Abstract
The banking sector is viewed as an important figure in the economic development. However, this sector is vulnerable to macroeconomic instability which lead to higher credit risk of banks. Motivated by the fact that unlike conventional banking, there is limited research study about the impact of macroeconomic factors on credit risk in Islamic banking. Therefore, further research to study about it has become important. This research aim is to evaluate the association between macroeconomic factors with credit risk through comparative analysis of these two kinds of banking system. Empirical results suggest that Islamic banks are more resistant during crisis, and only two variables (Exchange Rate and MS) which are significant to credit risk in Islamic banks. Meanwhile, in conventional banks almost all variables are significant except Industrial Production Index. This research is expected to give contributions to literature, and provide comparable information on the credit risk profile across the banks to stakeholders.
Highlights
Indonesia is much more vulnerable to any economic shocks toward trade, banking, and investment
From the risk management point of view, it is important for stakeholders to know whether these two kinds of banking system exhibit different levels of credit risk with principle that the basis of the conventional banking system is interest, while Islamic banks utilizing the funds on a profit and loss sharing basis
This study investigated the impact of macroeconomic factors on the credit risk of conventional banks and Islamic banks over 2008-2015
Summary
Indonesia is much more vulnerable to any economic shocks toward trade, banking, and investment. According to Tambunan (2010) Indonesia experienced two big economic crises and one small crisis (Presidential secretariat office BPS and BI, 2015). The first happened in 1997/1998 was triggered by a sudden capital flight from the country that caused Indonesia’s local currency, rupiah to depreciate significantly against the US dollar. The impact of the crisis has been forced around 123 banks in the US, including Lehman Brother (Gup, 2010). Begin September 2008, it spread and has affected many countries (Marshall, 2009). The latest happened in September 2015 devaluation of China’s Yuan caused rupiah depreciate to IDR 14.054 per US dollar (Bloomberg Dollar Index)
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