

Research Design

The research design for this study is to illustrate the relationship between the variables. It is to analyzed the relationship between total profit of RHB Islamic Bank Berhad which is the independent variables and selected independent variables. The research is based on monthly data between January 2009 to December 2011. Thus, the descriptive study will be selected in this research. It is use to described the relationship between the dependent variable with independent variable. Moreover, it helps to recognized and describe the factors determine the total profit of I slamic hire purchase in RHB Islamic Bank. The hypothesis will be test whether it can be accept or not by using the suitable statistical method. Statistical method offers an enhance understanding of the relationship as exist among variables.

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3.2 Methodology The objective of this study is to determine the significant relationship between dependent variable (total profit of AITAB) and the independent variables (BFR, TAD, TA and NPL).

The research methodology was initiated by: 1. Analyzing the trends of total profit of Islamic hire purchase in RHB Islamic Bank from January 2009 to December 2011 using the line chart. 2. 3. Analyzing the trends of BFR, TAD, TA, and NPL. Identifying the relationship between dependent variable; total profit of Islamic hire purchase and independent variables; BFR, TAD, TA, and NPL.

3.2.1

Multiple Regression Model

This tool is being use as the analysis to ensure the significant of the both data. It is used in the summary table and to

analyzed the expected relationship between the dependent variable and independent variable which are base financing rate (BFR), total amount disbursed (TAD), total asset (TA), and non performing loan (NPL) that come from the regression coefficient table.

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3.2.2

Coefficient of Determination (

R 2 = Total Explained Variation Total Variation

is to measure how many percent of change in the dependent variable that can be explained by the independent variable. The value of is from 0 1. If the result is 0 so there

none changes is dependent variable will be explain independent variable. If the result is 1 so the changes in dependent variable can be explain by the independent variable.

3.2.3

ANOVA (Analysis of Variance)

The ANOVA table presents a test of significance for the overall regression model. It is measure from the significance of F-value in this table. To determine whether the overall model is statistically significant, the F-value should be less than 0.05. State that the F ratio is very high which can be took as a good model with 1% significant level.

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3.2.4

Regression Coefficiant Analysis

From the regression coefficiant table, the researcher can determine the regression model, the significant relationship dependent and independent variables. The explanations of the regression are as follow: Prior relationship: 1. The negative (-) sign by the coefficiant show that there is negative relationship between DV (total profit of Islamic hire purchase) and IV (BFR, TAD, TA and NPL). 2. The positive sign (+) sign by the coefficiant show that there is positive relationship between DV (total profit of Islamic hire purchase) and DV (BFR, TAD, TA and NPL).

* Value of coefficient indicates how many changes in independent variable affect changes in dependent variable.

Value of the coefficient: 1. Coefficient of independent variable is negative value. If dependent variables increase by 1 unit, the independent variables decrease by 1 unit. 2. Coefficient of independent variable is positve value. If dependent variable increase by 1 unit, the independent variables increase by 1 unit.

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3.2.5

The Regression Model

The general purpose of regression model is to learn more about the relationship between several independent or predictor variables and a dependent or creation variable. The estimate regression model can be use to analyze the expected relationship between dependent variable and independent variable positively or negatively related. The regression model in this study could be written as follows:

For example,

Y = 0 + 1BFR1+2TAD2+3TA3+ 4NPL4

Y BFR TAD TA NPL

= = = = = =

Total Profit of Islamic Hire Purchase Based Financing Rate Total Amount Disbursed Total Asset Non Performing Loan Parameter to be Estimated

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3.2.6

F Statistic

F statistic test is use to know the reliability the over all data. This method is to evaluate the significant of each data. The result significant show if less than 0.05. If the result is more than 0.05 it not significant.

