A panel data analysis of fee income activities in Islamic Banks

Abstract EN

In recent years, commercial banking worldwide has experienced a significant decline in its traditional business of accepting deposits and offering loans.

Simultaneously, banks have become more involved in nontraditional activities that provide financial services and generate fee income.

As a result, income from nontraditional activities has risen relative to income from traditional activities.

This article presents an empirical investigation of Islamic banks’ involvement in various fee income activities.

Our theoretical hypotheses relate the level of fee income activities at an individual bank to asset size, profitability, core deposits, capital risk as well as credit risk.

These hypotheses are tested empirically using bank-specific information from a panel of Malaysian Islamic commercial banks for the years 1994 to 2004.

The results imply that banks with higher levels of fee-generating activities tend to have higher assets and core deposits as well as exhibit less risk.

These findings show that banks involved in nontraditional activities have more diverse sources of funds and greater access to financial markets, which reduces risk.

Since the findings suggest that banks with a greater involvement in nontraditional activities must resort to alternative sources of funds to finance their operations, nontraditional activities appear to be one method a bank can use to generate income.

Furthermore, institutions engaged in such activities tend, to a larger extent, to be safer.

Therefore, the underutilized fee income plays an important alternative source of revenue, hence able to reduce the over-dependence of Islamic banks on debt-financing as the main source of revenue.