Assessing the Indonesian Banking Risk: A Comparative Study between Islamic and Conventional Banks

Abstract

Technological advances and deregulation have driven banks to capitalize their benefits into some diversification activities they choose in the financial industry. This paper investigates the relation between service activities and risk of Indonesian banking industry in the period of 2015-2017. This study employs Structural Equation Modeling (SEM) with path analysis and multiple group analysis of 12 Islamic banks and 38 conventional banks. This study reveals that the Islamic banks appear to have more variable service activities and more stable risk than the conventional banks. For Islamic banks, non-financing income has a negative significant impact on bank risk; while commission income and trading income have a positive significant impact. Further, other non-financing income has a positive impact on bank risk. In the conventional banks, non-interest income has a positive impact on bank risk; while commission income has a negative impact. In addition, trading income also has a negative impact, and other non-interest income has a positive impact. These results imply that the Islamic banks emphasize the importance of expanding new service activities to reduce the risk. In conventional banks, diversified activities contribute to higher income volatility and debt level. Thus, they need to reduce the high cost of depositors which include savings, demand deposits, time deposits, and also interest costs of long-term debt as the sources of fund.

The Determinants of Capital Structure: A Comparative Study between Sharia and Non-Sharia Manufacturing Companies in Indonesia Stock Exchange (IDX)

“…The increase of debt or BLEV can be done to make use the sharia financial institutions, especially the Islamic banks. The research result by Friantina (2019) concludes that non-interest financing can reduce business risks and the risks of financing itself. In addition, Setiawan (2019) also concludes that the financing of sharia banking provides various positive roles in many economic sectors, especially in providing employment.…”

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“…The business management of the Islamic Microfinance Institution (IMFI) Baitul Maal wa Tamwil (BMT), a Non-Bank Financial Institution (NBFI), requires direct and intense guidance on its administration practice, transactions, and investments (Friantina, 2019). Discerning from the fundraising or liabilities of the third-party and assets gotten from the low-income communities, the BMT IMFI is risky.…”