The Influence of Financing Diversification and Financial Performance on the Risk of Islamic Commercial Banks in Indonesia

Raja Ria Yusnita

doi:10.35877/454RI.qems2499

Raja Ria Yusnita Faculty of Economics and Business, Riau Islamic University, Riau, 28284, Indonesia (ID)

https://doi.org/10.35877/454RI.qems2499

Keywords: Islamic Bank, Diversification Financing, Financing Contract, NPF, ROA

Viewed = 0 time(s)

Abstract

This study aims to examine the influence of financing diversification, which includes six financing contracts of Islamic banks in Indonesia and financial performance on credit risk represented by NPF in Islamic commercial banks using regression panel data in 2018-2022. The results of this study indicate that there is an insignificant positive influence on financing diversification and financial performance partially on credit risk in Islamic banking in Indonesia. However, financing diversification and financial performance together have a significant influence on credit risk, which is currently a concern of the Islamic bank financial services authority in Indonesia. The financial performance measurement indicators in this study only focus on ROA, and this indicator may have limitations in measuring the financial performance of Islamic banking.

References

Ab Hamid, N.A. and Abd Rahman, M.J. (2021) 'Institut Pengajian Tinggi students' acceptance of online learning: a review in the Muallim area of Perak', Jurnal Dunia Pendidikan, 3(2), pp. 164-173. Available at: http://myjms.mohe.gov.my/index.php/jdpd.
Adam, C. et al. (2023) 'Evidence of Diversification and Leverage in the Performance of Brazilian and Mexican Family Businesses', Latin American Research Review, 58(4), pp. 892-907. Available at: https://doi.org/10.1017/lar.2023.10.
Addury, M.M. (2023) 'Do financing models in Islamic banks affect profitability? Evidence from Indonesia and Malaysia', Journal of Islamic Economics Lariba, 9(1), pp. 79-96. Available at: https://doi.org/10.20885/jielariba.vol9.iss1.art5.
Aditya Kurnia Indrajaya, Stevan Goklas Simanjuntak and Susy Muchtar (2022) 'Bank Risk, Profitability, and Investment Diversification: A Study of Banking Companies in Indonesia', Journal of Economics, 27(1), pp. 64-79. Available at: https://doi.org/10.24912/je.v27i1.855.
Ahyar, M.K. (2021) 'The Effects of Economic Sector Financing Diversification on Profitability and Risk of Islamic Banks in Indonesia', JPS (Journal of Islamic Banking), 2(2), pp. 197-211. Available at: https://doi.org/10.46367/jps.v2i2.388.
Ajao, M.G. and KOKUMO-OYAKHIRE, G.A. (2021) 'Corporate Diversification and Financial Performance of Conglomerate Firms in Nigeria', Journal of Business Studies and Management Review, 5(1), pp. 91-101. Available at: https://doi.org/10.22437/jbsmr.v5i1.16665.
AlKhouri, R. and Arouri, H. (2019) 'The effect of diversification on risk and return in banking sector: Evidence from the Gulf Cooperation Council countries', International Journal of Managerial Finance, 15(1), pp. 100-128. Available at: https://doi.org/10.1108/IJMF-01-2018-0024.
Almunawwaroh M., & Marliana, R. (2018) 'Pengarug CAR, NPF, FDR, to the Profitability of Islamic Banks in Indonesia', Amwaluna: Journal of Islamic Economics and Finance [Preprint].
Anggraeni, Basuki and Setiawan, R. (2020) 'Diversification, Bank Risk, and Efficiency on Sharia Banking in Indonesia'. Available at: https://doi.org/10.2991/aebmr.k.200127.042.
Arifin, J. (2017) 'SPSS 24 for Research and Thesis', PT Gramedia, p. 79.
Asif, R. and Akhter, W. (2019) 'Exploring the influence of revenue diversification on financial performance in the banking industry: A systematic literature review', Qualitative Research in Financial Markets, 11(3), pp. 305-327. Available at: https://doi.org/10.1108/QRFM-04-2018-0057.
