Asymmetric Information and Non-Performing Financing: Study in The Indonesian Islamic Banking Industry

Abstract

The purposes of this study are: First, to analyze the indications of moral hazard and adverse selection on Indonesian Islamic commercial banks. Second, to analyze the influence of moral hazard and adverse selection on the Non Performance Financing of Indonesian Islamic banks. This study uses Error Correction Model (ECM) as a tool of analaysis. The results show that the indications of moral hazard have a positive effect on the non-performing financing (NPF) in the short run. The indication of the presence of moral hazard occurs at the long run on GDP variable, and the allocation of Murabaha financing (RM) has a positive effect on the mudharabah (FM) profit and loss sharing. The test results also show that adverse selection that represented by the profit sharing rate (PSR) has a positive effect on the level of risk sharing toward non-performing financing (NPF) in the long run.

Empirical evaluation of structure-conduct-performance paradigm as applied to the Iranian Islamic banking system

“…This result also is not consistent with some studies that argue that the Iranian banking system has become more competitive since the privatization of banks that has started in 2000 (Goodarzi and Shafiee, 2012; Najarzadeh et al , 2013). In addition, it is stated in the introduction that Islamic banking should be based on Islamic morals and Sharia and the act of collusion between banks is forbidden (Rodoni and Yaman, 2018) according to Sharia law. Regarding the cartel-like structure of the Iranian banking system and the existence of collusive behavior among the banks, it can be stated that the Iranian Islamic banking system, at least in this regard, is not based on Sharia law.…”

“…This result also is not consistent with some studies that argue that the Iranian banking system has become more competitive since the privatization of banks that has started in 2000 (Goodarzi and Shafiee, 2012;Najarzadeh et al, 2013). In addition, it is stated in the introduction that Islamic banking should be based on Islamic morals and Sharia and the act of collusion between banks is forbidden (Rodoni and Yaman, 2018) according to Sharia law.…”

“…This implies that banks in the Islamic banking system should avoid carrying out some operations like gambling, bearing excessive uncertainty and paying or charging interest (Tarique et al , 2020). Some other behaviors, such as collusion, are also prohibited based on the Islamic rules (Rodoni and Yaman, 2018). Besides in the practice of Islamic banking, some issues like economic development, progress, human well-being should be considered (Chapra, 2016; Furqani and Mulyany, 2009; Tarique et al , 2020).…”

“…This result is also in contradiction with other studies that argue that market structures have become more competitive, as the privatization of some Iranian banks (Goodarzi and Shafiee, 2012; Najarzadeh et al , 2013). As mentioned before, Islamic banking is based on Islamic morals and Sharia law and acts of collusion between banks are forbidden (Rodoni and Yaman, 2018). This very evidence again shows the difference between the Islamic banking concept and Islamic banking in action.…”

The Implementation of Profit Sharing at Lembaga Perkreditan Desa

“…Disclosure of the calculation of the rate of return and allocation of profits is very important to prevent financial institutions from manipulating earnings (Syanthi et al, 2017;Ningsih, 2015). On the other hand, increased transparency of bank financial conditions will also reduce information asymmetry so that market players can provide fair judgments and promote market discipline (Umiyati, 2020;Rodoni & Yaman, 2018;). Adequate disclosure is the minimum level that must be met so that the financial statements as a whole are not misleading for the purpose of directed decision making.…”