Browse > Article
http://dx.doi.org/10.13106/jafeb.2020.vol7.no11.657

Determinants of Indonesian Islamic Rural Banks' Profitability: Collusive or Non-Collusive Behavior?  

WIDARJONO, Agus (Department of Economics, Faculty of Business and Economics, Universitas Islam Indonesia)
MIFRAHI, Mustika Noor (Department of Economics, Faculty of Business and Economics, Universitas Islam Indonesia)
PERDANA, Andika Ridha Ayu (Department of Economics, Faculty of Business and Economics, Universitas Islam Indonesia)
Publication Information
The Journal of Asian Finance, Economics and Business / v.7, no.11, 2020 , pp. 657-668 More about this Journal
Abstract
This paper investigates the effect of market structure, including some bank-specific variables and macroeconomic conditions, on the profitability of Indonesian Islamic rural banks. We apply the structure conduct performance (SCP) and the relative market power (RMP) hypothesis. Panel data comprising 142 Islamic rural banks from 2013Q1 to 2018Q4 are employed. This study breaks them apart, associated with the level of economic development consisting of Java as developed regions and outside Java as less developed regions. This study employs static and dynamic panel regression. The GMM method, however, is appropriate because of the dynamic nature of profitability. Our results confirm the SCP hypothesis and fail to support the RMP hypothesis. The higher market concentration allows Islamic rural banks to generate a significantly higher profit by conducting a collusive strategy. More interestingly, the collusive behavior may result in more profit for Islamic rural banks located in the developed regions than those in less developed regions. Evidence also highlights the importance of operating efficiency and impaired financing on profitability. High operating efficiency and low impaired financing can improve profit. Our results suggest that capitalizing market share by improving efficiency and optimizing financing contracts between PLS and non-PLS contracts also improve profit.
Keywords
Profitability; Market Structure; Islamic Rural Bank; Indonesia;
Citations & Related Records
Times Cited By KSCI : 6  (Citation Analysis)
연도 인용수 순위
1 Beck, T., Demirguc-Kunt, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business model, efficiency and stability. Journal of Banking and Finance, 37(2), 433-447. https://doi.org/10.1016/j.jbankfin.2012.09.016   DOI
2 Berger, A. . (1995). The profit-structure relationship in banking--tests of market-power and efficient- structure hypotheses author. Journal of Money , Credit and Banking, 27(2), 404-431.   DOI
3 Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143. https://doi.org/10.1016/S0304-4076(98)00009-8   DOI
4 Chen, S. H., & Liao, C. C. (2011). Are foreign banks more profitable than domestic banks? Home- and host-country effects of banking market structure, governance, and supervision. Journal of Banking and Finance, 35(4), 819-839. https://doi.org/10.1016/j.jbankfin.2010.11.006   DOI
5 Choong, Y. V., Thim, C. K., & Kyzy, B. T. (2012). Performance of Islamic commercial banks in Malaysia : An empirical study. Journal of Islamic Economics, Banking and Finance, 8(2), 67-80.
