The Comparison of Earnings Management Practices in Indonesia’s Islamic Banks and Conventional Banks

Abstract

Banking sector is playing an important role in the economic stability of a country which also cannot be avoided earnings management practices. Islamic banks have grown rapidly in Indonesia, and are seen as more conservative than conventional banks. This conservative attitude is reflected in the size of the loan loss provision, which is an indicator of earnings management in the banking sector. This study aims to compare earnings management practices and their components between Islamic banks and conventional banks. This empirical study is conducted using a sample of 11 Islamic banks and 40 conventional banks in Indonesia during a period that ranges from 2011 to 2017. The comparison model is estimated using independent sample T-test. This study found that the earning managements practices is estimated significantly different between Islamic banks and conventional banks. This significant difference is probably caused by differences in organizational goals, in which Islamic banks are not fully profit oriented. The high level of loan loss provisions in Islamic banks indicates a high level of prudence in this type of bank. This study gives insight for the stakeholders about the earnings management practices both in Islamic and conventional banks. This study also can be used as a reference for those banks to improve their loan performance in elevating their profitability