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Role of Islamic banks in Indonesian banking industry: an empirical exploration

Author

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  • Rizvi, Syed Aun R.
  • Narayan, Paresh Kumar
  • Sakti, Ali
  • Syarifuddin, Ferry

Abstract

Islamic banks have been gaining traction in Indonesia, which is the world's largest Muslim population. Although the share of Islamic banking is small, the growth potential poses challenges and questions that need an inquiry. Our paper is a response to this. We investigate whether competition from Islamic banks adds to the financial stability and profitability. We then test the source of any such stability/instability. We find, consistent with the competition-stability theory, that the presence of Islamic banks has not impacted profitability but has made the banking industry more stable. We show that Islamic banks have improved both lending and deposit growth of the banking system, suggesting that Islamic banks have contributed to stability through both asset and liability channels.

Suggested Citation

  • Rizvi, Syed Aun R. & Narayan, Paresh Kumar & Sakti, Ali & Syarifuddin, Ferry, 2020. "Role of Islamic banks in Indonesian banking industry: an empirical exploration," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:pacfin:v:62:y:2020:i:c:s0927538x18304062
    DOI: 10.1016/j.pacfin.2019.02.002
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    Cited by:

    1. Bijoy Rakshit & Samaresh Bardhan, 2020. "Does Bank Competition Enhance or Hinder Financial Stability? Evidence from Indian Banking," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 75-102.
    2. Bowo Setiyono & Ahmad Maulin Naufa, 2020. "The Impact Of Net Stable Funding Ratio On Bank Performance And Risk Around The World," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 23(4), pages 543-564, December.
    3. Bayront Yudit Rumondor & Pakasa Bary, 2020. "Capital Flows and Bank Risk-Taking Behavior: Evidence From Indonesia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 33-53.

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