3.2.7

Spearman Correlation Analysis

Correlation is a statistical method used to determine wheter a relationship between variables exists. The analysis is done to see whether there is significant positive or negative relationship between dependent variable (BFR, TAD, TA and NPL). The researcher use correlation coefficient to determine whether two or more variable are related and determine the strength of the relationship between the variables. A Pearson will provide information such as direction, strength and significance of the relationship of all variables. The coefficient has range of possible values from -1 to +1. The value indicates the strength of the relationship, while the sign (+ or -) indices the direction. Correlation between dependent variable with independent variable shown as:

1. 2.

The perfect positive correlation represented by +1.0 The perfect negative correlation repserented by -1.0

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3.2.8

Trends

This is a module that allows the researcher to plot aggregate response data over time. It is use to show the trend of monthly performance and identify the highest and the lowest performance throughout the month. It is valuable to determine the nature of the research and conducting long running survey by examining trends in the data. This indicates the early warning indicator of potential problems and issues that will affect the performance of total outstanding balances of Islamic hire purchase.

3.2.9

T Statistic

T statistic is used to examine the null hypothesis. It show where there is a significant relationship between dependent variable with each independent variables.

Using significant level: 1. If the t-statistic value is greater than significance level ( < ), failed to reject H0. 2. If the t-statistic value is smaller than significance level ( > ), reject Ho and conclude H1. Confidence level will assure the significant level. If confidence interval level: 29 | P a g e

90 % then the significance level will be 0.1 ( = 0.1) 95 % then the significance level will be 0.5 ( = 0.5) WIDELY USED 99 % then the significance level will be 0.01 ( = 0.01)

3.3 Hypothesis of The Study A hypothesis can be defined as a logically conjectured relationship between two or more variables expressed in the form of a testable statement. By tetsing the hypothesis and confirming the conjectured relationship, it is expected that solutions can be found to correct the

problems encountered (Uma Sekaran, 2003).

1.

Null Hypothesis (H0) The conjecture that postulates no differences or no relationship between or among variables.

2.

Alternate Hypothesis (H1) An educated conjecture that sets the parameters one expects to find. The alternate hypothesis is tested to see whether or not the null is to be rejected.

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The hypothesis of the study are as follow: Hypothesis 1: : There is no significant relationship between the total profit of Aitab with BFR : There is significant relationship between the total profit of Aitab with BFR

Hypothesis 2 : : There is no significant relationship between the total profit of Aitab with TAD : There is significant relationship between the total profit of Aitab with TAD

Hypothesis 3 : : There is no significant relationship between the total profit of Aitab with TA : There is significant relationship between the total profit of Aitab with TA

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Hypothesis 4 : : There is no significant relationship between the total profit of Aitab with NPL : There is significant relationship between the total profit of Aitab with NPL

Where : : : BFR TAD TA NPL : : : : Null Hypothesis Alternative Hypothesis Base Financing Rate Total Amount Disbursed Total Asset Non Performing Loan

3.4 Coefficient of Beta Beta is used to determine which independent variables that most influence the total profit of Islamic hire purchase of RHB Islamic Bank Berhad. The result is estimated from the Beta column in coefficient table. The highest beta will be the strongest contribution of predictor in explaining the dependent variable.

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CHAPTER 4

FINDINGS AND ANALYSIS

4.0 INTRODUCTION

This chapter will be discusssed on the findings and analysis of this research paper. It determines the relationship of independent and dependent variables. It examine all the variables, consist of dependent variable, which is total profit of the RHB Islamic Bank Berhad and the independent variables which are, based financing rate (BFR), total amount disbursed (TAD), total asset (TA), and non performing loan (NPL). The findings being examined by using the Statitiscal Package for Social Science (SPSS) version 12.0 for Windows. The result and findings using the system are answering the objective and the hypothesis. All the data should be test their normality to find out whether the data used as variables normal or not. The main objective of the study is to identify the trends of the total profit of RHB Islamic Bank Berhad. It being execute by the Microsoft Excel 2007 to show the trends of the dependent variables use in this research paper. The trend is to figure out the effects of the independent variable to the total profit. Second objective is to determine the relationship between independent variable (total profit of RHB Islamic Bank Berhad) and dependent variables (BFR, TAD, TA and NPL). Multiple Regression and Spearman Correlation are used to examine the relationship between the variables.