6 Cihak, M., & Hesse, H. (2010). Islamic Banks and Financial Stability: An empirical analysis. Journal of Financial Services Research, 38(2), 95-113. https://doi.org/10.1007/s10693-010-0089-0   DOI
7 Claeys, S., & Vennet, R. V. (2008). Determinants of bank interest margins in Central and Eastern Europe: A comparison with the West. Economic Systems, 32(2), 197-216. https://doi.org/10.1016/j.ecosys.2007.04.001   DOI
8 Duong, T. T. N., Phan, H. T., Hoang, T. N., & Vo, T. T. T. (2020). The effect of financial restructuring on the overall financial performance of the commercial banks in Vietnam. Journal of Asian Finance, Economics and Business, 7(9), 75-84. https://doi.org/10.13106/jafeb.2020.vol7.no9.075   DOI
9 Fu, X., & Heffernan, S. (2009). The effects of reform on China's bank structure and performance. Journal of Banking and Finance, 33(1), 39-52. https://doi.org/10.1016/j.jbankfin.2006.11.023   DOI
10 Yuanita, N. (2019). Competition and bank profitability. Journal of Economic Structures, 8(1), 1-15. https://doi.org/10.1186/s40008-019-0164-0   DOI
11 Zarrouk, H., Ben Jedidia, K., & Moualhi, M. (2016). Is Islamic bank profitability driven by same forces as conventional banks? International Journal of Islamic and Middle Eastern Finance and Management, 9(1), 46-66. https://doi.org/10.1108/IMEFM-12-2014-0120   DOI
12 Khan, H. H., Ahmad, R. B., & Chan, S. G. (2018). Market structure, bank conduct and bank performance: Evidence from ASEAN. Journal of Policy Modeling, 40(5), 934-958. https://doi.org/10.1016/j.jpolmod.2018.02.001   DOI
13 Hamid, F. S. (2017). The effect of market structure on banks' profitability and stability: Evidence from ASEAN-5 countries. International Economic Journal, 31(4), 578-598. https://doi.org/10.1080/10168737.2017.1408668   DOI
14 Hussien, M., Alam, M. M., & Murad, M. W. (2019). The performance of Islamic banks during the 2008 global financial crisis: Evidence from Gulf Cooperation Council Countries. Journal of Islamic Accounting and Business Research, 10(3), 407-420. https://doi.org/10.2139/ssrn.2517359   DOI
15 Kabir, M. N., Worthington, A., & Gupta, R. (2015). Comparative credit risk in Islamic and conventional bank. Pacific Basin Finance Journal, 34, 327-353. https://doi.org/10.1016/j.pacfin.2015.06.001   DOI
16 Nguyen, M., Skully, M., & Perera, S. (2012). Market power, revenue diversification and bank stability: Evidence from selected South Asian countries. Journal of International Financial Markets, Institutions and Money, 22(4), 897-912. https://doi.org/10.1016/j.intfin.2012.05.008   DOI
17 Khasawneh, A. Y. (2016). Vulnerability and profitability of MENA banking system: Islamic versus commercial banks. International Journal of Islamic and Middle Eastern Finance and Management, 9(4), 454-473. https://doi.org/10.1108/IMEFM-09-2015-0106   DOI
18 Laeven, L., & Levine, R. (2007). Is there a diversification discount in financial conglomerates? Journal of Financial Economics, 85(2), 331-367. https://doi.org/10.1016/j.jfineco.2005.06.001   DOI
19 Mirzaei, A., Moore, T., & Liu, G. (2013). Does market structure matter on banks' profitability and stability? Emerging vs. advanced economies. Journal of Banking and Finance, 37(8), 2920-2937. https://doi.org/10.1016/j.jbankfin.2013.04.031   DOI
20 Pasiouras, F., & Kosmidou, K. (2007). Factors influencing the profitability of domestic and foreign commercial banks in the European Union. Research in International Business and Finance, 21(2), 222-237. https://doi.org/10.1016/j.ribaf.2006.03.007   DOI
21 Perera, S., Skully, M., & Chaudrey, Z. (2013). Determinants of commercial bank profitability: South Asian evidence. Asian Journal of Finance & Accounting, 5(1), 365-380. https://doi.org/10.5296/ajfa.v5i1.3012
22 Shaban, M., Duygun, M., Anwar, M., & Akbar, B. (2014). Diversification and banks' willingness to lend to small businesses: Evidence from Islamic and conventional banks in Indonesia. Journal of Economic Behavior and Organization, 103, S39-S55. https://doi.org/10.1016/j.jebo.2014.03.021   DOI
