Determinants of Bank Capital in Indonesian Islamic Banks
How to cite (SHIRKAH) :
Bank capital is the linchpin for Islamic banks to steer clear insolvency risk. However, studies on Islamic bank capital in Indonesia remain scarce, with existing studies failing to distinguish between Islamic commercial banks and Islamic business units. Our research analyzes the determinants of Islamic bank capital using the latest data and splits them into Islamic commercial banks and Islamic business units. We used quarterly data from 31 Islamic banks from 2014 to 2020. The estimation method used in this study was panel data regression with unbalanced panel data. The results reveal that bank capital is positively affected by bank size, bank margin, and financing. Conversely, competition, inefficiency, and non-performing financing worsen Islamic bank capital. In addition, bank size and margin have a more pronounced impact on Islamic commercial banks than on Islamic business units. However, inefficiency and non-performing financing have a stronger impact on bank capital for Islamic business units than for Islamic commercial banks. These findings have several important implications, suggesting that Islamic bank capital can be boosted through increased margins and efficiency, while reducing impaired financing is crucial for capital accumulation.
Anisa, A., & Sutrisno, S. (2020). Capital buffer and determinant factors of conventional banks in Indonesia. The Journal of Asian Finance, Economics and Business, 7(12), 377–384. https://doi.org/10.13106/jafeb.2020.vol7.no12.377
Bitar, M., Kabir Hassan, M., & Hippler, W. J. (2018). The determinants of Islamic bank capital decisions. Emerging Markets Review, 35, 48–68. https://doi.org/10.1016/j.ememar.2017.12.002
Bougatef, K., & Korbi, F. (2019). Capital buffer and credit-risk adjustments in Islamic and conventional banks. Thunderbird International Business Review, 61(5), 669–683. https://doi.org/10.1002/tie.22022
Daher, H., Masih, M., & Ibrahim, M. (2015). The unique risk exposures of Islamic banks’ capital buffers: A dynamic panel data analysis. Journal of International Financial Markets, Institutions and Money, 36, 36–52. https://doi.org/10.1016/j.intfin.2015.02.012
Danlami, M. R., Abduh, M., & Abdul Razak, L. (2022). CAMELS, risk-sharing financing, institutional quality and stability of Islamic banks: Evidence from 6 OIC countries. Journal of Islamic Accounting and Business Research, 13(8), 1155-1175. https://doi.org/10.1108/JIABR-08-2021-0227
Ding, X., Haron, R., & Hasan, A. (2023). The influence of Basel III on Islamic bank risk. Journal of Islamic Monetary Economics and Finance, 9(1), 167–198. https://doi.org/10.21098/jimf.v9i1.1590
Etudaiye-muhtar, O. F. (2021). Market structure, institutional quality and bank capital ratios : evidence from developing countries. European Journal of Management and Business Economics, 30(1), 92–107. https://doi.org/10.1108/EJMBE-09-2019-0158
Fajri, M. Z. N., Muhammad, A. A., Umam, K., Putri, L. P., & Ramadhan, M. A. (2022). The effect Covid-19 and sectoral financing on Islamic bank profitability in Indonesia. Journal of Islamic Economic Laws, 5(1), 38–60. https://doi.org/10.23917/jisel.v5i1.17181
Fu, X., Lin, Y., & Molyneux, P. (2014). Bank competition and financial stability in Asia Pacific. Journal of Banking and Finance, 38(1), 64–77. https://doi.org/10.1016/j.jbankfin.2013.09.012
Hanafi, S. M. (2021). The contribution of profit-sharing characteristics to the performance of Islamic banks. Shirkah: Journal of Economics and Business, 6(1), 52–65. https://doi.org/10.22515/shirkah.v6i1.378
Ibrahim, M. H., Aun, S., & Rizvi, R. (2017). Do we need bigger Islamic banks? An assessment of bank stability. Journal of Multinational Financial Management, 40, 77–91. https://doi.org/10.1016/j.mulfin.2017.05.002
Jiang, H., Zhang, J., & Sun, C. (2020). How does capital buffer affect bank risk-taking? New evidence from China using quantile regression. China Economic Review, 60(May 2019), 101300. https://doi.org/10.1016/j.chieco.2019.04.008
Kasman, S., & Kasman, A. (2015). Bank competition, concentration and financial stability in the Turkish banking industry. Economic Systems, 39(3), 502–517. https://doi.org/10.1016/j.ecosys.2014.12.003
Lepetit, L., Saghi-Zedek, N., & Tarazi, A. (2015). Excess control rights, bank capital structure adjustments, and lending. Journal of Financial Economics, 115(3), 574–591. https://doi.org/10.1016/j.jfineco.2014.10.004
