Financing Diversification and Profitability of Islamic Banking in Indonesia

Abstract

This study aims to determine the effect of Islamic bank financing diversification based on economic sectors and based on the type of use on profitability. This study uses financing data for Islamic Banks and Islamic Business Units in 2014-2018. The data in this study are the times series data. Data analyzed by used multiple linear regression analyses. This research provides that results that the HHI of diversification of Islamic bank financing based on the economic sector is positively related to increasing the profitability of Islamic banks. It means diversification of financing based on high economic sectors, has an impact on reducing the profitability of Islamic banks in Indonesia. While the HHI of diversification of financing by type of use give a significant influence in increasing the profitability of Islamic banks in a negative direction. If Islamic banking only focuses on channeling financing to the consumption sector, it can have an impact on decreasing profitability. So that Islamic banking needs to equalize the distribution of consumption to the working capital and investment sectors. The results of this study are interesting because it can be used as a reference for Islamic banking in determining the policy of diversification of financing to obtain high profitability with low risk.

The Sectoral Financing Diversification and the Profitability of Islamic Banking in Indonesia

“…Accordingly, the result shows that the concentration of sectoral financing has a negative effect on profitability, supporting the diversification stability hypothesis. This finding is in line with previous findings where the concentration of sectoral financing negatively affects the profitability of Islamic banks (Hamid & Ibrahim, 2020;Šeho et al, 2021;Prastiwi & Anik, 2021).…”

“…Both studies documented that financing concentration negatively impacts profitability. Prastiwi and Anik (2021) also found that sectoral financing concentration lowers the profitability of Indonesian Islamic banks. However, previous studies have not distinguished between Islamic commercial banks (ICBs) and Islamic windows banks (IWBs).…”

“…This finding indicates that the sectoral financing concentration will increase profits for ICBs, but the sectoral financing concentration will reduce profits for IWBs. Previous research has shown that the financing concentration increases profits in the case of Islamic rural banks in Indonesia and the case of aggregate Islamic banks in Indonesia (Prastiwi & Anik, 2021). Other studies document that the sectoral financing concentration Widarjono, Sidiq Published by University of Airlangga.…”

“…Sectoral diversification also lowers the profitability of 46 Islamic banks from 2000 to 2015 in six countries, but sectoral diversification's effect on profitability differs across risk levels (Šeho et al, 2021). The study of the diversification of Islamic banks in Indonesia has been conducted by and Prastiwi and Anik (2021). The result shows that financing diversification significantly increases IB's profitability.…”

Which is More Influential? Internal Factors or External Factors of Banks on the Profitability of Conventional Banks

“…According to the research findings of (Oktavia & Musdholifah, 2018) (Lotfalipour & Bazargan, 2020) (Abdelaziz et al, 2022), (Rizal et al, 2021), one of the macro variables that positively and significantly affects bank profitability is the rate of inflation.. Because people's decisions about what to save and invest depend on their income, inflation has a beneficial impact on profitability. In the meantime, study findings by penelitian (Bahjat et al, 2022) (Gumbo et al, 2022) (Prastiwi, 2022) demonstrate that inflation significantly and negatively affects bank profitability. A high rate of inflation indicates a high rate of price growth overall.…”