The Determinants of Credit Risk Under Dual Banking System: Indonesian Experience Based on Bank Specific Variables

Main Article Content

Muhammad Nur Faaiz F. Achsani
Salina Kassim


In Indonesian banking system, conventional banks are operating side by side with Islamic banking in a dual banking system. In terms of the credit risk determinants, Islamic banks should be affected by the different factors as conventional banks. However, the similarity of Islamic banks and the conventional bank in terms of contracts might lead to the opinion the same variables are affecting the performance of Islamic and conventional banks. The objective of the study is to examine and obtain an understanding on how the credit and financing in Indonesian dual banking system responses to changes in bank-specific variables. The main approach to fit the model used in this study is the dynamic panel data. Based on the result of the combined model, there are some independent variables that significantly affect credit risk. Profitability significantly affects credit risk with a negative relationship. While size significantly affects credit risk with a positive relationship. When it comes to the dummy variable, it can be said that the type of bank doesn’t play a significant role in determining the credit risk. In other word, there is no difference between Islamic bank and conventional banks in terms of credit risk. To analyze the crisis effect deeper, we compare the result of conventional banking model 2016-2020 and Islamic banking model 2016-2020. There is no independent variable that significantly affect the credit risk in the conventional banking model 2016-2020, three out of four independent variables affect credit risk significantly in the Islamic banking model 2016-2020. This is because conventional banks tend to play safe by avoiding the disbursement of credit and focusing on derivatives. However, this strategy is not suitable for Islamic banking as they are not allowed to do speculative activities. Islamic banking are still focusing on traditional banking activity.


Download data is not yet available.

Article Details



Adebola, S. S., Wan Yusoff, W. S., & Dahalanc, J. (2011). An ARDL approach to the determinants of non performing loans in Islamic banking system in malaysia. Kuwait Chapter of Arabian Journal of Business and Management Review, 1(2), 20-30.

Akram, H. & Rahman, K. u. (2018). Credit risk management A comparative study of Islamic banks and conventional banks in Pakistan. ISRA International Journal of Islamic Finance, 10(2), 185-205.

Al-Eitan, G. N. & Bani-Khalid, T. O. (2019). Credit risk and financial performance of the Jordanian commercial banks: a panel data analysis. Academy of Accounting and Financial Studies Journal, 23(5), 1-13.

Ali & Puah. (2018). The internal determinants of bank profitability and stability: An insight from banking sector of Pakistan. Management Research Review, 2040(8269).

Ali, A., Zulkhibri, M. & Kishwar, T. (2019). Credit risk, bank performance, and Islamic banking: Evidence from pakistan. Islamic Finance, Risk-Sharing and Macroeconomic Stability, 171-189. doi:doi:10.1007/978-3-030-05225-6_9.

Arellano, M. & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277-297.

Arrelano, M. & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51.

Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of econometrics, 87(1), 115-143.

Brewer, E., Minton, B. A. & Moser, J. T. (2000). Interest rate derivatives and bank lending. Journal of Banking & Finance, 24(3), 353-379.

Candera, M., Muslimin, A. & Permatasari Dina. (2021). Banking financial performance before and during the Covid 19 pandemic in Indonesia - Analysis of comparison between Islamic and conventional Banking. IT in Industry, 9(1), 976-986.

Fakhri, U. N. & Darmawan, A. (2021). Comparison of Islamic and conventional banking financial performance during the covid-19 period. International Journal of Islamic Economics and Finance, 4(SI)(Special Issue), 19-40.

Ferhi, A. (2017). Credit risk and banking stability: A comparative study between Islamic and conventional banks. Intellectual Property Rights: Open Access, 5(3), 1-7.

Gujarati, D. N. (2003). Basic Econometrics. New York (US): McGraw-Hill Higher Education.

Haryono, Y. (2016). Credit Risk Management Practices and Their Determinants: An Investigation of the Indonesian Islamic Banks. Kuala Lumpur (MY), IIUM.

Havidz & Obeng-Amposah. (2020). Indonesian banking industry specific and macroeconomic determinant of credit risk. International Journal of Advanced Engineering Research and Science (IJAERS), 7(1).

Holmberg, U. (2011). Banking and the determinants of credit crunches. Research Papers in Economics, 1-23.

Majid, M. A. & Ulina, S. (2020). Does the 2008 global financial crisis matter for the determinants of conventional and Islamic banking performances in indonesia. Jurnal Ekonomi & Keuangan Islam, 6(2), 77-90.

Manab, N. A., Theng, N. Y. & Md Rus, R. (2015). The determinants of credit risk in Malaysia. Procedia - Social and Behavioral Sciences, 1772, 301-308.

Masud, S. (2009). Could Islamic finance have prevented the global economic crisis?. Global Economic Finance Centre.

Mendoza, R.R. & Rivera, J. P. R. (2017). The effect of credit risk and capital adequacy on the profitability of rural banks in the philippines. Scientific Annals of Economic and Business, 64(1), 69-83.

[OJK] Otoritas Jasa Keuangan. (2020). Statistik Perbankan Syariah. Perizinan dan Informasi Perbankan. Jakarta (ID), Otoritas Jasa Keuangan.

[OJK] Otoritas Jasa Keuangan. (2013-2019). Statistik Perbankan Syariah. Jakarta (ID), Otoritas Jasa Keuangan.

Shkodra, J. & Ismajli, H. (2017). Determinants of the credit risk in developing countries: A case of Kosovo banking sector. Banks and Bank Systems, 12(4).

Sukmana, R. (2017). Determinants of credit and financing risk: Evidence of dual banking system in Indonesia. Journal of Islamic Finance, 3(2), 98-112. doi:http: //

Waemustafa, W., & Sukri, S. (2015). Bank specific and macroeconomics dynamic determinants of credit risk in Islamic banks and conventional banks. International Journal of Economics and Financial Issues, 5(2), 476-481.

Wiryono, S. K. & Effendi, K. A. (2018). Islamic bank credit risk: Macroeconomic and bank specific factors. European Research Studies Journal, 21(3), 53-62.

Zahra, S. F., Ascarya & Huda, N. (2018). Stanility measurement of dual banking system in Indonesia: Markov switching approach. Al-Iqtishad: Journal of Islamic Economics, 10(1), 25-52.

Zarrouk, H., Jedidia, K. B. & Moualhi, M. (2016). Is Islamic bank profitability driven by same forces asconventional banks? International Journal of Islamic and Middle Eastern Finance and Management, 9(1), 46-66.