Indonesian Islamic Banks and Financial Stability: An Empirical Analysis

Abstract

Islamic banking in Indonesia is very vulnerable to volatility in their business processes due to its small market share. Compared to conventional banks, seen from their financial performance, Islamic banks have a worse performance because of lower profit (ROA). This study examines the stability of Islamic banking in Indonesia. Stability is measured using the Z Score. The data in this study are aggregate data for Islamic commercial banks. The data used are monthly data from January 2015 to December 2019. This study uses the ARDL (Autoregressive Distributed Lag) method. The results of this study are that all independent variables OER, NPF, inflation, IPI, exchange rates have an effect on the stability of Islamic banking, except FDR. Lower efficiency and problematic financing increases the stability of Islamic banking. Meanwhile, macroeconomic factors, inflation and exchange rates, have a negative effect on the stability of Islamic banking. The economic downturn due to inflation and rupiah depreciation will increase the instability of Islamic banks.

Indonesia Islamic Banking Stability in The Shadow of Covid-19 Outbreak

“…This ratio can be used to measure the effectiveness and management of a bank in carrying out its operations and duties. The results of the research are supported by (Primadita, 2020;Maritsa & Widarjono, 2021).…”

“…So that Islamic banking must pay attention to the system in asset management and CAR so that Islamic banking can carry out its role as a financial institution that can advance the community's economy (Widarjono et al, 2020) Meanwhile for other internal variables, namely the NPF is negative and significant to the initial hypothesis that the NPF has a significant negative effect on the profits and stability of Islamic banking, where the more problematic financing (NPF), will reduce the profits and stability of Islamic banking. Non-performing loans that occur continuously for Islamic banking will cause potential losses, especially in the long term (Maritsa & Widarjono, 2021).…”

“…In addition, the position of asset share in Islamic banking reached 6.05%. Where this condition increased before the Covid-19 pandemic (Maritsa & Widarjono, 2021).…”

From Crisis to Stability: How Macroeconomics Shapes Islamic Banking and MSME Futures?

“…This contrast underscores the need for a nuanced understanding of the factors influencing Islamic banking performance within the context of the pandemic. Existing literature has explored various macroeconomic variables that can significantly affect the financial performance of Islamic banks, such as interest rates, inflation, exchange rates, and economic growth (Idawati, 2023;Maritsa & Widarjono, 2021). For instance, higher interest rates can negatively impact bank profitability by increasing borrowing costs and affecting lending activities (Idawati, 2023), while inflation and exchange rates can also have adverse effects on Islamic bank performance (Maritsa & Widarjono, 2021).…”

“…Existing literature has explored various macroeconomic variables that can significantly affect the financial performance of Islamic banks, such as interest rates, inflation, exchange rates, and economic growth (Idawati, 2023;Maritsa & Widarjono, 2021). For instance, higher interest rates can negatively impact bank profitability by increasing borrowing costs and affecting lending activities (Idawati, 2023), while inflation and exchange rates can also have adverse effects on Islamic bank performance (Maritsa & Widarjono, 2021). Additionally, financial system stability, which is influenced by macroeconomic conditions, can impact the financial performance of Islamic banks (Kasri & Azzahra, 2020).…”