COVID-19 Pandemic’s Impact on Return on Asset and Financing of Islamic Commercial Banks: Evidence from Indonesia

Gama Putra Danu Sohibien,Lilis Laome,Achmad Choiruddin,Heri Kuswanto

doi:10.3390/su14031128

Gama Putra Danu Sohibien, Lilis Laome + Show 2 more

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https://doi.org/10.3390/su14031128

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Abstract

The aim of this study is to propose appropriate models to forecast Return on Asset (ROA) and financing of Indonesia Islamic Commercial Banks during COVID-19 pandemic. In particular, we study the models which involve reciprocal relation between ROA and financing and incorporate COVID-19 pandemic’s impact. It is crucial because the government would benefit from forecasting results to formulate the policy for the banks related to ROA and financing. We consider two models: Vector Autoregressive with exogenous variable (VARX) and spline regression, since both models are able to exploit the multivariate structure of ROA and financing and to include COVID-19 impact as predictor. The results show that the VARX outperforms spline regression in terms of RMSE. Using VARX, we deduce that ROA and financing have a positive reciprocal relationship, meaning that when ROA increases, financing would increase, and vice versa. In addition, the pandemic has significant impact on the decline of the ROA. We recommend that banks conduct an in-depth analysis to determine the appropriate form of restructuring for debtors so that it does not have a significant impact on the decrease in ROA.

Highlights

Academic Editors: Rezzy Eko Caraka, Bank as an intermediation institution has a role to provide credit, i.e., collect funds and allocate them as a loan to community or business people to develop their business.Timsina [1], Majeed and Iftikhar [2], and Altar et al [3] find that bank credit can have a positive impact on the country’s economic growth
Indonesia, with a Muslim majority population, tends to avoid credit loans, for the reason that practicing a credit loan with an interest system is an act of usury that is not in accordance with Islamic sharia [4,5]
Islamic Commercial Bank runs their business activities based on Islamic sharia principles using profit-sharing system [2]

Summary

Introduction

Academic Editors: Rezzy Eko Caraka, Bank as an intermediation institution has a role to provide credit, i.e., collect funds and allocate them as a loan to community or business people to develop their business. Timsina [1], Majeed and Iftikhar [2], and Altar et al [3] find that bank credit can have a positive impact on the country’s economic growth. Capital loan can be obtained according to Islamic sharia by financing from. Islamic Commercial Bank runs their business activities based on Islamic sharia principles using profit-sharing system [2]. This alternative has become a popular option and makes

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