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While the third objective is to determine the major factor contributing the profitability of RHB Islamic Bank Berhad . The Coefficiant of Determination (R) are used to determine the factors impact of the profitability of AITAB. In order to recognize the major factor of the AITAB profitability, the coefficient of Beta being used to see the highest value of Beta to indicate the contributer of the profitability. major

4.1 Trend Analysis

TREND ANALYSIS OF TOTAL PROFIT AITAB (MONTHLY BASIS) FROM 2009 T0 2011
8000000 6000000 4000000 2000000 0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 -2000000 -4000000 -6000000 2009 2010 2011

RM

Total

FIGURE 4.1: TREND ANALYSIS OF TOTAL PROFIT OF AITAB

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By referring to the trends analysis graph above, it is show the trends of the total profit of Islamic hire purchase of the RHB Islamic Bank Berhad are fluctuating. On the 2009, the total proftshows the increasing trends, it is because of the increasing cases in the automobile business. However, it started to reduce on the first month of 2010, and becoming constant until the end of year. The profit gain are not too high as compared as previous year. Suddenly, end 2010, the total profit decreasing over the breakeven point and started to recover during the first month of 2011. But the profit gain are similar with the 2010 until RHB Islamic Bank Berhad facing loss on the third quarter of the 2011. With some effort and investigation, it starter to increased during the fourh quarter and recover from loss.

4.2 Multiple Regressions All the data taken from Bank Negara Malaysia and RHB Islamic Bank Berhad, Jalan Bukit Bintang, Kuala Lumpur. It was been computed by SPSS system and the result will be explaining below:

Model Unstandardized Coefficients B 1 (Constant) 9036631.007 Std. Error 2.612E7

Standardize d Coefficients Beta t .346 Sig. .732

Collinearity Statistics Toleran ce VIF

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BFR LNTAD LNTA LNNPL

-2330222.766 308811.059 1280938.201 -1732136.684

1112976.07 3 704189.395 1015550.56 7 756546.409

-.417 .070 .176 -.415

-2.094 .439 1.261 -2.290

.045 .664 .217 .029

.363 .564 .738 .439

2.754 1.772 1.354 2.280

Dependent Variable: Total Profit Table 4.2: Regression Coefficient Analysis

4.2.1 y=

Regression Coefficient Analysis

BBA = 9036631.007 2330222.766BFR + 308811.059TAD + 1280938.201TA 1732136.684NPL + Where, y = total profit of Islamic hire purchase (AITAB) = X1 X2 X3 X4 = = = = = Constant Based Financing Rate (BFR) Total Amount Disbursed (TAD) Total Asset (TA) Non Performing Loan (NPL) Error

Explaination on the unstandardized coefficients beta Based Financing Rate (BFR)

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From the table 4.2 for base financing rate (BFR) has relationship with total profit of Islamic hire

negative

purchase (AITAB). It

signifies when there is INCREASE of one (1) unit of base financing rate (BFR), the changes of total outstanding balances of Islamic hire purchase (AITAB) decrease by 2330222.76% and vice versa.

Total Amount Disbursed (TAD) From the table 4.2, total amount disbursed (TAD) has shown the positive relationship with the total profit of Islamic hire purchase (AITAB) for RHB Islamic Bank Berhad. It also signifies that when there is INCREASE of one (1) unit in total amount disbursed (TAD) of Islamic hire purchase (AITAB), will increase total profit by 308811.059% and vice versa.

Total Asset (TA) By refer to the table 4.2, it indicates the positive relationship between total asset (TA) and total profit of Islamic hire purchase (AITAB) for RHB Islamic Bank Berhad. It explained, when there is INCREASE of one (1) unit of total aaset (TA), will increase the total profit by 1280938.201% and vice versa.

