How Islamic Bank Managing Risk? An Emphasis on Anticipating Financial Crisis

Abstract

The global economic crisis in 2008 shocked and pressured Indonesian macroeconomic and financial system stability. The decline in macroeconomic stability has an impact on banking policy in lending. Most banks in the world respond to the crisis by doing credit rationing, but how about Islamic bank response toward this condition in Indonesia? Therefore, this study aims to examine the effect of Capital Adequacy Ratio (CAR) and macroeconomic variables on the amount of Islamic banking financing in Indonesia. The method used in this study is the SVAR (Structural Vector Auto Regression) analysis method. The results showed that inflation, capital, and CAR variables had a significant effect on Islamic bank’s financing amount. In contrast, GDP had no significant impact on Islamic bank’s financing amount which means that Islamic banking in Indonesia was not implemented pro-cyclical based lending policy.

Assessing the Islamic Bank Financing During Economic Recession: The Role of Stimulus Regulation POJK Number 11/POJK.03/2020

“…Several banks were found to have begun to limit the distribution of financing to the public in the midst of a pandemic. See the table below: Availability of credit is strongly influenced by bank management which adjusts to economic conditions (Viphindrartin et al, 2020). When banking is disturbed by limitations in diversifying and distributing risk, bank management will choose risk-averse behavior.…”

“…Acording to Viphindrartin et al (2020) the availability of credit itself is strongly influenced by bank management which adjusts to conditions when there are economic fluctuations. Bank management prefers risk-averse behavior when banks are faced with limitations in diversifying and distributing risk.…”

“…Bank management prefers risk-averse behavior when banks are faced with limitations in diversifying and distributing risk. As a result, almost all banks in the world tend to behave pro-cyclicality or reduce their lending during periods of economic downturn (Viphindrartin et al, 2020). Athanasoglou et al (2014) consider that in this case economic policies, and financial conditions as well as the bank's regulatory framework are factors that contribute to the pro-cyclicality of the banking industry.…”

“…The finding of the study show that Islamic banks' lending is less procyclical than conventional banks or even behave countercyclical behaviour, giving support for the stability view of Islamic banking systems. Furthermore, Viphindrartin et al (2020) examines how Islamic banks can manage risk during the global economic crisis in 2008, which suppressed macroeconomic stability and the financial system in Indonesia. The study found that the GDP variable had no significant effect on Islamic bank financing in Indonesia.…”

“…The occurrence of procyclicality can be marked when the economy develops exponentially through an increase in GDP, which then causes an increase in bank credit, both Islamic banks and conventional banks (Ascarya et al, 2016). In addition, the inflation rate can also affect the level of lending (Viphindrartin et al, 2020). According to Lin et al (2016), rising inflation can weaken borrowers' ability to make loan payments as a result of reduced real income when wages are stiff (Lin et al, 2016).…”