Dual Banking System Research Articles

Islamic banking finance and private sector investment in dual banking systems: the impact of institutional quality

Islamic banking finance and private sector investment in dual banking systems: the impact of institutional quality

Influence of spin-off decision on financing risk: Empirical insight from Indonesian Islamic banks

Background Spin-offs play a significant role in organizational development strategies, particularly in Islamic banking, by fostering entrepreneurship, innovation, and Shariah-compliant management practices. Indonesia stands as a pioneer in implementing the dual banking system and has established a spin-off policy to foster the growth of Islamic banking. This study investigates whether the spin-off decision has a significant impact on financing risk in Indonesian Islamic banks. Methods Financing risk is measured by the non-performing financing ratio, while the spin-off decision is represented by a dummy variable equal to 1 for the post-spin-off period and 0 for the pre-spin-off period. This study utilizes data from semi-annual reports of 35 Indonesian Islamic banks and analyzes it using a dynamic panel model with the Generalized Method of Moments (GMM). Results The findings reveal that spin-offs significantly reduce financing risk, thereby enhancing the financial resilience and boosting investor appeal. Notably, this implies that Islamic banks operating as Islamic windows exhibit a higher level of financing risk compared to fully-fledged Islamic banks. Furthermore, a noteworthy pattern emerges that spin-off Islamic banks with substantial assets demonstrate greater risk in comparison to their counterparts with more modest assets. System GMM also confirmed the result. Conclusions Islamic banks can significantly reduce their financing risks by establishing independent Islamic banks, or spin-offs. Unlike Islamic windows, which are typically integrated within conventional banks and face higher risk levels, standalone Islamic banks offer greater flexibility and control over their operations.

The impact of corruption and Islamicity on bank stability and profitability: assessing the moderating effect in dual banking systems

Purpose This paper aims to examine the impact of corruption on bank stability and bank profitability separately for Islamic banks as well as conventional banks. Moreover, it also investigates whether the existence of Islamicity and corruption in the environment can moderate the Islamic banks-stability and Islamic banks-profitability relationships. Design/methodology/approach Sample of the study consists 136 banks comprising 70 Islamic and 66 conventional banks over the period 2015–2021 from nine countries with dual banking systems. Panel data fixed effect estimator with year effects is used to estimate the results. Findings Results of the study show that Islamicity is positively and corruption is negatively related to bank stability as well as bank profitability. Further, it is found that the effect of corruption is significantly different between Islamic and conventional banks, wherein conventional banks are more adversely affected than Islamic banks. However, an insignificant difference between Islamic and conventional banks is observed in the case of Islamicity. Practical implications The study provides theoretical and practical implications. On theoretical side, the study presents Islamicity as more reliable measure of religiosity based on Islamic values that can help in control of corruption by moderating corruption-bank stability nexus especially in dual banking economies which have high share of Muslim population. On practical side, the study recommends policy and operational measures for mitigating corruption aiming bank stability. Originality/value The results of this study contribute to the corruption-finance, religion-finance and dual banking literature. This study suggests that regulators and bank management must consider corruption and Islamicity while formulating their policies for better bank performance/stability.

Liquidity and credit risks during the COVID-19 pandemic: evidence from a dual banking system

Purpose The purpose of this paper is to investigate the relationship between liquidity risk and credit risk of Islamic and conventional banks in a predominantly Muslim country (Indonesia) adopting a dual banking system. Design/methodology/approach To investigate liquidity-credit risk nexus, this study used a sample of 72 Islamic and conventional banks in Indonesia for a period between 2019 Q4 and 2022 Q1. This paper used a generalized method of moments (GMM) and generalized least square (GLS) estimators. Findings This study found that there is a nonlinear (inverted U-shaped) relationship between liquidity risk and credit risk in dual banking system. Liquidity risk was found to increase credit risk if it is below the optimal threshold, and above this optimal threshold, liquidity risk begins to decrease credit risk, both before and during the pandemic. In addition, the impact of liquidity risk on credit risk is higher in Islamic banks compared to conventional banks. Originality/value This paper reinvestigates the puzzle between credit risk and liquidity risk by taking a sample of a dual banking system country and by considering the period of the COVID-19 pandemic. To the authors’ knowledge, this approach has not been addressed in prior empirical studies.