Non Performing Loan (NPL)

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According to the table 4.2, it indicates the negative relationship between non performing loan (NPL) and Islamic hire purchase (AITAB) for RHB Islamic Bank Berhad. It explained, when there is INCREASE of one (1) unit of non performing loan (NPL), the total profit reduced by 1732136.684% and vice versa.

4.2.2

Coefficient of Determinanation (R

Model

R square

Adjusted R Square

Std. Error of The Estimate

Durbin-Watson

.744

.554

.496

1700764.362

1.311

Table 4.2.2: Model summary for coefficient of determination Coefficient of determination are also known as R square are use to measure the ampunt of total variation in dependent variables which can explained by all of the independent variables in the regression. R can be explained on the table 4.3.2. Higher of R, the more confident can be places in the estimation equation.

Based on this study, the dependent variable is the total profit of Islamic hire purchase (AITAB) for RHB Islamic Bank Berhad, while the independent variables are BASE FINANCING RATE (BFR), TOTAL AMOUNT DISBURSED (TAD), TOTAL ASSET (TA), and NON PERFORMING LOAN. According to the result obtained from 38 | P a g e

the research, R = 55.4% which shows that, it can be explained by the variables listed. The remaining 44.6% cannot be explained. It can be explained by other variables, not listed in this research, such as gross domestic product, money supply, deposit, and etc.

4.2.3

ANOVA

Model 1 Regression Residual Total

Sum of Squares 1.114E14 8.967E13 2.011E14

df 4 31 35

Mean Square 2.785E13 2.893E12

F 9.628

Sig. .000a

Table 4.2.3: Result for ANOVA Table The ANOVA table above are present a test of significance for the overall regression model. F-value are used to measured the significancy of the variables. The value should be less that 0.05 to consider statistically significant.

Referring to the table 4.2.3, this study shows that ANOVA expresses the F=9.628. On the other hand, the P-value calculated is .000a . It is show that, the P-value is lower than alpha set as at 0.05 (0.000 < 0.05). Therefore, the table indicates the significancy of all independent variables (BASE FINANCING RATE (BFR), TOTAL AMOUNT DISBURSED (TAD), TOTAL ASSET (TA), and NON PERFORMING LOAN (NPL). The hypothesis in all 39 | P a g e

independent variables had explaines the significant of dependent variable (TOTAL PROFIT of AITAB). As a result, it can conclude that overall model is significant.

4.2.4

T-Statistics R

Model Unstandardized Coefficients B 1 (Constan t) BFR LNTAD LNTA LNNPL 9036631.007 Std. Error 2.612E7

Standardize d Coefficients Beta t .346 -.417 .070 .176 -.415 -2.094 .439 1.261 -2.290 Sig. .732 .045 .664 .217 .029

Collinearity Statistics Toleranc e VIF

- 1112976.07 2330222.766 3 308811.059 704189.395 1280938.201 1015550.56 7 - 756546.409 1732136.684

.363 .564 .738 .439

2.754 1.772 1.354 2.280

Dependent Variable: Total Profit

Table 4.2.4: Result for T-Statistics

T-stat is use to derermine the relationship between independent variables and dependent variables. By using the significance level: 1. T-stat value is greater than significance level H0 , failed to reject

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2.

T-stat value is smaller than significance level conclude H1

), reject H0,

Confidence level will declare the significance level. It confidence internal level: 90% - the significance level will be 95% - the significance level will be 99% - the significance level will be )

ANALYSIS USING T-STATISTIC Overall analysis shows that two independent variable namely Based Financing Rate (BFR) and Non Performing Loan (NPL) have significance relationship with dependent variable total profit of Islamic hire purchase (AITAB) for RHB Islamic Bank Berhad. Other dependent variables such as Total Amount Disbursed (TAD) and Total Asset (TA) stated that, there is ni significant relationship between independent variables and dependent variable.

