Comparative Studies of Stability of Islamic and Conventional Banks in Indonesia

Abstract

In recent years, the Islamic banks (IBs) have grown rapidly compared with the growth of conventional banks (CBs) in Indonesia. There are some restrictions on the business of Islamic banks based on Islamic law, such as prohibition of interest charges. This study aims to answer why IB has grown faster than CB despite some restrictions on their business. Particularly, the thesis tries to measure the stability of bank operation by using z-score and Non Performing Loan (NPL) ratio, comparing the stability of IB with that of CB in Indonesia with the sample data consisting of 11 Islamic banks, 24 Sharia Business Units (UUS), and 120 conventional banks in Indonesia during the period of 2005-2012. The result shows that Islamic banks are more stable than conventional banks. Mostly during the global financial crisis in 2008, Islamic banks have shown that they are more stable, less risky, but less efficient. Macroeconomic environments and banking industries are factors that have more significant impact to Islamic banks. The findings proved that there is consistent result with the previous assumption.