Examining the Indonesian dual banking system: an exploration of market discipline indicators

PurposeThis research aims to investigate the disciplinary functions of depositors and subordinated debt holders within Indonesia's dual banking system, examining the impact of regulatory changes on market discipline.Design/methodology/approachThe study employs a comprehensive analysis of the dual banking system in Indonesia over 15 years. Utilizing a non-public dataset from the Financial Services Authority and the Indonesia Deposit Insurance Corporation, the study employs propensity score matching and difference-in-differences analysis.FindingsThe findings reveal distinct patterns in the exercise of market discipline by depositors over different regulatory regimes. During the blanket guarantee regime (2002–2005), depositors lacked the incentive to monitor banks but resumed their disciplinary role under the limited guarantee regime (2005–2017). Islamic banks faced simultaneous market and regulatory discipline, with market discipline prevailing.Originality/valueThis study contributes to the literature by providing novel insights into the interplay between regulatory changes, market discipline and depositor behavior within Indonesia's dual banking system. The utilization of a comprehensive non-public dataset from regulatory authorities adds to the originality of the research.

Interconnectedness between Islamic and conventional banks: a multilayer network view

PurposeThis study aims to examine information (stock return, volatility and extreme risk) spillovers and interconnectedness within dual-banking systems.Design/methodology/approachUsing multilayer information spillover networks, this paper conduct a deep analysis of contagion dynamics among 24 Islamic and 46 conventional banks from 2006 to 2022.FindingsThe findings show the network’s rapid response to financial shocks. Through cross-sector analysis, this paper identify information spillovers between and within Islamic and conventional banking systems. Furthermore, this research illustrates distinct roles played by Islamic and conventional banks within the multilayer network structure, contingent upon the nature of the financial shock.Practical implicationsUnderstanding the differential roles of Islamic and conventional banks in information transmission can aid policymakers and financial institutions in devising more effective risk management strategies, thereby enhancing financial stability within dual-banking systems.Originality/valueThis study contributes to the literature by emphasizing the necessity of examining contagion mechanisms beyond traditional single-layer network structures, shedding light on the shadow dynamics of information transmission in dual-banking systems.

Stability and Performance of Conventional and Sharia Banking in Indonesia Before and After the Covid-19 Pandemic

This study examines the impact of the COVID-19 outbreak on the performance and stability of Indonesia's dual banking system. Our sample includes the top 20 banks by assets, both conventional and sharia, from 2018 Q1 to 2023 Q3. Data for conventional banks is obtained from Bloomberg, while data for Islamic banks is sourced from each bank's official website. We use ROA, ROE, and NIM as performance variables and Z-Score and NPL as stability variables. External factors such as GDP, Inflation, BI Rate, and Exchange Rate serve as independent variables, while bank-specific variables act as controls. Panel data regression is used to determine causal relationships between these factors and banking performance and stability. We also compare bank performance and stability before and after COVID-19 using the Mann-Whitney Test. Findings indicate that the pandemic significantly affected conventional banks' Z-Score, NPL, ROA, ROE, and NIM, while only NPL was significantly affected in sharia banks. The results highlight the significant impact of GDP, exchange rate, and BI Rate on banking variables, while inflation had no effect. The type of bank significantly influences performance but not stability.

Corruption, Funding Structure and Bank Lending of Dual Banking System

The main objective of this paper is to examine the interaction effect of political turmoil on the relationship between funding structure and bank lending behaviour of Islamic (IBs) and Conventional banks (CBs). Political turmoil is measured by corruption (CPI) and election year (ELY) while the funding structure is measured by Total Customer Deposits (TCD) and Total Bank Deposits (TBD). We conducted a panel analysis of Islamic and conventional banks to ascertain whether the funding structure of Islamic banks can sustain financing supply and whether its growth is higher than conventional bank lending growth in times of political turmoil. Using the matched-pair technique, this study utilizes a panel sample of 58 Islamic banks and 58 conventional banks from 18 dual-banking countries from 2006 to 2017. The generalised Method of Moments (GMM) is used to deal with the endogeneity and heterogeneity issues. We observed that corruption and elections affect the amount of lending/financing given to IBs and CBs. The study found that TCD hinders the growth of credit supply for both IBs and CBs during elections. Nevertheless, TBD did not have any influence on bank lending. The study on interaction reveals that political turmoil has affected the relationship between funding structure and bank lending for Islamic and conventional banks. These findings contribute to supporting the Islamic banking system's involvement in financial and economic stability. This suggests that corruption is influencing the funding structure within the banking system, which in turn affects the availability of credit from banks. Future research could investigate whether the governance by the bank’s management leads to credit supply efficiency.

