Abstract
The purpose of this study is to investigate the determinants of Malaysia Islamic
banks capital adequacy ratio and its effects on financial positions of banks covered by the
study. Data are obtained from banks' annual reports; other proxies were collected from
bankscope database for the period 2006 - 2011.
Capital adequacy ratio is the ratio which determines the bank's capacity to meet the
time liabilities and other risks such as credit risk, operational risk etc. In the most simple
formulation, a bank's capital is the "cushion" for potential losses, and protects the bank's
depositors and other lenders. Banking regulators in most countries define and monitor CAR
to protect depositors, thereby maintaining confidence in the banking system.
Panel data methodology is used in this study and analyzes relationships between
independent variables; bank size (SIZE), operational efficiency (OPR), liquidity risk
(LQR), profitability (ROA and ROE), Credit risk (CR) and a dependent variable which is
capital adequacy ratio (CAR).
The results of the paper indicate that Credit risk (CR) and return on equity have a
negative effect on CAR, while return on assets positively influence CAR. On the other
hand operating efficiency (OPR), Liquidity risk (LR) and Bank size (SB)do not appear to
have any significant effect on CAR.
Keywords: Islamic banks, capital adequacy,determinants of capital adequacy ratio.
