The Susceptibility of Islamic Banks' Credit Risk Towards Macroeconomic Variables
DOI:
https://doi.org/10.31436/jif.v3i1.24Abstract
Credit risk is the most anticipated risk in the banking system. It is one of the key elements to assess systemic risk and stress testing financial fragility which is very helpful to come up with macro-prudential surveillance in financial systems. Unlike the conventional banking system, there is dearth of empirical study on macro-credit risk in relation with Islamic banking. As such, further research regarding the stability of the Islamic banking industry has become imperative. Accordingly, this paper is aimed at determining and assessing the long run vulnerabilities of Islamic financing sustainability in term of its response to changes in key macroeconomic variables by using time series econometric approaches of cointegration and vector autoregression (VAR). Based on the result of simulating variance decomposition (VD) and impulse response function (IRF), it is found that, sufficient evidence of long-run relationship between credit risk ratio in Islamic banking industry and the selected macroeconomic variables exist. The exchange rate, supply side-inflation, and growth have been indicated to negatively influence credit risk rate in Islamic banking, while money supply and Islamic interbank money market rate positively affect the risk rate.Downloads
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References
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Schechtman, R. and Gaglianone, W. P. 2011. Macro Stress Testing of Credit Risk Focused on the Tails. The Banco Central do Brasil Working Paper, Vol. 241.
Sugema, I. and A. Chowdury. 2007. Has Aid Made the Government of Indonesia Lazy?.Asia–Pacific Development Journal. Vol. 14(1).
Yusof, R.M., M. Wosabi, and M. S. A. Majid. 2008. Monetary Policy Shocks and Islamic Banks Deposits in a Dual Banking System: A Comparative Analysis Between Malaysia and Bahrain. 8th Global Conference on Business and Economics.
Adebola, S. S., W. S. W. Yusoff, and J. Dahlan. 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. Vol 1(2), 20-30.
Bacha, O. I. 2004. Dual Banking Systems and Interest Rate Risk for Islamic Banks. MPRA Paper, No. 12763.
BabouÄek, I. and M. JanÄar. 2005. Effects of Macroeconomic Shocks to the Quality of the Aggregate Loan Portfolio. CNB Working Paper Series, Vol. 1.
Banjarnahor, N. R. 2008. Mekanisme Suku Bunga SBI sebagai Sasaran Opersional Kebijakan Moneter dan Variabel Makroekonomi Indonesia: 1990.1-2007.4. Bulletin of Monetary Economics and Banking, Vol. 11(1).
Bank Indonesia. Annual Economic Report on Indonesia. Various Issues. Jakarta, Indonesia.
Basri, M. C. 2002. Why Trends of Protection Changed Over Time in Indonesia. ISEAS Visiting Researchers Series No. 2.
Beck, R., P. Jakubik, and A. Piloiu. 2013. Non-Performing Loans: What Matters in Addition to the Economic Cycle? The European Central Bank Working Paper Series, no. 1515.
Bracons, A. O., Charles A. E. G., Dimitrios P. T., and Lea Z. 2006.Towards a Measure of Financial Fragility. Discussion Paper Series. Vol. 554(2).
Cihák. 2007. Introduction to Applied Stress Testing. IMF Working Paper, Vol. 59.
Clair, R. St. 2004. Macroeconomic Determinants of Banking Financial Performance and Resilience in Singapore. Monetary Autharity of Singapore Staff Paper. Pp (38).
Demirguç-Kunt, A. and E. Detragiache. 1998. The Determinants of Banking Crises in Developing and Developed Countries. IMF Staff Paper, Vol. 45(1).
Drehman, M., A. J. Patton, and S. Sorensen. 2006. Non Linearity and Stress Testing. Bank of England, London.
Dendawijaya, L. 2001. Manajemen Perbankan. Ghalia Indonesia, Jakarta.
Enders, Walters. 1995. Applied Econometrics Time Series. John Wiley and Sons, inc., Canada.
Endresz, M. V. and Z. Vasary. 2008. Macro Stress Testing with Sector Specific Bankruptcy Models. MNB Working Papers.
Foglia, A. 2009. Stress Testing Credit Risk: A Survey of Authorities’ Approaches. International Journal of Central Banking, vol. 5(3).
Graeve, F., T. Kick, and M. Koetter. 2008. Monetary Policy and Bank Distress: An Integrated Micro and Macro Approach. Discussion Paper Banking and Financial Studies. Vol 2(3).
Gujarati, D. N. and Dawn C. Porter. 2009. Basic Econometrics Fifth Edition. New York: McGraw-Hill.
Hoggarth, G., S. Sorensen, and L. Zicchino. 2005. Stress Testing of UK banks using a VAR Approach. Bank of England Working Paper, Vol. 282.
