DO ISLAMIC BANKS IN INDONESIA TAKE EXCESSIVE RISK IN THEIR FINANCING ACTIVITIES?

Muhamad Anindya Hiroshi Purbayanto (School of Business and Management Institut Teknologi Bandung, Indonesia)
Taufik Faturohman (School of Business and Management Institut Teknologi Bandung, Indonesia)
Yulianti Yulianti (School of Business and Management Institut Teknologi Bandung, Indonesia)
Arson Aliludin (School of Business and Management Institut Teknologi Bandung, Indonesia)

Journal of Islamic Monetary Economics and Finance
Vol 8 No 1 (2022)

This study analyzes the risk-taking behavior of Indonesian Islamic Banks by examining whether the relation between financing Growth rate and non-performing financing (NPF). We employ threshold regression models and bank-level data of 24 Islamic banks (full-fledged Islamic banks and Islamic banking windows) covering the period from 2009 to 2019. We find evidence for the excessive risk-taking of Islamic Banks. More specifically, while the relation between NPF and FGR is negative when the one-lagged NPF is below the threshold (estimated to be 5.42%), it turns positive once it is above the threshold. This means that banks with NPF above the 5.42 percent threshold tend to take risky loans.