Islamic Bank Credit Risk: Macroeconomic and Bank Specific Factors

Sudarso Kaderi Wiryono and Kharisya Ayu Effendi

European Research Studies Journal, 2018, vol. XXI, issue 3, 53-62

Abstract: The purpose of this research is to investigate the influence of macroeconomic and banking factors on credit risk in Islamic banking.The methodology used is panel data regression analysis. The data set is consisting of secondary data from banking financial statements contained in the respective websites, as well as macroeconomic variables obtained from the Central Bureau of Statistics and Central Bank Indonesia for the period 2010 to 2016. The results support the hypothesis that the SIZE of the bank is influencing positively and significantly the credit risk. Other variables tested were financing expansion, financing quality, GDP and inflation which have been proven to influence negatively and significantly the credit risk. These results support the results of another study by Effendi and Yuniarti (2018) regarding the influence of macroeconomic variables on credit risk. The contribution of this article is that similar conclusions have been made regarding the influence of banking factors on credit risk. Both results lead to the conclusion that Islamic banking could be affected negatively if it does not regulate the quality and the expansion of its financing properly.

Keywords: Islamic bank credit risk, bank factors. Introduction According to the literature Islamic banking first appeared in the 1960s. Its emergence was characterized by the establishment of interest-free cooperation founded by Ahmed El Najjar 1963 in the city of Mit Ghamr, which is a small city in Egypt (Ahangar et al., 2013). Then began to develop in Islamic countries and other non-Islamic in 1975 (Misman et al., 2015), namely the UK, Australia, Singapore, Hong Kong and some countries in Europe. Islamic banking in Indonesia has emerged in 1992, which coincided with the establishment of the Bank Muamalat by MUI. The emergence of Islamic banking provides alternative funding in addition to conventional banking. In addition, Islamic banking is increasingly showing its existence as a stable financial institution with a proof that it is the only bank that did not has liquidity of capital problems when a financial crisis is striking.A financial crisis is not a new phenomenon in the world of banking. The Asian financial crisis in 1997 was caused by the depression of Thai currency (bath), which affected the banking system in Southeast Asia, including Indonesia. Then an economic crisis in 2007 caused by the failure of mortgage financing in the United States affected the global economic system. The Asian economic crisis in 1997 which led to a jump in the inflation rate in Indonesia was another experience which pushed the Central Bank in Indonesia to raise interest rates to suppress a surge on inflation. As a result, lending rates increased, and the failure of credit payments also increased. This gives an early assumption that macroeconomic may affect credit risk. Because of the economic crisis in 2007 the global economy has been affected seriously, a fact that provides an initial overview that a banking factor may affect credit risk. Even though Islamic banking is stable amid the shocks of crises, Islamic banking is not immune from the economic risks as well as the risk experienced by conventional banking. Islamic banking is highly affected by credit risk.There are two types of credit risk, namely the systematic and unsystematic risk (Haryono et al., 2016). According to Aver (2008) and Castro (2012), a systematic risk is related to macroeconomic variables and unsystematic risk is related to several banking factors. The research regarding the influence of credit risk by macroeconomic variables was first claimed in the work of Modligiani and Brumberg in the early 1950s (Deaton, 2005). According to this research, macroeconomic variables such as GDP, unemployment rate, and inflation rate may play a crucial role in credit risk evaluation. According to Louzis et al. (2011) and Thalassinos et al. (2015) credit risk is influenced by macroeconomic variables. Empirical studies by Salas and Saurina (2002), Jimenez and Saurina (2006), Das and Ghosh (2007), Boudriga et al. (2009), Thiagarajan et al. (2011) and Castro (2012) had confirmed the negative correlation between the level of GDP and problematic credit (credit risk). Moreover, empirical studies by Rinaldi and Sanchis-Arellano (2006) and Castro (2012) had revealed that the unemployment rate and the inflation rate have a negative correlation with the problematic credit.Literature supports the hypothesis that credit risk is affected by banking factors (Berger and DeYoung, 1997; Fischer et al., 2000; Jimenez and Saurina, 2004; Ahmad and Arif, 2007; Thalassinos et al., 2012; 2013; Setyawati et al., 2017). Meanwhile, the efficiency hypothesis is risky in formulating mechanisms that may be related to efficiency and problematic credit (credit risk). According to the agency theory, banks with relatively low capital respond to moral hazard incentively by increasing the riskiness of their loan portfolio, which resulted (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.ersj.eu/dmdocuments/2018_XXI_3_4.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ers:journl:v:xxi:y:2018:i:3:p:53-62

Access Statistics for this article

More articles in European Research Studies Journal from European Research Studies Journal
Bibliographic data for series maintained by Marios Agiomavritis ().