Ayusaleha, A. and Laila, N. (2022) 'Diversifications, Bank Characteristics, and Profitability of Sharia Commercial Banks in Indonesia', Journal of Islamic Economics Theory and Application, 9(3), pp. 299-309.
Azmi, W. et al. (2019) 'Intricacies of competition, stability, and diversification: Evidence from dual banking economies', Economic Modeling, 83, pp. 111-126. Available at: https://doi.org/10.1016/j.econmod.2019.02.002.
Baroroh, H. (2023) 'Activity Diversification, Performance, and Profitability in Islamic Banking', JIET (Scientific Journal of Islamic Economics), 9(02), pp. 1920-1927.
Benjakik, S., & Habba, B. (2021) 'Income Diversification and Bank Performance: Does Bank Size Matter? Empirical Evidence from African Banking Sector', Research Journal of Finance and Accounting [Preprint]. Available at: https://doi.org/10.7176/rjfa/12-16-03.
Boamah, N.A., Boakye-Dankwa, A. and Opoku, E. (2022) 'Risk-taking behavior, competition, diversification and performance of frontier and emerging economy banks', Asian Journal of Economics and Banking, 6(1), pp. 50-68. Available at: https://doi.org/10.1108/ajeb-04-2021-0047.
Chen, C.J. et al. (2018) 'How business strategy in non-financial firms moderates the curvilinear effects of corporate social responsibility and irresponsibility on corporate financial performance', Journal of Business Research, 92, pp. 154-167. Available at: https://doi.org/10.1016/j.jbusres.2018.07.030.
Duho, K.C.T., Onumah, J.M. and Owodo, R.A. (2020) 'Bank diversification and performance in an emerging market', International Journal of Managerial Finance, 16(1), pp. 120-138. Available at: https://doi.org/10.1108/IJMF-04-2019-0137.
Fadli, J.A. (2019) 'Should Banks Diversify Their Income and Credit? Evidence From Indonesia Banking Industry', Kinerja, 23(1), pp. 28-41. Available at: https://doi.org/10.24002/kinerja.v23i1.2124.
Fatmafuli, E. and Moin, A. (2022) 'The Effect of Return on Assets, Operating Costs and Operating Income, and Financing to Deposit Ratio on Non Performing Financing in Islamic Banks with Financial Constraints as Moderating Variables', Selekta Manajemen: Journal of Business & Management Students, 01(01), pp. 248-269. Available at: https://journal.uii.ac.id/selma/index.
Feng, Y. et al. (2022) 'Diversification and financialization of non-financial corporations: Evidence from China', Emerging Markets Review, 50. Available at: https://doi.org/10.1016/j.ememar.2021.100834.
Gitahiga, P.N. (2020) 'Reveneu Diversification and Quality of loan portoflio', Jornal of Economics and Management, pp. 5-19.
Halim, A. et al. (2019) 'The Effect of Diversification Strategy on Efficiency in Manufacturing Companies Listed on the Indonesia Stock Exchange', Indonesian Accounting and Finance Studies, 2(2), pp. 149-176. Available at: https://doi.org/10.21632/saki.2.2.149-176.
Huynh, J. and Dang, V.D. (2021) 'Loan portfolio diversification and bank returns: Do business models and market power matter?', Cogent Economics and Finance, 9(1). Available at: https://doi.org/10.1080/23322039.2021.1891709.
Ihdina Sabilal Haq (2023) 'the Effect of Credit Portfolio Diversification Strategy on the Risk of Bad Credit in Indonesian Islamic Banking for 2018-2022 Period', J-EBIS (Journal of Economics and Islamic Business) [Preprint]. Available at: https://doi.org/10.32505/j-ebis.vi0.5560.
Ilyas, R. (2015) 'The Concept of Financing in Islamic Banking', Research Journal, 2.
Junaeni, I. et al. (2023) 'Efforts To Increase the Growth of Islamic Bank Financing By Diversifying the Right Financing Types', International Journal of Professional Business Review, 8(4). Available at: https://doi.org/10.26668/businessreview/2023.v8i4.1011.
