CHAPTER 1 INTRODUCTION This chapter outlines the background of the study and the foundation of the research problem statement research objectives research questions the scope of research and significance of the research 1 1 BACKGROUND OF THE STUDY The past 2 decades saw Malaysia s banking sector underwent some major structural changes especially after the country went through the financial crisis in 1998 and 2008 This has made an indirect trend whereby most banks and other financial institutions have prompted into merger and acquisition in order to boost their capital and asset base Liberalization and globalization is also a major factor of transformation within commercial banks It made it more competitive for commercial banks to become the one stop finance service destination and also to provide innovative financial services in order to meet the changes in the financial world Banks have played an intermediary role to encourage the stream of assets between surplus funds unit and deficit funds units in an economy Alkhazaleh Almsafir 2014 Therefore according to San Heng 2013 banks have a huge impact in shaping the pattern of an economy and along these lines banks have been broadly perceived as the most basic organizations in a financial system Ramlall 2009 had called attention to that it is essential for the banking sector to manage a level of financial stability related soundness particularly after the 2008 United State Subprime emergency which had driven genuine bothersome conditions too numerous nations around the world Along these lines it is fundamental for banks to keep up gainful development with the goal that it can guarantee the security and soundness of money related framework Azlan Jamal Rahimie Karim 2012 additionally pointed that a well managed and profitable bank can advance monetary development of the nation and can maintain the sudden economic downturn Money is a very sensitive and precarious asset to handle
These risks originate from both the microeconomic and macroeconomic Some of these risks include market risk credit risk default risk interest rate risk the risk from operational point of view and exchange rates Aruwa Musa 2014 Banks are very keen on asset quality this is the appraisal of any organizations assets so as to investigate credit risk levels and size Alshatti 2015 According to Adeolu 2014 asset quality is a little yet exceptionally delicate factor that measures the soundness and gainfulness of commercial banks and essentially concentrates on the nature of credits Fundamentally bank specific factors emerge from the inner which is inside the control of bank management Alper Anbar 2011 expressed that an effective banking sector can advance alluring financial development while credit bankruptcies could bring about deliberate emergency Afriyie 2013 bolstered once there is a poor credit risk policy inside the bank credit risk exposure will be bigger as advance default rate increments and in this manner bank s execution will be influenced Notwithstanding some examines uncover that credit risk can enhance bank's profitability which demonstrates banks operate in high credit risk condition will be remunerated by higher returns
Thus it develops question on whether Malaysian commercial banks able to benefit if work in a high credit risk condition Pat 2012 found that inflation will back off the economy because of costs of products and services increase while the individual s income will remain the same It will cause inflation when the market is excessively fluid as money supply more than money demand To that end a couple of business investigators have analysed that diminishments in loanable assets could significantly influence bank subordinate borrowers e g privately owned businesses and may cause noteworthy diminishments in their fixed investment consumption or even lead them to insolvency Gertler Gilchrist 1994 Meanwhile Muda Shaharuddin Embaya 2013 concurred that when slump of domestic economic activities occur in Malaysia in the midst of 1998 and 2008 the credit application in the country showed declining pattern as well In Malaysia banks are viewed as prevailing financial institution along these lines thus their well being condition is essential as it will give impact to the general condition of the economy Suffian 2009 Subsequently having the information on factors impacting commercial banks profitability is not just imperative but at the same time is fundamental in settling the economy and in addition for the advantages of different gatherings such as the government financial authorities and other stakeholders
The significance of banking profitability can be divided into 2 categories that is from the internal microeconomic and external macroeconomic perspective Internally Inside the benefit is to some degree considered as the important part to carry a business In this manner the most pertinent and significant factors have been explored to investigate the impacts on bank's profitability which is measured by return on assets The bank specific are bank size capital adequacy and credit risk Meanwhile for the macroeconomic variables are exchange rate and real interest rate only will be covered
