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ISSN : 1598-7248 (Print)
ISSN : 2234-6473 (Online)
Industrial Engineering & Management Systems Vol.19 No.3 pp.538-542
DOI : https://doi.org/10.7232/iems.2020.19.3.538

Determinant of Indonesian Islamic and Conventional Banks’ Profitability

Ahmad Syathiri, Muslich Anshori*, Raditya Sukmana
Postgraduate School, Universitas Airlangga, Surabaya Indonesia
*Corresponding Author, E-mail: slich@feb.unair.ac.id
May 6, 2020 June 22, 2020 June 29, 2020

ABSTRACT


This study aims to investigate the prominent determinants of Islamic and conventional banks’ profitability. The independent variables are bank size, loan, credit risk, and stability (measured by z-score). The profitability was measured by return on assets. The analysis of data was on annual data of Islamic banks (Islamic commercial banks and sharia business unit of conventional banks) and traditional commercial banks during the period 2014-2016. The statistical description showed that the profitability and loan of the sharia business unit are higher than Islamic and conventional commercial banks. Islamic commercial banks have the highest credit risk. Traditional commercial banks are more stable than Islamic banks. The regression test results found that credit risk and z-score have a significant and robust relationship with the profitability of Islamic and conventional banks. The higher z-score and lower credit risk will increase profitability. The bank size and loan variable do not affect the profitability of conventional banks. But vice versa, the bank size has a positive and significant relationship with the profitability of Islamic commercial banks and negative relationships with the sharia business unit profitability. Likewise, the loan variable has a negative and significant relationship with the profitability of Islamic commercial banks and a positive relationship with the sharia business unit profitability. It can be explained that the profitability of Islamic banks is influenced by all of the independent variables. While conventional bank profitability is only affected by two variables. Thus, it can be concluded that only stability and credit risk variable plays a vital role in increasing the profitability of Islamic and conventional banks.



초록


    1. INTRODUCTION

    The beginning of the establishment of Islamic Banking in Indonesia in 1992 started with the establishment of Bank Muamalat Indonesia. The number of Islamic banks and sharia business unit of conventional banks has reached 47 units of banks in Indonesia until the end of 2016. The growth of Islamic banks has grown 27 percent over the past three years. The presence of Islamic banks can be a competitor for conventional banks in providing financial services to the public. Both banks also have different characters in their operations. Islamic banking has Islamic principles as an operational base, while the conventional bank has interest-based operations. Differences in principle and character will undoubtedly affect the bank's policy in determining the decision of lending and deposit funding.

    An important matter in the management of funds is the ability of banks to manage risks and maximize profitability. To achieve high profitability (Rahayuningsih et al., 2019;Werling et al., 2018), banks must have sufficient funds to meet the needs of the public as a borrower. Therefore, a bank must have a large asset availability. The increasing asset should also consider the composition of the deposit and equity ratio. In return, it will increase total assets. Lack of deposit funds will also affect fi-nancing decisions as well as the core business of all banks. Decreasing financing funds also means eliminating the opportunity to earn an income.

    Conventional banking principally relies heavily on interest rates as a source of income, while Islamic banking relies on the rate of profit sharing. Therefore, it is crucial to investigate the factors that affect the level of profitability of Islamic banks and conventional, given that all financial institutions principally have the same orientation for obtaining high profits. Differences in financial management principles of both types of banks are whether the difference in the level of profitability. What are the most dominant factors affecting bank profitability?

    Differences in performance aspects between Islamic banks and conventional can be seen from the results of studies conducted by Sukmana and Febriyati (2016) and Khan et al. (2017), which found that there is a difference between the performance of Islamic and conventional banks. The results of that study are also in line with the results of studies conducted by Abdul-Majid et al. (2017), Erol et al. (2014), Wasiuzzaman and Gunasegavan (2013), and Khan et al. (2017).

    The variables used as determinants of Islamic bank performance in the study conducted by Alharbi (2017) are internal consist of capital ratio, deposit and short-term funding ratio, asset composition, foreign ownership, loan loss provision over average loan ratio, operation cost, and external and macroeconomics variables. While the variables used as determinants of the performance of conventional banks in the study conducted by Petria et al. (2015) are internal variable consist of bank-specific includes banks size, capital, credit risk, efficiency, liquidity risk, and business mix indicators, external and macroeconomics variables.

    Based on the results of the literature review above, the variables used in this paper are profitability as the dependent variable, bank size, risk-taking, and loan variable as independent variables. However, what distinguishes this research from previous research is the object of study that divided into three types of banks: conventional commercial banks, Islamic retail banks, and sharia business units of traditional banks and investigating the most dominant factors affecting the profitability of the three types of banks.

    2. RESEARCH METHOD

    Data of the research is unbalanced data based on the annual report of Islamic Commercial Banks, Conventional Commercial Banks, and Sharia Business Unit of Conventional Banks in Indonesia between 2014 and 2016. The Sharia Business Unit is a transaction service unit based on the sharia principle provided by conventional banks as the application of dual windows system. For data analysis, the regression method is used for all of the banks and per group of the bank. The dependent variable is profitability measured using the proxy of return on assets (RoA). The independent variables consisted of bank size measured by the natural logarithm of Asset (LnAsset), risk-taking measured using credit risk and Z-score, and loan measured utilizing the loan to total deposit ratio. Credit risk was represented by a non-performance loan ratio. Z-score was calculated based on the return on assets plus equity ratio divided by the standard deviation of RoA.