Khattak, M.A. et al. (2021) 'Competition, diversification, and stability in the Indonesian banking system', Bulletin of Monetary Economics and Banking, 24, pp. 59-88. Available at: https://doi.org/10.21098/BEMP.V24I0.1481.
Kurniawan, H. (2022) 'Analysis of factors affecting the financial performance of Islamic Commercial Banks', Journal of Accounting and Digital Finance, 2(1), pp. 16-30. Available at: https://doi.org/10.53088/jadfi.v2i1.320.
Lee, C.C., Hsieh, M.F. and Yang, S.J. (2014) 'The relationship between revenue diversification and bank performance: Do financial structures and financial reforms matterα', Japan and the World Economy, 29, pp. 18-35. Available at: https://doi.org/10.1016/j.japwor.2013.11.002.
Lestari, W.A. (2020) 'Diversification of Financing as an Effort to Increase Profitability at Islamic Commercial Banks in Indonesia', Iqtishaduna, 11(1), pp. 37-58. Available at: https://doi.org/10.20414/iqtishaduna.v11i1.1131.
Malini, H., Islahiyah, D. and Suwantono, E. (2020) 'Integration and Portfolio Diversification of Islamic Banking in ASEAN Emerging Countries', Proceedings of the Annual Academic Seminar on Economics and Development Studies, pp. 978-602.
Masruroh, M. (2018) 'Financing Diversification as an Effort to Increase Profitability in Islamic Banks', Al-Tijary, 3(2), p. 117. Available at: https://doi.org/10.21093/at.v3i2.1102.
Moudud-Ul-Huq, S. et al. (2018) 'Does bank diversification heterogeneously affect performance and risk-taking in ASEAN emerging economies?', Research in International Business and Finance, 46, pp. 342-362. Available at: https://doi.org/10.1016/j.ribaf.2018.04.007.
Muharam, H. and Bellinda, B. (2020) 'Income Diversification, Bank Performance, and the Moderating Role of Ownership Type', Strategic Business Journal, 29(1), pp. 68-79. Available at: https://doi.org/10.14710/jbs.29.1.68-79.
Nahda, K. and Rahmadana, A.L. (2021) 'Diversification Strategy and Good Governance: Does It Affect Firm's Leverage?', Journal of Finance and Banking, 25(3), pp. 599-616. Available at: https://doi.org/10.26905/jkdp.v25i3.5758.
Nataly, Mahadwartha, P.A. and Utami, M. (2019) 'The Effect of Risk and Diversification on Profitability in Foreign Exchange Banks Listed on the Indonesia Stock Exchange for the Period 2012-2016', Calyptra: Scientific Journal of Surabaya University Students, 7(2).
Ndungu, J.G. and Muturi, W. (2019) 'Effect of Diversification on Financial Performance of Commercial Banks in Kenya', International Journal of Current Aspects, 3(V), pp. 267-285. Available at: https://doi.org/10.35942/ijcab.v3iv.67.
Ngoc Nguyen, K. (2019) 'Revenue Diversification, Risk and Bank Performance of Vietnamese Commercial Banks', Journal of Risk and Financial Management, 12(3). Available at: https://doi.org/10.3390/jrfm12030138.
Ningrum, E.P., Samrotun, Y.C. and Suhendro, S. (2020) 'Non Performing Financing in Islamic Commercial Banks in Indonesia', Journal of Development Economics STIE Muhammadiyah Palopo, 5(2). Available at: https://doi.org/10.35906/jep01.v5i2.422.
Nisar, S. et al. (2018) 'The impact of revenue diversification on bank profitability and stability: Empirical evidence from south asian countries', International Journal of Financial Studies, 6(2). Available at: https://doi.org/10.3390/ijfs6020040.
Okpoa, A.G. and Damiana, O.E. (2023) 'Corporate Diversification and Firm Performance: Evidence from the Nigerian Banking Sector', Journal of Technology Management and Business, 10(1). Available at: https://doi.org/10.30880/jtmb.2023.10.01.006.
