The relationship between Islamic financing with risks and performance of commercial banks in Indonesia

Abstract

In this study, we examine whether Islamic financing can explain three important bank risks in a country with a dual banking system: credit risk, profit-rate risk, and liquidity risk. Using Indonesian data, we find that commercial banks with Islamic financing have significantly lower credit risks but significantly higher profit-rate risk than banks without Islamic financing. Mann-Whitney test of liquidity risk find that there is no significant difference on the liquidity risk for banks with Islamic financing and those without Islamic financing. We also find factors that significantly associate to the determination of credit risk, profit-rate risk, and liquidity risk. Lastly, the comparison between performance of banks with Islamic financing and banks without Islamic financing along with their determinants are also provided.