Gunsel, Nil. 2008. Micro and Macro Determinants of Bank Fragility in North Cyprus Economy. International Research Journal of Finance and Economics. Vol. 22. Euro Journals Publishing, Inc.
Imaduddin, M. 2007. Determinants of Banking Credit Default in Indonesia: A Comparative Analysis.
Imbierowicz, B. and C. Rauch. 2012. The Relationship between Liquidity Risk and Credit Risk in Banks. Goethe University Frankfurt, Germany.
International Monetary Fund. 2011. Russian Federation: Technical Note on Stress Testing of the Banking Sector. IMF Country Report, Vol 11(334).
Islamic Financial Service Board. 2012. Guiding Principle on Stress Testing For Institutions Offering Islamic Financial Services. Kuala Lumpur, IFSB.
Kassim, S. H., M. S. A. Majid, and R. M. Yusof. 2009. Impact of Monetary Policy Shocks on The Conventional and Islamic Banks In a Dual Banking System: Evidence from Malaysia. Journal of Economic Cooperation and Development, 30(1): 41-58.
Kearns, A. 2004. Loan Losses and the Macro economy: A Framework for Stress Testing Credit Institutions’ Financial Well-Being. Financial Stability Report. Pp 111–122.
Khemraj, T. and S. Pasha. 2009. The Determinants of Non-Performing Loans: an Econometric Case Study of Guyana. Paper Presented at the Caribbean Centre for Banking and Finance Biannual Conference on Banking and Finance, Trinidad.
Linda, M. 2007. Responsifitas Kredit Investasi terhadap Variabel Makro ekonomi dan Perbankan Pada Bank Persero dan Bank Umum Swasta Nasional Devisa dan Non Devisa. Faculty of Economics and Management. Bogor Agricultural University, Bogor.
Lucas R. E. jr. 1976. Econometric Policy Evaluation: a Critique. Carnegie-Rochester Conference Series on Public Policy, 1, 19-46.
Mankiw, N. G. 2003. Teori Makro ekonomi. Erlangga, Jakarta.
Ibrahim, M. H. 2011. Stock Market Development and Macroeconomic Performance in Thailand. Engineering Economics Paper, vol. 22(3): 230-240.
McGuckin, R. H. 2000. Business Cycle Indicators Handbook. United States. The Conference Board, United States.
Mishkin, F. S. 1998. The Economics of Money, Banking, and Financial Market. Fifth Edition. Addison Wesley, Massachusetts.
Moosa, I. A. 2003. International Finance. 2nd Edition. McGraw Hill, New York.
Muthohharoh, M. 2010. The Impact of Macroeconomic Shocks on Stability of Dual Banking System in Indonesia. Faculty of Economics and Management. Bogor Agricultural University, Bogor.
Nursechafia. 2010. The Impact of Macroeconomic Shocks on Deposits and Credit in a Dual banking System in Indonesia. Faculty of Economics and Management. Bogor Agricultural University, Bogor.
Park, C., R. P. Majuca, and J. T. Yap. 2010. The 2008 Financial Crisis and Potential Output in Asia: Impact and Policy Implications. The Philippine Institute for Development Studies (PIDS) Discussion Paper Series, no. 11.
Pesaran, M. H., T. Schuermann, B.-J. Treutler, and S. M. Weiner. 2006. “Macroeconomic Dynamics and Credit Risk: A Global Perspective.†Journal of Money, Credit, and Banking, Vol.38 (5): 1211–61.
Reinsal, G. C., and Ahn, S. K. 1992. Vector Autoregression Models with Unit Root and Reduced Rank Structure: Estimation, Likelihood Ratio Test, and Forecasting. Journal of Time Series Analysis, 13, 353-375.
Rosly, S. A. 2005. Critical Issues on Islamic Banking and Financial Markets: Islamic Economics, Banking and Finance, Investments, Takaful, and Financial Planning. Kuala Lumpur: Dinamas Publishing.
Schechtman, R. and Gaglianone, W. P. 2011. Macro Stress Testing of Credit Risk Focused on the Tails. The Banco Central do Brasil Working Paper, Vol. 241.
Sugema, I. and A. Chowdury. 2007. Has Aid Made the Government of Indonesia Lazy?.Asia–Pacific Development Journal. Vol. 14(1).
Yusof, R.M., M. Wosabi, and M. S. A. Majid. 2008. Monetary Policy Shocks and Islamic Banks Deposits in a Dual Banking System: A Comparative Analysis Between Malaysia and Bahrain. 8th Global Conference on Business and Economics.
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Published
2014-03-01
How to Cite
Nursechafia, N., & Abduh, M. (2014). The Susceptibility of Islamic Banks’ Credit Risk Towards Macroeconomic Variables. Journal of Islamic Finance, 3(1). https://doi.org/10.31436/jif.v3i1.24
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