Stability of Islamic banks in Indonesia: Autoregressive Distributed Lag Approach

Abstract

Islamic banks in Indonesia are very vulnerable to the instability of their business processes because of their small market share. Moreover, based on their financial performances, Islamic banks are worse than those of conventional banks due to lower profits (ROA) and higher Non-performing financing (NPF). Our study investigates the stability of Islamic banks. We measure the stability using Z-score and NPF. Instead of an individual bank, the study applies an aggregate data of Islamic banks encompassing Islamic commercial banks along with Islamic business units. Monthly time series data, covering January 2010 to December 2018 are selected. We apply the Autoregressive Distributed Lag (ARDL) model. The findings document that the Islamic bank's specific variables affecting stability are size, CAR, and efficiency. The larger size and CAR support the Islamic bank's stability. Lower efficiency increases the Islamic bank's instability. Meanwhile, Inflation and exchange rates affect the Islamic bank's stability. Economic downturns due to inflation and depreciation of rupiah increase the instability of Islamic banks. AbstrakBank Islam di Indonesia sangat rentan terhadap ketidakstabilan proses bisnis mereka karena pangsa pasar yang kecil. Selain itu, berdasarkan kinerja keuangan mereka, bank syariah lebih buruk daripada bank konvensional karena laba lebih rendah (ROA) dan pembiayaan bermasalah (NPF) lebih tinggi. Penelitian ini menyelidiki stabilitas bank Islam. Stabilitas keuangan diukur dengan menggunakan Z-score dan NPF. Penelitian ini menggunakan data agregat bank syariah yang mencakup bank komersial syariah bersama dengan unit bisnis syariah. Data yang digunakan adalah bulanan dari Januari 2010 hingga Desember 2018. Penelitian ini mengaplikasikan model Autoregressive Distributed Lag (ARDL). Temuan penelitian ini mendokumentasikan bahwa variabel spesifik bank Islam yang memengaruhi stabilitas adalah besarnya asset, CAR, dan efisiensi. Aset dan CAR yang tinggi mendukung stabilitas bank syariah. Efisiensi yang lebih rendah meningkatkan ketidakstabilan bank syariah. Sementara itu, inflasi dan nilai tukar memengaruhi stabilitas bank Islam. Penurunan ekonomi akibat inflasi dan depresiasi rupiah meningkatkan ketidakstabilan bank Islam.

Financing diversification and Indonesian Islamic bank's non-performing financing

“…CAR negatively affects NPF and inefficient operating also contributes to higher NPF. (Havidz & Setiawan, 2015;Setiawan & Bagaskara, 2016;Widarjono, 2020). In addition, some macroeconomic variables such as GDP, inflation, and exchange rate also contribute to Islamic banks' NPF (Havidz & Setiawan, 2015;Lin et al, 2016;Widarjono, 2020).…”

“…This study contributes to empirical literatures in some ways. First, some previous studies have examined the Islamic commercial banks' nonperforming financing (Kabir & Worthington, 2017;Hassan et al, 2019;Widarjono, 2020;Rahmah & Armina, 2020) as well as conventional banks such as Rachman et al (2018), Tran & Nguyen (2020), Le & Diep (2020). However, to the best of our knowledge, they have not addressed the impact of financing diversification on NPF.…”

Projection of Indonesian Islamic commercial banks efficiency and stability in the Covid-19 period using DEA and panel ARDL

“…The use of this method encompasses the individual bank's effect and further contributes to the novelty of the study. In comparison, Widarjono (2020) who used ARDL as a method to assess the Islamic banks' stability in Indonesia used aggregate value of all Islamic commercial banks and Islamic business units, eliminating the possibilities of banks' individual effects. The variables in ARDL use the existing DEA variables, which mean that two-equation models as the output variables in DEA consist of two variables.…”

“…This solution may be acceptable for banks which have high risks and liquidity problem. As stated by Widarjono (2020), the stability of Islamic banks is greatly influenced by the size of banking assets and capital adequacy, as greater assets signify greater stability. Therefore, increasing equity is vital to maintain the stability of Islamic banks.…”

Does market structure matter for Islamic rural banks' profitability?

“…Agus Widarjono, M. B. Hendrie Anto | 395 | Warninda (2014), Sriyana (2015), Hosen & Rahmawati (2016), Setyawati et al (2017), Trinugroho et al (2017), Widarjono (2018), Aisyah & Hosen (2018), Sutrisno & Widarjono (2018), Al Arif & Awwaliyah (2019), Widarjono (2020a), Widarjono (2020b). The existing empirical studies of Indonesian Islamic banks employ panel data as well as time series data.…”