    3. RESULTS AND DISCUSSION

    Table 1 shows that the average return on assets of sharia business unit is higher than conventional commercial banks and Islamic commercial banks. These results indicate that sharia business units have better capability than the other two banks in gaining business profit and increasing efficiency. These results can also be explained that lower RoA can be caused by the little ability of assets to obtain great benefits. If viewed from the aspect of the average total assets, that asset of conventional banks is higher than Islamic commercial banks and Sharia business units.

    The level of the credit risk of Islamic banks is higher than sharia business units and conventional commercial banks. These results indicate that traditional banks can reduce the risk of credit default. Another factor is the level of loans that also affects the level of credit risk. Conventional banking has the lowest average loan rate compared to both banks. Sharia business units have the highest credit loans.

    The level of stability of conventional banks measured by z-score is higher than Islamic commercial banks and sharia business units. This result indicates that conventional banks are more stable than Islamic banks. Islamic commercial banks are more durable than sharia business units.

    3.1 Regression

    In this session, the analysis ignores the bank type groups, so all the banks enter into the sample analysis. The purpose of this analysis is to obtain the results of factors that affect the profitability of banks as a whole without differentiating between types of banks.

    The result of the regression test (Table 2) shows that loan and z-score have a positive and significant relation to the return on asset. The higher the loan and stable level, the bank profitability will also increase. Credit risk has a strong and significant negative relationship to return on assets. The lower the credit risk will increase bank profitability. Unlike the bank size that it does not affect the level of bank profitability.

    3.2 Regression Test Results per Type of Bank

    The result of this regression is a test conducted based on the type of bank, so it can find out the factors that affect the level of profitability of each bank. The purpose of analysis per type of bank is to obtain information about the differences between factors affecting bank profitability by type of bank.

    The result of the regression test in a column of Islamic commercial banks in Table 3 shows that z-score and bank size have a positive and significant influence on return on assets. This result supports the resulting study conducted by Trad et al. (2017) and Alharbi (2017), which found that bank size has a positive impact on RoA. The higher the assets and stability of Islamic banks, the bank profitability will also increase. While the level of credit and loan risk has a negative and significant impact on RoA, it can be explained that the lower the NPF level, and the financing, the profitability of Islamic banks will increase. This result differs from Alharbi (2017) that Islamic banks do not depend on the loan.

    In sharia business unit column shows that bank size and credit risk negatively affect RoA. It can be explained that high bank size and credit risk will reduce profitability. Z-score and loan rates have a positive and significant effect on RoA. These results also can be explained that high stability and excellent loan fund will increase bank profitability.

    In the conventional banks, the column shows that the loan and bank size does not affect the RoA level. The results of this study have similarities with the results of the study of Menicucci and Paolucci (2016) that loan does not affect RoA, but bank size affects on RoA. Credit risk has a negative and significant effect on the RoA level. This result supports the resulting research conducted by Petria et al. (2015). The Z-score level has a positive and significant relationship. The more stable conventional bank will increase the bank’s profitability.

    3.3 Robustness Test

    The robustness test is performed to determine the reliability of the regression test result based on robust standard error. This test is to find out the variables which influence consistently on bank profitability. The robustness test is based on the combination of all types of banks and each type of bank. Robust regression is also often used to overcome heteroscedastic problems, i.e., using robust standard errors that are resistant to heteroscedastic problems.

    The robustness test result for all bank types shown in Table 4 shows that p-value for all variables did not change significantly as the standard error was changed. These results indicate that all variables are consistent and robust against standard error changes.

    The robustness test result for Islamic commercial banks shown in Table 5 shows that the p-value for size and loan variable change significantly as the standard error was changed and tended to increase. These results indicate that only z-score and credit risk variables are consistent and robust against standard error changes. The size variable becomes insignificant, and other variables remain significant at 0.05.

    The robustness test result for conventional commercial banks shown in Table 6 shows that the p-value for all variable changes significantly as the standard error was changed, especially for credit risk, and the z-score variable tends to increase. But, credit risk and z-score p-value remain significant at 0.05.

    The robustness test result for the sharia business unit shown in Table 7 shows that the p-value for all variable changes significantly as the standard error was changed and tended to decrease. All variable p-value becomes more significant at 0.05.

    4. CONCLUSION

    Based on the descriptive statistics found that conventional commercial banks were more stable as measured by z-score, Islamic banks are at high risk measured by credit risk, and sharia business units were more profitable and have high credit loan rates. The regression test results found that credit risk and z-score have a significant and robust relationship with the profitability of Islamic and conventional banks. The higher z-score and lower credit risk would increase profitability. The bank size and loan variable did not affect the profitability of conventional banks. But vice versa, the bank size had a positive and significant relationship with the profitability of Islamic commercial banks and negative relationships with the sharia business unit profitability.

    Likewise, the loan variable has a negative and significant relationship with the profitability of Islamic commercial banks and a positive relationship with the sharia business unit profitability. It can be explained that the profitability of Islamic banks is influenced by all of the independent variables. While two variables only impact the current bank profitability. Thus, it can be concluded that only stability and credit risk variable plays an essential role in increasing the profitability of Islamic and conventional banks. Based on the results of robustness testing, it is found that all variable is consistent with the regression test and do not change significantly with standard error changes.

    Figure

    Table

    Statistics description

    Regression test

    Regression test results per type of bank

    Robustness test result for all bank

    Robustness test result for Islamic commercial bank

    Robustness test result for conventional commercial bank

    Robustness test result for sharia business unit of conventional bank

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