Bank financing diversification, market structure, and stability in a dual-banking system

This paper examines the effects of bank financing diversification and market concentration on bank stability in Malaysia. Our study is unique as it investigates these effects within a banking industry that has undergone major restructuring due to the introduction and rapid penetration of a new banking type, Islamic banking. Despite its recent history, Islamic banking, having benefited from strong government support, has grown to command more than a third of the market share. The extensive realignment caused by such industry disruption makes the study of such effects on banking stability highly relevant and interesting. The study investigates 24 conventional and 18 Islamic banks in Malaysia from 2003 to 2019. Our results reveal differences in the above dynamics between the two bank types. Increasing diversification up to a moderate level enhances the stability of conventional banks, but only in less-concentrated markets. Very high diversification levels, however, impair their stability. For Islamic banks, stability seems unresponsive to financing diversification. Furthermore, while market concentration negatively affects the stability of conventional banks, Islamic banks appear to benefit from market concentration. These findings withstand our robustness tests using alternative measures of the key variables. Further examination suggests that these dynamics may have a temporal dimension. Our findings imply that a policy based on a single regulatory framework emphasizing increased diversification and competition across the industry may not be appropriate for all banks. Conventional and Islamic banks may require different regulatory treatment.

Impact of banking subsystem liquidity creation on real economic output

PurposeThis study aims to examine the impact of liquidity creation per capita of tri-banking system and dual banking system on real economic output.Design/methodology/approachThis study applies the feasible generalized least square framework on the data set of 12 countries, 8 with tri-banking system and 4 with dual banking system over the 2013–2022 period.FindingsThe findings show that for countries with tri-banking system, only liquidity creation by full-fledged Islamic Banks (FIBs) and hybrid conventional banks (HCBs) spurs real output, with the impact of HCBs being greater than that of FIBs. Nonetheless, for countries with dual banking system, both FIBs’ and pure CBs’ (PCBs) liquidity creation fosters real output. However, the impact of PCBs is slightly greater. Finally, Granger causality results confirm only the positive impact of the tri-banking system’s liquidity creation on real output.Practical implicationsFor countries with tri-banking system, only HCBs’ and FIBs’ liquidity creation spurs real output. However, for countries with dual banking system, liquidity created by both FIBs and PCBs fosters real output. However, only liquidity created by tri-banking system has a unidirectional Granger causality with real output.Originality/valueTo the best of the authors’ knowledge, this is the first study that examines the impact of the banking subsystem liquidity creation on real economic output. Examining the impact of the liquidity created by this banking subsystem on the real economy is important for both regulators and policymakers.

Impact of capital inflows on bank profitability: a comparative analysis of dual banking systems

PurposeUsing data on 739 banks from 22 countries with a dual banking system from 2012 to 2019, this paper aims to examine whether capital inflows affect banks’ profitability in recipient countries.Design/methodology/approachThe authors check the conjecture about the effect of capital inflows on the profitability of the host country’s banks by estimating the following regression:Pict=α0+α1·CFct+α2·Islamici+α3·CFct×Islamici+δ·Xict+θ·Yct+εict (1)where the dependent variable (Pict) refers to bank profitability, measured by either ROA or ROE for bank i, country c and year t. ROA is defined as the ratio of net profit to average total assets expressed as a percentage, which determines how efficiently a bank uses its assets to generate a profit. ROE is defined as the ratio of net profit to average total equity expressed as a percentage, which is a measure of increases in shareholders’ wealth.FindingsThe authors find that capital inflows are generally positively associated with bank profitability. However, cross-border capital inflows reduce the rate of return in Islamic banks relative to their conventional counterparts. When decomposing inflows by instrument, the authors find that the enhancing role of capital inflows on bank profitability comes mainly from debt inflows and borrowers; the authors observe that the documented results emanate mostly from the inflows to the financial sector. These results remain unchanged if holding a bank’s risk constant. Overall, foreign funds in the form of debt inflows targeting the financial sector can disproportionately improve the performance of commercial banks in recipient countries.Originality/valueThe paper is an original research project. The analysis contributes to the existing literature in several ways: the authors study whether the impact of capital inflows on bank profitability varies with the bank business model by looking at both the Islamic and conventional bank systems. The profitability of the banking system is an important catalyst for growth and stability. The authors also decompose capital inflows to recipient countries into their equity and debt components and study the differential impact of those components on the profitability of Islamic and conventional banks.

