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

Main Article Content

Yona Friantina

Keywords

Indonesian banking, Risk, Service activities, Islamic bank, Conventional bank

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.

Downloads

Download data is not yet available.
Abstract 250 | pdf Downloads 337

References

Alfarisi, M. F. (2015). Impact of Financial Crisis on Non-Traditional Income: Islamic Banks Vis a Vis Conventional Banks. Journal of Islamic Finance, 4(1), 031-038. doi: 10.12816/0024799.

Beck, T., Kunt, A. D., & Merrouche, O. (2013). Islamic vs conventional banking: Business model, efficiency and stability. Journal of Banking & Finance, 37, 433-447. doi: 10.1016/j.jbankfin.2012.09.016.

De Marco, A., & Mangano, G. (2013). Risk and value in privately finance healthcare projects. Journal of Construction Engineering and Management, 918-926.

De Marco, A., & Mangano, G. (2017). Risk factors influencing the debt leverage of project financing initiatives in the energy industry. International Journal of Energy Sector Management, 1750-6220.

Ekanayake, N., & Wanamalie. (2017). Income Diversification and Bank Risk-Return Trade-Off: Evidence from an Emerging Economy. Asian Economic and Financial Review, 7(7), 644-655. doi: 10.18488/journal.aefr.2017.77.644.655.

Elsas, R., Hackethal, A., & Holzhauser, M. (2010). The Anatomy of Bank Diversification. Journal of Banking & Finance, 1274-1287.

Faye, I., Triki, T., & Kangoye, T. (2013). The Islamic Finance Promises: Evidence from Africa. Review of Development Finance, 136-151.

Grassa, R. (2012). Islamic Banks Income Structure and Risk : Evidence from GCC Countries. Accounting Research Journal, 25(3), 227-241. doi: 10.1108/10309611211290185.

Hamdi, H., Hakimi, A., & Zaghdoudi, K. (2017). Diversification, bank performance and risk: have Tunisian banks adopted the new business model? Financial Innovation, 3(22), 1-25. doi: 10.1186/s40854-017-0069-6.

Hardianto, D. S., & Wulandari, P. (2016). Islamic Bank Vs Conventional Bank : Intermediation, Fee Based Service Activity and Efficiency. International Journal of Islamic and Middle Eastern Finance and Management, 9(2), 1-18. doi: 10.1108/IMEFM-01-2015-0003.

Hidayat, W. Y., Kakinaka, M., & Miyamoto, H. (2012). Bank Risk and Non Interest Income Activities in the Indonesian Banking Industry. Economics & Management Series, 03, 1-25.

Karanja, N. e. (2012). The Relationship Between Non Interest Income and Financial Performance of Commercial Banks in Kenya. -, 1-67.

Landskroner, Y., Ruthenberg, D., & Zaken, D. (2005). Diversification and Performance in Banking: The Israeli Case. Journal of Financial Services Research, 27-49.

Le, T. (2016). The effect of income diversification on bank risk: Evidence from Vietnam. SSRN Electronic Journal, 1-2.

Lepetit, L., Nys., E., Rous, P., & Tarazi, A. (2008). Bank Income Structure and Risk : An Empirical Analysis of European Banks. Journal of Banking and Finance, 32, 1452-1467. doi: 10.1016/j.jbankfin.2007.12.002.

Meslier, C., Tacneng, R., & Tarazi, A. (2013). Bank Diversification, Risk and Profitability in an Emerging Economy with Regulatory Asset Structure Constraints : Evidence from the Philippines. Archives Ouvertes, 1-55.

Molyneux, P., & Yip, J. (2013). Income Diversification and Performance of Islamic Banks. Journal of Financial Management, Markets and Institutions, 1(1), 47-66. doi: 10.12831/73632.

Moudud-Ul-Huq, S., Ashraf, B. N., Gupta, A. D., & Zheng, C. (2018). Does bank diversification heterogeneously affect performance and risk-taking in ASEAN emerging economies? Research in International Business and Finance, 1-22. doi: 10.1016/j.ribaf.2018.04.007.

Ng, S. T., Xie, J., & Kumaraswamy, M. M. (2010). Simulating the effect of risks on equity return for concession-based public-private partnership projects. Engineering, Construction and Architectural Management, 352-368.

Nguyen, M., Perera, S., & Skully, M. (2016). Bank market power, ownership, regional presence and revenue diversification: Evidence from Africa Emerging Markets Review, 1-27. doi: 10.1016/j.ememar.2016.03.001.

Nguyen, T. C., Vo, D. V., & Nguyen, V. C. (2015). Risk and Income Diversification in the Vietnamese Banking System. Journal of Applied Finance & Banking, 5(1), 99-115.

Nisar, S., Peng, K., Wang, S., & Ashraf, B. N. (2018). The Impact of Revenue Diversification on Bank Profitability and Stability: Empirical Evidence from South Asian Countries. International Journal of Financial Studies, 6(40), 1-25. doi: 10.3390/ijfs6020040.

Suhartanto, D., Muflih, M., Setiawan, & Hadiati, N. (2018). Loyalty Intention towards Islamic Bank: The Role of Religiosity, Image, and Trust. International Journal of Economics and Management, 12(1), 137-151.

Trivedi, S. R. (2015). Banking Innovations and New Income Streams : Impact on Banks Performance. The Journal for Decision Makers, 40(1), 28-41. doi: 10.1177/0256090915573616.