Noor Fadhzana Mohd Noor
University of Selangor

The significance of a bank’s leverage ratio and its determinants is undeniable. The ratio denotes particularly the debt used by the bank to generate income for the investors as well as shareholders. Thus, it warrants the bank’s ability to finance and generate income. Besides the ratio itself, it is of importance to explore the determinants of the ratios. Past literature has established the determining impact of a bank’s performance and bank’s size on the leverage. However, these determinants have not been explored in the context of Malaysian banks, particularly Islamic banks. In addition, a unique reserve used by Islamic banks in Malaysia known as the profit equalization reserve may also be a significant determinant of the leverage ratio because it is used as a cushion for risks related to the investment products of Islamic banks. As such, this study examined the relationship between leverage ratio, bank’s performance, size and profit equalisation reserve in Malaysian Islamic banks. Using GMM estimators, both difference and system, a significant relationship was found between the current leverage ratio and previous leverage ratio and profit equalization reserve. Overall, the results are consistent with the past studies. In addition, the determining impact of the profit equalization reserve on leverage ratios of Islamic banks in Malaysia was also discovered.

Keywords: Leverage ratio, bank’s performance and profit equalization reserve