Prospek Masa Depan Dual Banking System Dalam Konteks Globalisasi Ekonomi Syariah

The primary challenge facing the global banking system is how conventional and Islamic banking systems can operate simultaneously and synergistically within the context of Islamic economic globalization. This study aims to analyze the future prospects of the Dual Banking System, which integrates conventional and Islamic banking, in supporting global economic stability and growth. The methodology employs a qualitative approach with descriptive analysis, incorporating literature review and secondary data analysis from research reports of international institutions focused on the Islamic finance industry. The findings indicate that the Dual Banking System has significant potential to enhance financial inclusion and offer ethical and stable investment alternatives. However, substantial challenges, such as non-uniform regulations and disparate business cultures, remain to be addressed. The implications of this research suggest that with more comprehensive regulatory support and improved financial literacy, the Dual Banking System can become a crucial pillar in fostering a more inclusive and sustainable global economy

Ownership Structure and Bank Dividend Policies: New Empirical Evidence from the Dual Banking Systems of MENA Countries

Ownership Structure and Bank Dividend Policies: New Empirical Evidence from the Dual Banking Systems of MENA Countries

Women directors’ attributes and demographics: New insights into bank risk

This study examines the impact of women directors’ representation and characteristics on bank risk in a unique sample of 12 developing countries with dual banking systems. We examine different women’s leadership and monitoring attributes (leadership and independence) and demographic attributes (educational level and background, foreign directors, and financial expertise). Our results indicate that women directors significantly reduce bank risk, regardless of bank type. Foreign female directors and the financial expertise of women directors are both associated with high bank risk while the relation is inverted for independent women directors. We also find that women directors with high educational qualifications (i.e., postgraduate level) and those holding qualifications in accounting and finance are negatively associated with bank risk. Considering bank type, women on the board have an overall adverse impact on risk in Islamic banks, showing high bank risk across various risk indicators and directors’ attributes/demographics.

PENGARUH STRUKTUR MODAL TERHADAP PROFITABILITAS BANK PADA DUAL BANKING SYSTEM DI INDONESIA

The dual banking system in Indonesia still faces the problem of inadequate capitalization with a high level of leverage. This study aims to analyze the effect of capital structure on bank’s profitability in Dual Banking System in Indonesia. The data analysis method used is panel data regression and difference test on 8 conventional banks and 8 Islamic banks. Panel data regression is intended to identify the influence of capital structure proxied through DER and CAR ratios on profitability (ROA) with control variables of bank size and asset’s growth. The secondary data used is annual report data for the period 2013-2022 sourced from OJK. The estimation results on conventional banking show that the DER and growth variable has a significant positive impact on profitability, while CAR and bank size have no significant influence on profitability. Then, in Islamic banking, DER has a significant negative influence on profitability performance, while CAR and growth have no significant influence on Islamic bank’s profitability performance. Meanwhile, bank size is proven to affect the Islamic bank’s profitability performance. Through a t-test, there is a significant difference in profitability performance and capital structure between the two banking systems in Indonesia.

