Determinants of non-performing financing in local and foreign islamic banks in Malaysia: the moderating role of staff efficiency

Non-Performing Financing (NPF) levels recorded by 11 local and 5 foreign Islamic banks in Malaysia from 2017 to 2023 indicate fluctuations throughout that timeframe. High NPF may impact the financial performance of Islamic banks in Malaysia and effect the general financial stability of the country. This study examines the determinants that may influence the NPF levels of both local and foreign Islamic banks in Malaysia. It includes internal factors such as Return on Assets (ROA), Financing to Deposit Ratio (FDR), Bank Size, and Financing Loss Provision (FLP), and external elements like Gross Domestic Product (GDP), Unemployment Rate (UR), Inflation Rate (IR), and Control of Corruption (COC). This research also includes Staff Efficiency (STAFFX) as a moderating factor that affects the link between the independent and dependent variables. Staff Efficiency is important because if personnel do not work effectively (due to insufficient expertise), the performance of the bank is likely to be significantly impacted. The data for this study were sourced from the Fitch Connect Database, the Department of Statistics Malaysia, and the Worldwide Governance Indicator. This research employs Panel Data Regression Analysis with the Generalized Least Squares Method and a hierarchical regression model. The findings indicate that ROA, FDR, Bank Size, FLP, and UR significantly influence the NPF levels of local and foreign Islamic banks in Malaysia. Other predictors, namely GDP, IR, and COC have insignificant impact on NPF. This research also shows that Staff Efficiency can moderate and enhance the correlation between FDR and NPF in local Islamic banks, along with the links between Inflation Rate and NPF as well as COC and NPF in foreign Islamic banks. This study provides new interesting findings regarding the beneficial effect of Staff Efficiency in minimizing NPF during the unstable economic conditions.