Pertiwi, S. P., & Suhartini, D. (2022) 'The Effect of Revenue Diversification, Intellectual Capital, and Risk Management Disclosure on Firm Value: Empirical Study on Conventional Commercial Banks Listed on the Indonesia Stock Exchange 2015-2020. Fair Value:', Scientific Journal of Accounting and Finance, 5((02)), pp. 1082-1094.
Pham, K.D. et al. (2021) 'Financial crisis and diversification strategies: The impact on bank risk, and performance', Economics and Business Letters, 10(3), pp. 249-261. Available at: https://doi.org/10.17811/ebl.10.3.2021.249-261.
Phan, D.T., Nguyen, T.T. and Hoang, T.T. (2022) 'Impact of income diversification on the business performance of Vietnamese commercial banks', Cogent Business and Management, 9(1). Available at: https://doi.org/10.1080/23311975.2022.2132592.
Pramika, M. et al. (2022) 'Income Diversification, Performance and Risk in Indonesian Islamic Banks for the Period 2009-2018', Alkasb: Journal of Islamic Economics, 1(June), pp. 20-42. Available at: https://jurnal.instika.ac.id/index.php/alkasb/article/view/273%0Ahttps://jurnal.instika.ac.id/index.php/alkasb/article/download/273/174.
Prasetya, I.E., Kosjoko, K. and Mufarida, N.A. (2022) 'Effect of Electric Current Variation and Weld Seam on Tensile Strength and Microstructure of Tig Weld Joints on Aluminum Alloy 6061', Elements: Journal of Mechanical Engineering, 9(1), pp. 14-23. Available at: https://doi.org/10.34128/je.v9i1.187.
Prastiwi, I.E. and Anik, A. (2020) 'The Impact of Credit Diversification on Credit Risk and Performance of Indonesian Banks', Global Review of Islamic Economics and Business, 8(1), p. 013. Available at: https://doi.org/10.14421/grieb.2020.081-02.
Prastiwi, I.E. and Anik, A. (2021) 'Financing Diversification and Profitability of Islamic Banking in Indonesia', Journal of Accounting and Tax, 21(02). Available at: https://doi.org/10.29040/jap.v21i02.1817.
Prastiwi, I.E. and Anik, A.A. (2020) 'Credit Diversification, Monitoring, and Banking Performance in Indonesia', Scientific Journal of Islamic Economics, 6(1). Available at: https://doi.org/10.29040/jiei.v6i1.775.
Priyadi, U. et al. (2021) 'Determinants of credit risk of Indonesian Sharīʿah rural banks', ISRA International Journal of Islamic Finance, 13(3), pp. 284-301. Available at: https://doi.org/10.1108/IJIF-09-2019-0134.
Purnamasari, A.E. and Musdholifah, M. (2018) 'Analysis of External and Internal Bank Factors on Financing Risk of Islamic Commercial Banks in Indonesia for the Period 2012-2015', BISMA (Business and Management), 9(1), p. 13. Available at: https://doi.org/10.26740/bisma.v9n1.p13-25.
Puspitasari, N. (2018) Islamic Finance Theory and Practice. Yogyakarta: UII Press.
Quyen, P.G. et al. (2021) 'Income Diversification and Financial Performance: The Mediating Effect of Banks' Size, Ownership Structure and the Financial Crisis in Vietnam', Journal of Accounting and Investment, 22(2). Available at: https://doi.org/10.18196/jai.v22i2.10775.
Rahmawati, D. and Mardanugraha, E. (2023) 'Impact Analysis of Income Diversification on Banking Profitability Case Study of Banking in Indonesia IMPACT ANALYSIS OF INCOME DIVERSIFICATION ON BANKING PROFITABILITY CASE STUDY OF BANKING IN INDONESIA-NonCommercial 4.0 International License (CC BY-NC 4.0)', Journal of Economics, 12(02), p. 2023. Available at: http://ejournal.seaninstitute.or.id/index.php/Ekonomi.
Risfandy, T. and Pratiwi, D.I. (2022) 'The Performance of Indonesian Islamic Rural Banks During Covid-19 Outbreak: the Role of Diversification', Journal of Islamic Monetary Economics and Finance, 8(3), pp. 455-470. Available at: https://doi.org/10.21098/jimf.v8i3.1564.
