Do Non-Traditional Activities Matter for Income Diversification and Performance of Islamic Banks in Indonesia?

Abstract

Non-traditional activities are started being concerned. It is questionable whether Islamic banks follow the trend of utilizing non-traditional activities to promote income. Therefore, it is important to examine the trend and the diversification among traditional (Profit Loss Sharing (PLS) and non-PLS) and non-traditional activities by Islamic banks. This study also examines the impact of these three activities on performance and how diversification affects performance. Eleven (11) Islamic banks are tested for a period of 2010-2018. This study finds that revenue is mostly earned from non-PLS activities, non-traditional activities and the lowest one is PLS activities as PLS activities contain high risks. This study also finds that PLS and non-PLS activities affect performance. Meanwhile,non-traditional activities can not necessarily be shift of traditional activities and doesnot play a major role in performance.It can be due to only fewer instruments of non-traditional activities that are available and suitable with Islamic banks. Besides, diversification does not affect performance which indicates that diversification is not optimal yet in supporting income. This results imply in providing information for Islamic bankers about how activities can diversify the income. 
 Keywords:traditional activities,non-traditional activities,IslamicBanks,diversification, performance