The aim of this paper is to analyse the financial performance of Islamic banks in Malaysia measured using ratio analysis of profitability, liquidity, credit risk and impaired financing performance. The study also includes determining the impact of nominal Gross Domestic Product (GDP) and inflation rates on the variables of profitability, liquidity, credit risk and impaired financing performance during the period spanning from year 2007 to year 2011. The result of regression shows that nominal GDP has significant impact on macroeconomic variables such as return on average asset, liquidity ratio and equity to net loans. Therefore, there are only certain macroeconomic variables that have significant impact towards nominal GDP. As for the log-linear regression between nominal GDP and inflation rate as the dependent variables, the results shown that nominal GDP has significant and positive impact on ROAA (return on average asset) and liquidity ratio and EQL (equity to total liquidity). However, as for inflation rate, the results shown that the inflation rate has negative correlation with profitability ratio (ROAE and ROAA). Furthermore, surprisingly the inflation rates have no significant impact on the profitability ratio. The constraint of this paper is the limitation of time series period data on some of the economic variable as well as relying in the use of basic linear regression analysis.