Abstract
This study investigates whether Islamic rural banks perform better than conventional rural banks as their competitor in Indonesia. To measure Islamic rural banks' financial performance, we apply financial stability using Z-score and profitability using the return on assets. We use monthly time series data from January 2009 to December 2018. The dynamic regression of the Autoregressive Distributed Lag (ARDL) model is then employed. The results report that the Z-Score of Islamic rural banks is higher than the Z-Score of conventional rural banks. This finding shows that Islamic rural banks are less risky than conventional rural banks. However, the Islamic rural banks' financial stability is very vulnerable to changes in equity, output, and inflation than conventional rural banks. Although the Islamic rural banks' profit rate is lower compared to conventional rural banks, it is considered more stable. The profit of Islamic rural banks is affected by size, equity, domestic output, and inflation.
Highlights
The Islamic financial market is a newcomer to the global financial market
The higher Z-Score of Islamic Rural Bank (IRB) is due to two things which are from more stable Return on asset (ROA) and higher Capital Adequacy Ratio (CAR) compared to Conventional Rural Bank (CRB)
This study aims to analyze whether the financial performance of IRB with the types of profit-and-loss sharing (PLS) and non-PLS system contracts is better than CRB as its competitors
Summary
The Islamic financial market is a newcomer to the global financial market. One of the important Islamic financial markets is Islamic banking. The total Islamic financial assets were US$ 2.44 trillion in 2018, for which Islamic banks, with their asset of US$ 1.72 trillion, contributed 71% of the total Islamic financial assets. Saudi Arabia, Malaysia, UAE, and Qatar are the dominant players of global Islamic banking in the world. Those five countries, with their asset of US$ 1.34, accounted for 78% of the world Islamic banking assets. Some non-Muslim countries such as the United Kingdom, Luxembourg, Germany, and Russia practice Islamic banks
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