EXPLANATION ON T-TEST : Refer table 4.2.4 Based Financing Rate (BFR)

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There is significant relationship between Based Financing Rate (BFR) and Total Profit of AITAB since the value is -2.094. As a result, Ho is reject. Total Amount Disbursed (TAD) There is no significant relationship between Total Amount Disbursed (TAD) and Total Profit of AITAB since the value is 0.439. As a result, Total Asset (TA) There is no significant relationship between Total Asset (TA) and Total Profit of AITAB since the value is 1.261. As a result, is failed to reject. Non Performing Loan (NPL) There is significant relationship between Non Performing Loan (NPL) and Total Profit of AITAB since the value is -2.290. As a result, H0 is reject. is failed to reject.

4.2.5 42 | P a g e

Coefficient of Beta

Model

Beta

Constant BASED FINANCING RATE (BFR) 0.417 TOTAL AMOUNT DISBURSED (TAD) 0.070 TOTAL ASSET (TA) 0.176 NON PERFORMING LOAN (NPL) 0.415

Table 4.2.5: Result of Beta Beta is use to determine most factor that contribute on effect of dependent variable (total profit of AITAB). Beta column in coefficient table can interpret the result of the major contributor. The highest beta represent the strongest or the most influences factor of independent variables on dependent variable. According to the table above, Based Financing Rate (BFR) and Non Performing Loan (NPL) is the highest Beta, which is 0.417 and 0.415 respectively. While the lowest Beta represent Total Amount Disbursed (TAD) and Total Asset (TA), which is 0.070 and 0.176 respectively. It indicates, Based Financing Rate (BFR) are the most factor that will effect the dependent variable (total profit of AITAB). On the other hand, the lowest contribution of the dependent variable is Total Amount Disbursed (TAD).

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4.2.6

Correlations

TP Spearman's rho TP Correlation Coefficient Sig. (2-tailed) N BFR Correlation Coefficient Sig. (2-tailed) N LNTA Correlation D Coefficient Sig. (2-tailed) N LNTA Correlation Coefificient Sig. (2-tailed) N LNNP Correlation L Coefficient Sig. (2-tailed) N -.683 1.000 . 36
**

BFR -.683
**

LNTAD .417
*

LNTA .008 .963 36 .311 .065 36 -.320 .057 36 1.000 . 36 .376

*

LNNPL -.699** .000 36 .787** .000 36 -.569** .000 36 .376* .024 36 1.000 . 36

.000 36 1.000 . 36 -.644

**

.011 36 -.644
**

.000 36 .417
*

.000 36 1.000 . 36 -.320 .057 36 -.569

**

.011 36 .008 .963 36 -.699

**

.000 36 .311 .065 36 .787

**

.000 36

.000 36

.000 36

.024 36

**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).

Table 4.2.6: Result of Correlation According to the table above, by comparing value that is stated as sig. 2 tail with p value will interpret whether independent variable is significant or not significant. If significant level is less that P-value, have to reject null hypothesis H0. While, if significant level is more that P-value, have to accept the null hypothesis H0. 44 | P a g e

4.2.7

Hypothesis using Correlation

Hypothesis 1 : There is no significant relationship between Total Profit of AITAB and Based Financing Rate. : There is significant relationship between Total Profit of AITAB and Based Financing Rate.

According the Spearmens Correlaion table, based financing rate shows a negative correlation relationship with total profit AITAB. Spearmans correlation of based financing rate is 0.683. There is significant relationship between total profit of AITAB and based financing rate by looking at the p-value is less than 0.05 (0.00). As a result, Ho is rejected. This relationship was supported by the previous study, it was revealed a negative correlation between the BFR and the profitability of the bank (Kader & Leong, 2009). In addition, Staikouras and Wood (2011) stated the result of the findings on several countries on the bank profitability which show a negative relationship between the interest rate and the profit. Hypothesis 2 : There is no significant relationship between Total Profit of AITAB and Total Amount Disbursed. 45 | P a g e

: There is significant relationship between Total Profit of AITAB and Total Amount Disbursed.

