Measuring Financial Distress of Islamic Banks Under Pandemic and Its Determinants: Random Effect Approach

Abstract

This study objectives to measure banks’ financial distress level and test whether fundamental factors and COVID-19 affect the banks' financial conditions. The data were sourced from the Islamic banks’ quarterly financial reports in Indonesia for 2019.1 to 2021.1 to find out a financial conditions before and during the pandemic. Testing was done through a panel data regression test. The random effect model was obtained as the best model for this research after going through several stages of model selection tests. Meanwhile, this study produced several essential findings for adding to the empirical research repertoire during the pandemic. First, the Altman Z-Score test's results varied from distress, a gray area, and safe from ten Islamic banks studied. Second, after several testing stages, it was found that capital adequacy, profitability, and financing proportion positively affected financial conditions, while COVID-19 did not affect the Islamic banks’ financial conditions. These findings showed that Islamic banks in Indonesia are stable during the pandemic for the short-term, however, for the long-term impact requires more observations.