DO ISLAMIC BANKS IN INDONESIA TAKE EXCESSIVE RISK IN THEIR FINANCING ACTIVITIES?

  • Muhamad Anindya Hiroshi Purbayanto School of Business and Management Institut Teknologi Bandung, Indonesia
  • Taufik Faturohman School of Business and Management Institut Teknologi Bandung, Indonesia
  • Yulianti Yulianti School of Business and Management Institut Teknologi Bandung, Indonesia
  • Arson Aliludin School of Business and Management Institut Teknologi Bandung, Indonesia
Keywords: Risk taking behavior, Non-performing financing (NPF), Threshold regression, Islamic banks.

Abstract

This study analyzes the risk-taking behavior of Indonesian Islamic Banks by examining whether the relation between financing Growth rate and non-performing financing (NPF). We employ threshold regression models and bank-level data of 24 Islamic banks (full-fledged Islamic banks and Islamic banking windows) covering the period from 2009 to 2019. We find evidence for the excessive risk-taking of Islamic Banks. More specifically, while the relation between NPF and FGR is negative when the one-lagged NPF is below the threshold (estimated to be 5.42%), it turns positive once it is above the threshold. This means that banks with NPF above the 5.42 percent threshold tend to take risky loans.

References

Barr, R. S., Seiford, L. M., & Siems, T. F. (1994). Forecasting bank failure: A non-parametric frontier estimation approach. Recherches Economiques de Louvain/Louvain Economic Review, 60(4), 417–429.

Berger, A., & DeYoung, R. (1997). Problem loans and cost efficiency in commercial banks. Journal of Banking and Finance, 21(6), 849–870.

Berger, A. N., & Udell, G. F. (1994). Did risk-based capital allocate bank credit and cause a ‘‘credit crunch” in the United States? Journal of Money, Credit and Banking, 26(3), 585–628.

Berger, A. N., & Udell, G. F. (2004). The institutional memory hypothesis and the procyclicality of bank lending behaviour. Journal of Financial Intermediation, 13(4), 458–495.

Bernanke, B., & Gertler, M. (1986). Banking and macroeconomic equilibrium. Princeton University, Woodrow Wilson School of Public and International Affairs.

Borio, C., Furfine, C., & Lowe, P. (2001). Procyclicality of the financial system and financial stability: Issues and policy options. In Monetary and Economic Department (Ed.), Marrying the macro- and microprudential dimensions of financial stability, BIS Papers, No 1, March 2001, pp 1-57. Basel, Switzerland: Bank for International Settlements.

Bruche, M., & Llobet, G. (2011). Walking wounded or living dead? Making banks foreclose bad loans. FMG Discussion Papers dp675, Financial Markets Group.

Caner, M., & Hansen, B. E. (2004). Instrumental variable estimation of a threshold model. Econometric Theory, 20(5), 813-843.

Clair, R. T. (1992). Loan growth and loan quality: Some preliminary evidence from Texas banks. Federal Reserve Bank of Dallas, Economic Review -Third Quarter, (pp. 9-22).

Cottarelli, C., Dell’Ariccia, G., & Vladkova-Hollar, I. (2005). Early birds, late risers, and sleeping beauties: Bank credit growth to the private sector in Central and Eastern Europe and in the Balkans. Journal of Banking & Finance, 29(1), 83–104.

Demirguc-Kunt, A. (1989). Deposit-institution failures: A review of empirical literature. Economic Review, 25(4), 2–18.

Demyanyk, Y., & Van Hemert, O. (2011). Understanding the subprime mortgage crisis. The Review of Financial Studies, 24(6), 1848-1880.

Foos, D., Norden, L., & Weber, M. (2010). Loan growth and riskiness of banks. Journal of Banking & Finance, 34(12), 2929–2940.

Gorton, G., & Rosen, R. (1995). Corporate control, portfolio choice, and the decline of banking. The Journal of Finance, 50(5), 1377–1420.

Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345-368.

Hassan, M. K., & Aliyu, S. (2017). A contemporary survey of Islamic banking literature. Journal of Financial Stability, 34(February 2018), 12–43.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

Koudstaal M., & Wijnbergen S. V. (2012). On risk, leverage and banks: Do highly leveraged banks take on excessive risk. Tinbergen Institute Discussion Paper, No. 12-022/2/DSF31, Tinbergen Institute, Amsterdam and Rotterdam.

Kraft, E., & Jankov, L. (2005). Does speed kill? Lending booms and their consequences in Croatia. Journal of Banking & Finance, 29(1), 105–121.

Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008). Bank income structure and risk: An empirical analysis of European banks. Journal of Banking & Finance, 32(8), 1452– 1467.

Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2012). Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios. Journal of Banking & Finance, 36(4), 1012-1027.

Novellyni, D., & Ulpah, M. (2017). Non-performing loans, moral hazard and lending behaviour of Indonesian banks. International Journal of Economics and Management, 11(S2), 365–378.

Saunders, A., Strock, E., & Travlos, N. G. (1990). Ownership structure, deregulation, and bank risk taking. The Journal of Finance, 45(2), 643-654.

Shrieves, R. E., & Dahl, D. (2003). Discretionary accounting and the behavior of Japanese banks under financial duress. Journal of Banking & Finance, 27(7), 1219–1243.

Sinkey Jr., J. F., & Greenawalt, M. B. (1991). Loan-loss experience and risk-taking behavior at large commercial banks. Journal of Financial Services Research, 5(1), 43–59.

Sobarsyah, M., Soedarmono, W., Yudhi, W. S. A., Trinugroho, I., Warokka, A., & Pramono, S. E. (2020). Loan growth, capitalization, and credit risk in Islamic banking. International Economics, 163(October), 155–162.

Soedarmono, W., Saheruddin, H., & Prasetyo, D. (2020). Excess loan growth, funding liquidity and credit risk. Indonesia Deposit Insurance Corporation Research Working Paper.

Zhang, D., Cai, J., Dickinson, D. G., & Kutan, A. M. (2016). Non-performing loans, mora hazard and regulation of the Chinese commercial banking system. Journal of Banking Finance, 63(February), 48–60.

Published
2022-02-28
How to Cite
Purbayanto, M. A. H., Faturohman, T., Yulianti, Y., & Aliludin, A. (2022). DO ISLAMIC BANKS IN INDONESIA TAKE EXCESSIVE RISK IN THEIR FINANCING ACTIVITIES?. Journal of Islamic Monetary Economics and Finance, 8(1), 149 - 160. https://doi.org/10.21098/jimf.v8i1.1431
Section
Articles