Income Structure and Performance: An Empirical Analysis of Islamic and Conventional Banks in Indonesia

Abstract

Banks have tried to compensate for the decline in their profits due to increasedcompetition by shifting their focus toward non-intermediation activities. This paperassesses the impact of these non-intermediation activities on the profitability and riskof Islamic and conventional banks in Indonesia. We use a system generalized methodof moments estimator to control for the simultaneity for all the banks in our samplefor the period from 2007 to 2017. Our results suggest that non-intermediation incomehas a positive impact on bank performance. We find no difference between Islamicand conventional banks in terms of the link between non-intermediation income andperformance.

Competition, Diversification, and Stability in the Indonesian Banking System

“…The loan loss provision ratio shows a negative impact on stability, suggesting that an increase in the LLP reduces the level of bank stability. These results are in line with the findings of Ali and Khattak (2020).…”

“…These results are reported in Table 8. Following the recent work of Ali and Khattak (2020) on Indonesia, we use the ratio of loan/ financing loss provisions to total assets (LLP) and the ratio of deposits to total assets (CDTA) as additional bank-specific variables. Besides that, we replace the GDP growth rate and inflation rate with GDP per capita growth rate.…”

A comparative analysis of capital, risk, efficiency, profitability, diversification and integration of the Eurozone and the United States banking institutions in the aftermath of the global financial crisis

“…In relation to income diversification, the profitability of the greatest part of the reported groups is positively and statistically significantly affected, providing evidence that the profitability of a diversified bank is possibly enhanced when compared with a bank with lower levels of income diversification, therefore, confirming the results of Moudud-Ul-Huq et al, (2019), Ferreira et al, (2018), Ali & Khattak, (2020) and Luu et al, (2019), Mostak Ahamed, (2017) as well as Elsas et al, (2009). The results could be linked with operational synergies and/or higher income maximum capacity that are generated because of income diversification (Sanya and Wolfe, (2010), Baele et al, (2007)).…”

“…Initially, Alkhouri&Arouri, (2018) draw the conclusion that asset diversification is positively related with bank performance. Ali &Khattak, (2020), in the same way, conclude that income diversification of Islamic and conventional banks in Indonesia is positively linked with bank performance during the period 2007-2017. Their findings also indicate no difference in the relationship between bank performance and income diversification for conventional and Islamic banks.…”