Roziq, A. and Sumartin, D.P. (2021) 'Capital, Effeciency, NPF and Profitability: Sharia Banks In Indonesia', International Journal of Management [Preprint].
Septina, F. (2022) 'Leverage, Product Diversification, and Performance of Life Insurance Companies in Indonesia', Peer-Reviewed Article Journal of Finance and Banking, 26, pp. 2443-2687.
Shun-Ho Chu, Shunping Li, Xueying Xia, Xiaoyu Liu, Jiaxia Li, S.Z. (2021) 'Bank Diversification and Performance: The Role of Financial Stability', Advances in Economics, Business and Management Research, 178(Icemed), pp. 38-43.
Sittichobtham, M.K. (2019) 'How does loan portfolio diversification affect bank profitability?', Chulalongkorn University [Preprint].
Sofianingsih, R. and Fitanto, B. (2022) 'The Effect of Income Diversification, Bopo and Carter on Banking Profitability During the Covid-19 Pandemic', Contemporary Studies in Economic, FINANCE AND BANKING, 1(2), pp. 333-344. Available at: https://csefb.ub.ac.id/index.php/csefb/article/view/12.
Sudiro, B.A., Ahmar, N. and Ardiansyah (2022) 'Murabahah Financing, Musyarakah, Mudharabah, Istishna and Ijarah Against Sharia Banking Profit Sharing', JFBA: Journal of Financial and Behavioural Accounting, 2(2), pp. 40-49. Available at: https://doi.org/10.33830/jfba.v2i2.4182.2022.
Susamto, A.A., Octavio, D.Q. and Wardani, D.T.K. (2020) 'Comparing Credit Risk in Islamic and Conventional Banking Using Bank-Level Panel Data', Economica: Journal of Islamic Economics, 11(2), pp. 235-262. Available at: https://doi.org/10.21580/economica.2020.11.2.5027.
Trinugroho, I., Risfandy, T. and Ariefianto, M.D. (2018) 'Competition, diversification, and bank margins: Evidence from Indonesian Islamic rural banks', Borsa Istanbul Review, 18(4), pp. 349-358. Available at: https://doi.org/10.1016/j.bir.2018.07.006.
Turiastini, M. and Darmayanti, N.P.A. (2017) 'The Effect of Diversification and Business Risk on the Financial Performance of Miscellaneous Industry Sector Companies in Bei', E-Journal of Management, Udayana University, 7(1), p. 251. Available at: https://doi.org/10.24843/EJMUNUD.2018.v7.i01.p10.
Ulfah, S. (2020) 'Understand 5 PAUD Learning Methods before sending your child to school', Popmama.Com, p. 1. Available at: https://www.popmama.com/kid/1-3-years-old/sarrah-ulfah/metode-pembelajaran-paud-sebelum-menyekolahkan-anak/5.
Utami, R.A. and Nabhan, F. (2022) 'The important role of bank efficiency in mediating the effect of income diversification and bank liquidity on bank performance', Journal of Accounting and Digital Finance, 2(2), pp. 72-85. Available at: https://doi.org/10.53088/jadfi.v2i2.48.
Wardina, T.D. (2020) 'Impact of Financing Diversification on Islamic Bank Credit Risk', Journal of Islamic Economics Theory and Applied, pp. 140-155.
Wasiaturrahma et al. (2020) 'Financial performance of rural banks in Indonesia: A two-stage DEA approach', Heliyon, 6(7). Available at: https://doi.org/10.1016/j.heliyon.2020.e04390.
Widarjono, A. and Rudatin, A. (2021) 'Financing diversification and Indonesian Islamic bank's non-performing financing', Journal of Islamic Economics & Finance, 7(1), pp. 45-58. Available at: https://doi.org/10.20885/jeki.vol7.iss1.art4.
Widarjono, A. and Sidiq, S.S. (2022) 'the Sectoral Financing Diversification and the Profitability of Islamic Banking in Indonesia', Journal of Islamic Economics and Business, 8(2), pp. 201-219. Available at: https://doi.org/10.20473/jebis.v8i2.36316.
Yaman, A. and Holle, M.H. (2022) 'Funding Diversification: Impact on the Performance of Islamic Commercial Banks in Indonesia', El-Qist: Journal of Islamic Economics and Business (JIEB), 12(1), pp. 96-110. Available at: https://doi.org/10.15642/elqist.2022.12.1.96-110.