23 Pisedtasalasai, A., & Edirisuriya, P. (2020). Diversification and performance of Sri Lankan Banks. Journal of Asian Finance, Economics and Business, 7(9), 1-10. https://doi.org/10.13106/jafeb.2020.vol7.no9.001   DOI
24 Rizvi, S. A. R., Narayan, P. K., Sakti, A., & Syarifuddin, F. (2020). Role of Islamic banks in Indonesian banking industry: An empirical exploration. Pacific Basin Finance Journal, 62, 101117. https://doi.org/10.1016/j.pacfin.2019.02.002   DOI
25 Sahile, S. W. G., Tarus, D. K., & Cheruiyot, T. K. (2015). Market structure-performance hypothesis in Kenyan banking industry. International Journal of Emerging Markets, 10(4), 697-710. https://doi.org/10.1108/IJoEM-12-2012-0178   DOI
26 Smirlock, M. (1985). Evidence on the (non) relationship between concentration and profitability in banking. Journal of Money, Credit and Banking, 17(1), 69-83.   DOI
27 Sutrisno, & Widarjono, A. (2018). Maqasid Sharia Index, banking risk and performance cases in Indonesian Islamic banks. Asian Economic and Financial Review, 8(9), 1175-1184. https://doi.org/10.18488/journal.aefr.2018.89.1175.1184   DOI
28 Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277-279. https://doi.org/10.2307/2297968   DOI
29 Ahamed, M. M. (2017). Asset quality, non-interest income, and bank profitability: Evidence from Indian banks. Economic Modelling, 63, 1-14. https://doi.org/10.1016/j.econmod.2017.01.016   DOI
30 Al Arif, M. N. R., & Awwaliyah, T. B. (2019). Market share, concentration ratio and profitability: evidence from Indonesian Islamic banking industry. Journal of Central Banking Theory and Practice, 8(2), 189-201. https://doi.org/10.2478/jcbtp-2019-0020   DOI
31 Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51. https://doi.org/10.1016/0304-4076(94)01642-D   DOI
32 Azmat, S., Skully, M., & Brown, K. (2015). Can Islamic banking ever become Islamic? Pacific Basin Finance Journal, 34, 253-272. https://doi.org/10.1016/j.pacfin.2015.03.001   DOI
33 Waemustafa, W., & Sukri, S. (2016). Systematic and unsystematic risk determinants of liquidity risk between Islamic and conventional banks. International Journal of Economics and Financial Issues, 6(4), 1321-1327. https://doi.org/10.6084/m9.figshare.4052316
34 Trabelsi, M. A., & Trad, N. (2017). Profitability and risk in interest-free banking industries: A dynamic panel data analysis. International Journal of Islamic and Middle Eastern Finance and Management, 10(4), 454-469. https://doi.org/10.1108/IMEFM-05-2016-0070   DOI
35 Trad, N., Trabelsi, M. A., & Goux, J. F. (2017). Risk and profitability of Islamic banks: A religious deception or an alternative solution? European Research on Management and Business Economics, 23(1), 40-45. https://doi.org/10.1016/j.iedeen.2016.09.001   DOI
36 Trinugroho, I., Agusman, A., Ariefianto, M. D., Darsono, D., & Tarazi, A. (2015). Determinants of cross regional disparity in financial deepening: Evidence from Indonesian provinces. Economics Bulletin, 35(2), 896-910.
37 Trinugroho, I., Risfandy, T., & Ariefianto, M. D. (2018). Competition, diversification, and bank margins : Evidence from Indonesian Islamic rural banks. Borsa Istanbul Review, 18(4), 349-358. https://doi.org/10.1016/j.bir.2018.07.006   DOI
38 Trinugroho, I., Risfandy, T., Ariefianto, M. D., Prabowo, M. A., Purnomo, H., & Purwaningsih, Y. (2017). Does religiosity matter for Islamic banks' performance? Evidence from Indonesia. International Journal of Economics and Management, 11(2), 419-435.
39 Widarjono, A., Anto, M. B. H., & Fakhrunnas, F. (2020). Financing risk in Indonesian Islamic Rural banks : Do financing products matter ? Journal of Asian Finance, Economics and Business, 7(9), 305-314. https://doi.org/10.13106/jafeb.2020.vol7.no9.305   DOI
40 Yanikkaya, H., Gumus, N., & Pabuccu, Y. U. (2018). How profitability differs between conventional and Islamic banks: A dynamic panel data approach. Pacific Basin Finance Journal, 48, 99-111. https://doi.org/10.1016/j.pacfin.2018.01.006   DOI