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Competition, diversification, and bank margins: Evidence from Indonesian Islamic rural banks

Author

Listed:
  • Irwan Trinugroho
  • Tastaftiyan Risfandy
  • Mochammad Doddy Ariefianto

Abstract

This paper examines the determinants of bank margins in Indonesian Islamic rural banks. We find that bank margins are affected mainly by competition and diversification. In this less competitive market, Islamic rural banks are able to set high margins. Islamic rural banks are also tend set high margins when they do not diversify their revenue, referring to the cross-subsidization strategy. We also find that the impact of competition and diversification on bank margins are more pronounced in the banks with lower banks’ loan contract diversification and also banks with a higher proportion of profit-and-loss sharing (PLS) lending. However, those impacts diminish when Islamic banks are located in provinces with above-average numbers of Muslims and located outside Java. Our empirical results therefore also suggest that regional differences matter for bank margins.

Suggested Citation

  • Irwan Trinugroho & Tastaftiyan Risfandy & Mochammad Doddy Ariefianto, 2018. "Competition, diversification, and bank margins: Evidence from Indonesian Islamic rural banks," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 18(4), pages 349-358, December.
  • Handle: RePEc:bor:bistre:v:18:y:2018:i:4:p:349-358
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    Citations

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    Cited by:

    1. Susamto, Akhmad Akbar & Octavio, Danes Quirira & Risfandy, Tastaftiyan & Wardani, Dyah Titis Kusuma, 2023. "Public ownership and local bank lending at the time of the Covid-19 pandemic: Evidence from Indonesia," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    2. Šeho, Mirzet & Ibrahim, Mansor H. & Mirakhor, Abbas, 2021. "Does sectoral diversification of loans and financing improve bank returns and risk in dual-banking systems?," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    3. Risfandy, Tastaftiyan & Tarazi, Amine & Trinugroho, Irwan, 2022. "Competition in dual markets: Implications for banking system stability," Global Finance Journal, Elsevier, vol. 52(C).
    4. Burhanudin Harahap & Tastaftiyan Risfandy, 2022. "Islamic Organization and the Perception of riba (Usury) and Conventional Banks Among Muslims: Evidence From Indonesia," SAGE Open, , vol. 12(2), pages 21582440221, May.
    5. Agus Widarjono & Diana Wijayanti & Suharto Suharto, 2022. "Funding liquidity risk and asset risk of Indonesian Islamic rural banks," Cogent Economics & Finance, Taylor & Francis Journals, vol. 10(1), pages 2059911-205, December.
    6. Mansor H. Ibrahim & Siong Hook Law, 2019. "Financial Intermediation Costs In A Dual Banking System: The Role Of Islamic Banking," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 22(4), pages 531-552, December.
    7. Mohamed, Toka S. & Elgammal, Mohammed M., 2023. "Credit risk in Islamic microfinance institutions: The role of women, groups, and rural borrowers," Emerging Markets Review, Elsevier, vol. 54(C).
    8. Faaza Fakhrunnas & Rindang Nuri Isnaini Nugrohowati & Razali Haron & Mohammad Bekti Hendrie Anto, 2022. "The Determinants of Non-Performing Loans in the Indonesian Banking Industry: An Asymmetric Approach Before and During the Pandemic Crisis," SAGE Open, , vol. 12(2), pages 21582440221, June.
    9. Mudeer A. Khattak & Buerhan Saiti & Shabeer Khan, 2023. "Does market power explain margins in dual banking? Evidence from panel quantile regression," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1826-1844, April.
    10. Cañón, Carlos & Cortés, Edgar & Guerrero, Rodolfo, 2022. "Bank competition and the price of credit: Evidence using Mexican loan-level data," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 56-74.

    More about this item

    Keywords

    Bank margins; Competition; Diversification; Islamic rural banks; Indonesia;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure

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