According to the Spearmans Correlation table, total amount disbursed shows a positive correlation relationship with total profit of AITAB. Spearmans correlation of total amount disbursed is 0.417. There is significant relationship between total profit of AITAB and total amount disbursed by looking at the p-value is less than 0.05 (0.011). As a result, H0 is rejected. This result was supported by Selvili, Chang and Wu (2003) which they examined the relationship between the level of total amount of loans and the profits. It shows that, the positive significant relationship between both of variables.

Hypothesis 3 : There is no significant relationship between Total Profit of AITAB and Total Asset. : There is significant relationship between Total Profit of AITAB and Total Asset. According to the Spearmans Correlation table, total asset of AITAB shows a positive correlation relationship with the total profit of AITAB. Spearmans correlation of total asset of AITAB and total profit of AITAB is 0.008. There is no significant relationssip between total profit of AITAB and total asset of 46 | P a g e

AITAB by looking at the p-value is more than 0.05 (0.963). As a result, it is failed to reject Ho.

Hypothesis 4 : There is no significant relationship between Total Profit of AITAB and Non Performing Loan. : There is significant relationship between Total Profit of AITAB and Non Performing Loan.

According to the Spearmans Correlation table, non performing loan shows a negative correlation relationship with the total profit of AITAB. Spearmans correlation of non performing loan and total profit of AITAB is -0.699. There is a significant relationship between total profit of AITAB and non performing loan by looking at the p-value than 0.05 (0.000). As a result, reject the null hypothesis (H0).

The result was supported by the previous researcher, when the non performing loan increase, the profitability of the bank will reduce, and the capital become inadequate (Ranjan & Dhal, 2003). Therefore, the profitability of the bank will be reduce to streghthen the existing financing. It is because, the non47 | P a g e

performing loan have an impact on the profitability (Selvili, Chang, Wu, 2003).

CHAPTER 5 5.0 CONCLUSION AND RECOMMENDATION 5.1 Conclusion

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Islamic hire purchase business is very challenges business which have so many barriers to meet it goals. Islamic hire purchase using the contract of Ijarah, known as Al-Ijarah Thumma Al-Bai (AITAB). It is one of the well known Islamic product offered by the financial institution, not only from the Islamic financial institution, but also from the conventional institution. From this study, its can show overview of the trend of RHB Islamic Bank Berhad profitability. The trend show the total profit of AITAB for RHB Islamic Bank Berhad are fluctuate depends on the situation during the month. Profit maximization is the main objective of the most organization. However, there is so much challenges need to be faces by Islamic hire purchase of department of RHB Islamic Bank Berhad would reflect the trend of total profit of AITAB. Based financing rate and non performing loan has a positive relationship with the total profit of Islamic hire purchase (AITAB). When there is increase in based financing rate and non performing loan, it will decrease the amount of total profit of AITAB. While the total amount disbursed and total asset of AITAB generate negative relationship with the total profit of AITAB. The changes occur on the variable will not influence the total profit of AITAB. This research also being conducted to recognize the variables which be the major factor contributing the influence of Islamic hire purchase in RHB Islamic Bank Berhad profitability. The variables are Based Financing Rate, Total Amount Disbursed, Total Asset, and Non Performing Loan. After findings, Based Financing Rate and Non Performing Loan are the most influences factor to the total profit of Islamic hire purchase (AITAB). In addition, after the R have veen tested, the result obtained for R is 55.4%. It indicates that, 55.4% can be explained by the variables listed. While the 49 | P a g e

remaining balance which 44.6% cannot be explained. It may be explained by other variables such as money supply, gross domestic product, deposit and etc. Overall model is significant since the ANOVA expresses the F=9.628. On the other hand, the P-value show the value below than 0.05, which is 0.000. In the T-test, the test signify the significant relationship between Total Profit of AITAB with Based Financing Rate and Non Performing Loan. While Total Amount Disbursed and Total Asset shows no significant variables with the Total Profit of AITAB. Based on the correlation result, Total Amount Disbursed and Total Asset have positive relationship with the Total Profit of AITAB. While Based Financing Rate, Total Amount Disbursed and Non Performing Loan have significant relationship with the Total Profit of AITAB. Whereas Based Financing Rate and Non Performing Loan have negative relationship. Only Total Asset of AITAB is not significant with Total Profit of AITAB. In conclsion, the three objectives in this research have been successfully met.