Mateev, M., Nasr, T., & Sahyouni, A. (2022). Capital regulation, market power and bank risk-taking in the MENA region: New evidence for Islamic and conventional banks. Quarterly Review of Economics and Finance, 86, 134–155. https://doi.org/10.1016/j.qref.2022.07.005
Meslier, C., Risfandy, T., & Tarazi, A. (2020). Islamic banks’ equity financing, Shariah supervisory board, and banking environments. Pacific Basin Finance Journal, 62, 101354. https://doi.org/10.1016/j.pacfin.2020.101354
Mujtaba, G., Akhtar, Y., Ashfaq, S., Abbas Jadoon, I., & Hina, S. M. (2022). The nexus between Basel capital requirements, risk-taking and profitability: what about emerging economies? Economic Research-Ekonomska Istrazivanja , 35(1), 230–251. https://doi.org/10.1080/1331677X.2021.1890177
Mursal, M., Darwanis, D., & Ibrahim, R. (2019). What influences capital adequacy ratio in islamic commercial banks? Evidence from Indonesia. Journal of Accounting Research, Organization and Economics, 2(1), 1–10. https://doi.org/10.24815/jaroe.v2i1.12868
Nguyen, T. V. H., & Nguyen, T. V. H. (2022). How do banks price liquidity? The role of market power. Global Finance Journal, 53(April), 100736. https://doi.org/10.1016/j.gfj.2022.100736
Parmankulova, I. (2022). The drivers of fi nancial vulnerability and profitability: evidence from conventional and Islamic banks in Islamic fi nance-oriented countries. Journal of Islamic Accounting and Business, 13(6), 902–919. https://doi.org/10.1108/JIABR-06-2021-0155
Raharjo, P. G., Hakim, D. B., Manurung, A. H., & Maulana, T. N. A. (2014). Determinant of capital ratio: A panel data analysis on state-owned banks in Indonesia. Buletin Ekonomi Moneter Dan Perbankan, 16(4), 369–386. https://doi.org/10.21098/bemp.v16i4.451
Risfandy, T., Harahap, B., Hakim, A. R., Sutaryo, S., Nugroho, L. I., & Trinugroho, I. (2020). Equity financing at Islamic banks: Do competition and bank fundamentals matter? Emerging Markets Finance and Trade, 56(2), 314–328. https://doi.org/10.1080/1540496X.2018.1553160
Risfandy, T., Tarazi, A., & Trinugroho, I. (2022). Competition in dual markets: Implications for banking system stability. Global Finance Journal, 52(August 2020), 100579. https://doi.org/10.1016/j.gfj.2020.100579
Septiarini, D. F., Hisan, U. F. C., Matsahri, M., & Filianti, D. (2021). Capital buffer, risk, profitability, size, and macroeconomics: Empirical study on Islamic banks. Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah, 13(1), 171–190. https://doi.org/10.15408/aiq.v13i1.20823
Smaoui, H., Salah, I. Ben, & Diallo, B. (2020). The determinants of capital ratios in Islamic banking. Quarterly Review of Economics and Finance, 77, 186–194. https://doi.org/10.1016/j.qref.2019.11.002
Sutrisno, M. (2018). Factors determinant of bank capital buffer: Empirical study on islamic rural banking in Indonesia. Advance in Social Science, Education, Humanities Research, 186(Insyma), 84–87. https://doi.org/10.2991/insyma-18.2018.21
Sutrisno, S., & Widarjono, A. (2022). Is profit–loss-sharing financing matter for Islamic bank’s profitability? The Indonesian case. Risks, 10(11), 1–13. https://doi.org/10.3390/risks10110207
Wardana, G. K., & Barlian, N. A. (2022). Determinant of Islamic banks on the world capital structure. IQTISHODUNA: Jurnal Ekonomi Islam, 11(2), 195–206. https://doi.org/10.54471/iqtishoduna.v11i2.1874
Widarjono, A., Anto, M. B. H., & Sidiq, S. (2022). Sectoral financing concentration and profitability of Islamic Banking in Indonesia. Share: Jurnal Ekonomi Dan Keuangan Islam, 11(1), 149-170. https://doi.org/10.22373/share.v11i1.11133
Widarjono, A., & Rudatin, A. (2021). Financing diversification and Indonesian Islamic bank’s non-performing financing. Jurnal Ekonomi & Keuangan Islam, 7(1), 45–58. https://doi.org/10.20885/jeki.vol7.iss1.art4
Widarjono, A., Suseno, P., Safitri, D. U. R., Yaseen, A., Azra, K., & Hidayah, I. N. (2023). Islamic bank margins in Indonesia: The role of market power and bank-specific variables. Cogent Business & Management, 10(2), 2202028. https://doi.org/10.1080/23311975.2023.2202028
Copyright
