Technological advances and deregulation have driven banks to capitalize their benefits into some diversification activities they choose in the financial industry. This paper investigates the relation between service activities and risk of Indonesian banking industry in the period of 2015-2017. This study employs Structural Equation Modeling (SEM) with path analysis and multiple group analysis of 12 Islamic banks and 38 conventional banks. This study reveals that the Islamic banks appear to have more variable service activities and more stable risk than the conventional banks. For Islamic banks, non-financing income has a negative significant impact on bank risk; while commission income and trading income have a positive significant impact. Further, other non-financing income has a positive impact on bank risk. In the conventional banks, non-interest income has a positive impact on bank risk; while commission income has a negative impact. In addition, trading income also has a negative impact, and other non-interest income has a positive impact. These results imply that the Islamic banks emphasize the importance of expanding new service activities to reduce the risk. In conventional banks, diversified activities contribute to higher income volatility and debt level. Thus, they need to reduce the high cost of depositors which include savings, demand deposits, time deposits, and also interest costs of long-term debt as the sources of fund.

The Indonesian banking industry has developed technology innovation will provide financial services to generate income. The purpose of this paper is to compare the service activity and to explore the effect of the service activity on risk in Islamic and conventional banks. By analyzing 12 Islamic banks and 38 conventional banks in Indonesia during the period from 2015 to 2017, we use Structural Equation Modelling (SEM) with path analysis and multiple group analysis. The result shows that the service activity of Islamic banks appears to be more variable than conventional banks. The risk level of Islamic banks is more stable than conventional banks. For Islamic banks, non-financing income has a significant negative effect on risk, commission income and trading income have a significant positive effect on risk, and other non-financing income has no effect on risk. However, no significant effect has been observed between non-interest income, commission income, trading income, other non-interest income and risk level in conventional banks. This finding indicates that the combination of funding activities, lending activities, and service activities allows Islamic banks to obtain the diversification income till reduce risks. For conventional banks, diversification in activities contributes to the higher volatility of bank revenue.