The impact of inflation on Islamic banks’ home financing risk: Before and during the COVID-19 outbreak

Abstract

The COVID-19 outbreak has had a severe impact on nearly all industries, including Islamic banking, which plays a significant role but is exposed to higher risk. This study aims to evaluate the credit risk that Islamic banks in Indonesia have been exposed to related to home financing before and during the COVID-19 outbreak. Panel data are employed covering the period January 2016 to September 2020 on a monthly basis. The data were analyzed using a dynamic panel approach to present a distinct picture of Sharia-compliant property financing before and during the COVID-19 outbreak. In general, the findings show that the macroeconomic variable reflected by regional inflation has had a different influence in the two periods, with Islamic banks having had much more exposure to macroeconomic risk, specifically in home financing, during the epidemic. In addition, the different influences are also shown by the study results, which show that provinces on Java Island face less risk exposure than those outside Java. In terms of impulse response factors and variance decompositions’ result, before the outbreak, the response of home financing risk to inflation tended to be more stable. However, during the outbreak, the movement has tended to fluctuate more, especially outside Java Island. The same result for variance decompositions shows a similar trend, with inflation tending to have a larger impact during the outbreak. AcknowledgmentsWe are grateful to the Direktorat Penelitian dan Pengabdian Masyarakat (DPPM) Universitas Islam Indonesia No. 001/Dir/DPPM/70/Pen.Unggulan/XII/2020 for support and providing a research grant for the study.

The Determinants of Islamic Banks’ Non-Performing Financing in the Small-Medium Enterprises (SMEs) Sector

“…It indicates that lower inflation is possibly due to less purchasing power possessed by society to buy products and services provided by SMEs. As a result, such condition creates a higher possibility for SMEs to return the financing amount to the Islamic bank (Fakhrunnas et al, 2021). The finding is also in line with what was found by Aviliani et al (2015), Nursechafia and Abduh (2014), Erdinç andGurov (2016), andFirmansyah andGunardi (2018), who concluded that inflation has a negative and significant effect stated that inflation has a negative relationship to Islamic banks' NPF.…”

“…According to the finding, during all periods, inflation does not have a significant influence on NPF in all models. The finding is different from Fakhrunnas et al (2021), andAnto et al (2022) stated that inflation is the determinant of NPF's value in the Indonesian Islamic bank. Moreover, FDR has a positive and significant impact on NPF in investment financing.…”

“…The finding is similar to Sutrisno et al (2020), who also highlighted the negative impact of the COVID-19 pandemic on Islamic banks' performance in Indonesia. Moreover, Fakhrunnas et al (2021) and Anto et al (2022) attempted to explain the relationship between Islamic banks' non-performing financing in home financing to regional inflation before and during the COVID-19 pandemic with adopting a dynamic panel data. However, the prior studies did not explain how Islamic banks' performance in the SME sector by covering before and during the outbreak as well as analyzing the regional approach in the case of Indonesia.…”

The Impact of COVID-19 on the Performance of Islamic Banks in the MENA Region

“…As for the inflation rate impact, Table 3 indicates that the spread of COVID-19 infections in 2020 increased the inflation rate during 2020 and 2021, which is in line with the observed results of scholars such as Fakhrunnas et al (2021). However, the results in Table 7 reveal the absence of significant influence of the inflation rate on the financial return of IBs during the COVID-19 crisis.…”

“…A large number of bank customers have not been able to pay back their debts because they lost their jobs during the quarantine period (Hasan, 2020). Many IBs have thus faced various macroeconomic risks (Fakhrunnas et al, 2021) and huge withdrawals of funds by their depositors (Cahyono et al, 2021).…”