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Do business models in Islamic bank matters? The effect of business models on bank performance and stability

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  • Fakhrana Nadhilah
  • Oktofa Yudha Sudrajad

Abstract

This paper examines the effect of business models in Islamic banking on bank performance and stability. We use a method to cluster dynamically, namely longitudinal k-means, to identify the business model of Islamic banks from a sample of 31 Islamic banks in Indonesia from 2010Q1 to 2019Q3. We use return on asset (ROA) and return on equity (ROE) to measure bank performance and z-index and loss provisions to measure bank stability. Our findings show that profit-sharing banks and margin banks have the potential to increase ROA and tend to be more stable. Meanwhile, customer banks are better able to maintain ROE but less stable. We also confirm the literature that fee-based products increase a bank's profitability while funding mudharabah products decreases a bank's performance and stability.

Suggested Citation

  • Fakhrana Nadhilah & Oktofa Yudha Sudrajad, 2022. "Do business models in Islamic bank matters? The effect of business models on bank performance and stability," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 15(3), pages 253-272.
    • Handle: RePEc:ids:ijmefi:v:15:y:2022:i:3:p:253-272
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