Copyright aims to protect the specific way the article has been written to describe an experiment and the results. Shirkah: Journal of Economics and Business is committed to its authors to protect and defend their work and their reputation and takes allegations of infringement, plagiarism, ethical disputes, and fraud very seriously. Automotive Experiences is published under the terms of the Attribution-NonCommercial 4.0 International (CC BY-NC 4.0). Authors retain copyright and grant the journal right of first publication (online and print) with the work simultaneously. We use the restrictive license (non-commercial) as follows:
BY (attribution): Users are allowed to share, distribute and redistribute the published article in any medium or format, with an identification of the authors and its initial publication in this journal. Authors are encouraged to post and distribute their articles immediately after publication (e.g., institutional or public repositories, personal websites). Authors are allowed to enter into additional contractual arrangements for the non-exclusive distribution of the published and an acknowledgment of its initial publication in this journal.
NC (non-commercial): Users are not allowed to use the article commercially without the permission of the authors. Authors agree explicitly that the published article is indexed worldwide in databases, repositories and indexation services, even if these services operate on a commercial basis. Authors grant Shirkah: Journal of Economics and Business explicit the right to include the published articles in databases, repositories and indexation services. License
License to Publish
The non-commercial use of the article will be governed by the Attribution-NonCommercial 4.0 International (CC BY-NC 4.0). The author hereby grants Shirkah: Journal of Economics and Business an exclusive publishing and distribution license in the manuscript include tables, illustrations or other material submitted for publication as part of the manuscript (the “Articleâ€) in print, electronic and all other media (whether now known or later developed), in any form, in all languages, throughout the world, for the full term of copyright, and the right to license others to do the same, effective when the article is accepted for publication. This license includes the right to enforce the rights granted hereunder against third parties.
Author's Warranties
The author warrants that the article is original, written by stated author/s, has not been published before, contains no unlawful statements, does not infringe the rights of others, is subject to copyright that is vested exclusively in the author and free of any third party rights, and that any necessary written permissions to quote from other sources have been obtained by the author(s).
User Rights
Under the Creative Commons Attribution-Non Commercial 4.0 International (CC BY-NC 4.0) license, the author(s) and users are free to share (copy and redistribute the material in any medium or format) and adapt (remix, transform, and build upon the material). Users must give appropriate credit, provide a link to the license, and indicate if changes were made.
Rights of Authors
Authors retain the following rights:
- Copyright, and other proprietary rights relating to the article, such as patent rights,
- The right to use the substance of the article in future own works, including lectures and books,
- The right to reproduce the article for own purposes, provided the copies are not offered for sale, and
- The right to self-archive the article.
Co-Authorship
If the article was prepared jointly with other authors, the signatory of this form warrants that he/she has been authorized by all co-authors to sign this agreement on their behalf, and agrees to inform his/her co-authors of the terms of this agreement.
Royalties
This agreement entitles the author to no royalties or other fees. To such extent as legally permissible, the author waives his or her right to collect royalties relative to the article in respect of any use of the article by Shirkah: Journal of Economics and Business or its sublicensee.
Miscellaneous
Shirkah: Journal of Economics and Business will publish the article (or have it published) in the Journal if the article’s editorial process is successfully completed and Shirkah: Journal of Economics and Business or its sublicensee has become obligated to have the article published. Shirkah: Journal of Economics and Business may conform the article to a style of punctuation, spelling, capitalization, and usage that it deems appropriate.