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Is spin-off policy an effective way to improve performance of Islamic banks? Evidence from Indonesia

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  • Trinugroho, Irwan
  • Santoso, Wimboh
  • Irawanto, Rakianto
  • Pamungkas, Putra

Abstract

Indonesia has adopted a dual banking system in which both conventional and Islamic banks operate. Most of the sharia-based banks, however, are still operating Islamic windows within their conventional entity. To strengthen the role of Islamic banking in the intermediation system, the government issued Islamic Banking Law No. 21/2008 to encourage Islamic windows of conventional banks to become a legal entity separate from their parent company. Because some Islamic windows have spun off in this fashion, we can employ a difference-in-difference approach to examine the effect of such a spin-off on Islamic banks’ performance, efficiency, and risk. Our study covers all Islamic commercial banks (including Islamic windows of conventional banks) in Indonesia from 2008–2019. We find that the performance and efficiency of full-fledged Islamic banks are significantly lower compared with Islamic windows of conventional banks. Moreover, our results show that financing risk increases after the spin-off. The inferior performance of full-fledged Islamic banks persists for four years after the spin-off. We also find that a conversion strategy results in better outcomes, particularly for profitability and efficiency, than a pure spin-off strategy.

Suggested Citation

  • Trinugroho, Irwan & Santoso, Wimboh & Irawanto, Rakianto & Pamungkas, Putra, 2021. "Is spin-off policy an effective way to improve performance of Islamic banks? Evidence from Indonesia," Research in International Business and Finance, Elsevier, vol. 56(C).
    • Handle: RePEc:eee:riibaf:v:56:y:2021:i:c:s0275531920309600
    DOI: 10.1016/j.ribaf.2020.101352
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    Cited by:

    1. Fasano, Francesco & Rocca, Maurizio La & Cariola, Alfio & Passarelli, Mariacarmela, 2023. "Banking relationship and research spin-offs’ life cycle: The Italian experience," Research in International Business and Finance, Elsevier, vol. 65(C).

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