5.2 Recommendation Profitability for every organization is very important to measure their performance. In order to increase the profitability of Islamic hire purchase,

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known as Al-Ijarah Thumma Al-Bai (AITAB), there are some recommendation that relates with the variables. The recommendations are as listed below:

1.

RHB Islamic Bank Berhad can charge lower profit rate to the their customer, Therefore, many customer can choose hire purchase facility with the bank. This recommendation is based on the analysis done through the findings. Which lower Based Financing Rate inposed by the bank.

2.

RHB Islamic Bank Berhad should increase their sales of hire purchase product, to gaining the profit from the financing facilities. The more financing approved to the customer, the more profit will be gained through the profit rate imposed of the financing.

3.

RHB Islamic Bank should prevent the existing account from listed as the non performing account. It will interupt the circulation of money, which the bank should do financing with other bank to provide the financing to the new customer. The prevention activity must be agressive since the customer are reluctant to pay their rent.

4.

RHB Islamic Bank can also do some cross selling for the existing customer. The cross selling can be road tax renewal and insurance or takaful renewal since the bank keep the registeration card of the

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vehicles. The cross selling can help in increase the total profit of the Islamic hire purchase business (AITAB).

REFERENCES

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Abdullah, N. (2009) Good Faith, Fair-Dealing and Disclosure Requirements in Hire Purchase Contract in Malaysia: Islamic and Conventional Perspective. Journal of Islam in Asia. Vol. 6, No. 1 Abdullah, N. I., and Dusuki , A. W. (2006) Customers Perception of Islamic HirePurchase Facility in Malaysia: An Empirical Analysis. IIUM Journal Economics and Management. Vol. 14, No. 2, pp 177-204 Akhter, W., Orangzab, Raza, A., and Akram, M. (2011). Efficiency and Performance of Islamic Banking: The Case of Pakistan. Far East Research Centre. Hong Kong Chang, Y., T. (2006). Role of Non-Performing Loans (NPLs) and Capital Adequacy in Banking Structure and Competition. Working Paper Series. University of Bath, School of Management Fofack, H. (2005). Nonperforming Loans in Sub-Saharahan Africa: Causal Analysis and Macroeconomic Implications. World Bank Policy Research Working Paper 3769 Gul, S., Irshad, F., and Zaman, K. (2011). Factors Affecting Bank Profitability in Pakistan. The Romanian Economic Journal. Year XIV, No. 39 Haron, S. (1996).Competition and Other External Determinants of The Profitability of Islamic Banks.Islamic Economic Studies. Vol. 4, No. 2 Haron, S. (2004). Determinants of Islamic Banks Profitability. Global Journal of Finance and Economics. Vol. 1, No.1 Hassan, M. K., and Bashir, A. (2001). Determinants of Islamic Banking Profitability. ERF Paper Kader, R. A., and Leong, Y. K. (2009). The Impact of Interest Rate Changes on Islamic Bank Financing. International Review ofof Business Reserch Papers. Vol. 5, No. 3, pp. 189-201 Martani, D., and Munaiseche, R. R. (2009). Factors Affecting Profitability of Multifinance Companies in Indonesia

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Ranjan, R., and Dhal, S. C. (2003). Non-Performing Loans and Terms of Credit of Public Sector Banks in India: An Empirical Assessment. Reserves Banks of India Occasional Papers. Vol. 24, No. 3 Resolutions of Shariah Advisory Councul of Bank Negara Malaysia (2011) Staikouras, C. K., and Wood, G. E. The Determinants of Europian Banks Profitability. International Business and Economics Research Journal. Vol. 3, No. 6 Wen, C. W., Chin, O.C., and Zekiye, S. (2003). Banking System, Real Estate Market and Nonperforming Loan

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