Abstract
Shariah bank has become the core of Indonesia financial industry. In the implementation, Shariah banking in Indonesia is integrated with social issues since the basic fundamental of Shariah banking industry are from religions and regulations. In detail the return are not solely depends on society demand but also related with moral issues. As corruption that kept on happening and political instability makes Shariah Banking industry in Indonesia sensitive and fragile towards socio economic development happening during certain period. This paper attempt to investigate the socio economic factors together with bank specific factors of Indonesia Shariah Banks by using GMM and Quantile regression. The dataset used or in this study involves 34 Shariah banks in Indonesia. In this study, Return on Assets has been found significantly positive to bank specific factors such as credit risk and statistically negative to cost to income ratio. However, it has been found that the relationship between risk and return is heterogenous or dissimilar accross different quantiles. Findings of the study tend to reveal that the socio economic factors particularly corruption, political stability and investment freedom have positive and significant relation to the Shariah bank performances in Indonesia.
Highlights
Indonesia under the dual financial system has the most severe exposure toward the instability and imbalances that creates by financial crisis and the faltering of money market due to the relatively high linkages of dual banking system
Strong correlation between variables suggest the major factor contributing to the strong correlation are investment freedom and political stability, since variables that correlates to each other came from different value and based on the characteristics of Shariah banks
The three variables important at any percentile showed that risk sharing in Shariah banking is positive and significantly related to Shariah bank performances
Summary
Indonesia under the dual financial system has the most severe exposure toward the instability and imbalances that creates by financial crisis and the faltering of money market due to the relatively high linkages of dual banking system. As the growth of Shariah bank in Indonesia increase over the last eleven years, which indicates that most of investors already aware of the Shariah banking industry This reason along with significant growth of market share makes the performances measurement of Shariah banks in Indonesia are very important to conduct. This research have two significant contribution, it will provide special treatment for the Shariah banks in one side and realize the core concepts of Shariah principle regulation and decide what is the best concept for Shariah principle in the future in order to achieve efficient market in term of fairness, transparency, protection to investor and reducing systematic risk by finding the impact of bank specific variables and socio-economic freedom on Shariah banks profitability in Indonesia and by finding whether risk-return relationship across different percentiles is similar or not in terms of bank specific and socio-economic freedom variables
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