Retraction: The Cyclical Behavior of Credit and Liquidity Risks on Bank Stability in MENA Countries with a Dual Banking System

Retraction: The Cyclical Behavior of Credit and Liquidity Risks on Bank Stability in MENA Countries with a Dual Banking System

The Impact of Non-Muslim Community Perspectives on Islamic Banking in Jayapura, Papua, Indonesia

Islamic banks function as intermediary institutions governed by Sharia principles, catering to both Muslim and non-Muslim clientele. Operating within a Dual Banking System alongside conventional banks, Sharia-compliant banks engage in profit and loss sharing activities. The increasing clientele at Banks Syariah Papua encompasses not only Muslims but also a considerable number of non-Muslim customers. This study aims to examine the impact of location, product offerings, promotional activities on the inclination of nonMuslim individuals to patronize Banks Syariah Papua. The population studied is the non-Muslim population of Kecamatan Jayapura Utara, Papua Province. This study includes 123 samples from respondents. Research results indicate that location variable, product variable, and promotion variable have a significant impact on the attitudes of non-Muslim populations toward Bank Syariah Indonesia customer interest factors on the interest of non-Muslim customers to become customers at Banks Syariah Papua.

Implikasi Pemberlakuan Sistem Perbankan Ganda Terhadap Penerapan Norma Hukum Islam Di Dalam Perbankan Syariah Di Indonesia

The Financial System is regulated in Law Number 4 of 2023 concerning the Development and Strengthening of the Financial Sector (P2SK). Dual banking system is the implementation of the banking system simultaneously, namely conventional banks and Islamic banks simultaneously. The implementation of the Dual banking system is based on Law No. 7 of 1992 concerning Banking, in which it regulates shortcuts about the system and is perfected by Law No. 10 of 1998. As a result of the implementation of the "dual banking system model", legal problems arise, especially in the intermediation function of Islamic banks as financial institutions that have differences in the variation of fund distribution to the public, with the intermediation function of conventional banks as financial institutions that can only channel funds to the public in the form of credit. The implications of implementing this dual banking system are the gateway to implementing Islamic economic legal norms in every Islamic bank product and business. To ensure compliance with sharia principles, DSN MUI issues fatwas. The MUI DSN fatwa was then formalized through PBI and POJKut selanjutnya diformalkan melalui PBI maupun POJK.

Revitalization Supervision Islamic Banking in Enhancement Compliance in Indonesia and Malaysia

This study is indicated with social reality that, following three decades of dual banking system implementation in Indonesia, Islamic banks' operational activities are essentially identical with the operations of conventional banks. The thing that distinguishes is only the Shariah "brand". In the vast zone of national banking industry, Islamic banks are still being the "followers" of conventional banks with approximately 6.65% market share. The focus of study is on the Islamic bank supervision system by DPS, the Shariah Bank Compliance Directorate, and OJK in carrying out supervisory functions related to fields of duty. The study methodology applied is a normative legal study which includes a study of norms, principles of sharia banking law, and the opinions of sharia economic law experts, while those used are a statutory approach and a sociological approach. The next stage of data analysis is data display, which illustrated through tables, figures, and graphs. Data categorization was carried out relied to the theme to identify the implementation of Islamic bank supervision duties in conforming to Shariah principles and the implementation of laws and regulations. The results showed that there are several problems in Islamic bank supervision institutions that make supervisory performance not optimal and pose potential legal risks for the bank. The roles of DPS, the Directorate of Shariah Bank Compliance, and OJK, which run independently and inefficiently, create overlapping aspects of Islamic bank supervision. This study recommends amending UURI No. 21 of 2008 about Shariah Banking by giving attributive responsibility to DPS to sanction Islamic banks that proved to violate Shariah principal compliance and establishing the OJK regulations on Islamic banking audit instruments.

Competition, regulation, and systemic risk in dual banking systems

This study investigates the impact of competition and banking regulation on the systemic risk of Islamic Banks (IBs) and Conventional Banks (CBs). Utilizing a random effects panel model with robust errors and an unbalanced panel data set encompassing 80 IBs and 204 CBs from 17 emerging market countries spanning 2000 to 2019, we show that the lack of competition increases systemic risk exposure, which may stem from the interconnection channels and the individual bank risk contributions. Interestingly, this effect is not significantly different between IBs and CBs. Our results also reveal a non-linear relationship between competition and systemic risk. Specifically, greater competition leads to increased systemic stability, but beyond a certain threshold, higher competition exacerbates banks' systemic risk. Additionally, we find that larger banks are more vulnerable to systemic risk, and the lack of competition worsens this vulnerability. We also show that banks with greater market power after the GFC are more exposed to systemic risk.